As filed with the Securities and Exchange Commission on November 28, 2000
FILE NO. 811-08642
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 10
THE NEW YORK TAX EXEMPT BOND PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 557-0700
Margaret W. Chambers, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to:John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
<PAGE>
EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended. However,
beneficial interests in the Registrant are not being registered under the
Securities Act of 1933, as amended (the "1933 Act"), because such interests will
be issued solely in private placement transactions that do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Registrant may only be made by other investment companies,
insurance company separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any beneficial
interests in the Registrant.
<PAGE>
A-11
i:\dsfndlgl\mastfeed\nytrb\port\amend8.doc
PART A
Responses to Items 1,2,3,5 and 9 have been omitted pursuant to paragraph 2(b) of
Instruction B of the General Instructions to Form N-1A.
Item 4. Investment Objectives, Principal Investment Strategies, and Related
Risks
INVESTMENT OBJECTIVE
The investment objective is to provide a high level of tax exempt income for New
York residents consistent with moderate risk of capital. This goal can be
changed without the approval of interest holders.
PORTFOLIO MANAGEMENT
The Portfolio management team is led by Benjamin Thompson, vice
president, who joined the team in June 1999, Robert W. Meiselas, vice president
who joined the team in June 1997 and has been at J.P. Morgan since 1987, and
Kingsley Wood, Jr., vice president who has been on the team since January 2000.
Prior to joining J.P. Morgan, Mr. Thompson was a senior fixed income Portfolio
manager at Goldman Sachs, and Mr. Wood was a senior fixed income portfolio
manager at Mercantile Bank & Trust. Prior to joining Mercantile in July of 1998,
Mr. Wood was an institutional tax-exempt trader at ABN-AMRO and Kemper
Securities.
PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
INVESTMENT APPROACH
The Portfolio invests primarily in New York municipal securities that it
believes have the potential to provide high current income which is free from
federal, state, and New York City personal income taxes for New York residents.
The Portfolio may also invest to a limited extent in securities of other states
or territories. To the extent that the Portfolio invests in municipal securities
of other states, the income from such securities would be free from federal
personal income taxes for New York residents but would be subject to New York
State and New York City personal income taxes. For non-New York residents, the
income from New York municipal securities is free from federal personal income
taxes only. The Portfolio may also invest in taxable securities. The Portfolio's
securities may be of any maturity, but under normal market conditions the
Portfolio's duration will generally range between three and seven years, similar
to that of the Lehman Brothers New York 1-17 Years Municipal Bond Index
(currently 5.4 years). At least 90% of assets must be invested in securities
that, at the time of purchase, are rated investment-grade (BBB/Baa or better) or
are the unrated equivalent. No more than 10% of assets may be invested in
securities rated B or BB.
PRINCIPAL RISKS
The Portfolio's share price and total return will vary in response to changes in
interest rates. How well the Portfolio's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described below. Because most of the Portfolio's investments will typically
be from issuers in the State of New York, its performance will be affected by
the fiscal and economic health of that state and its municipalities. The
Portfolio is non-diversified and may invest more than 5% of assets in a single
issuer, which could further concentrate its risks. To the extent that the
Portfolio seeks higher returns by investing in non-investment-grade bonds, often
called junk bonds, it takes on additional risks, since these bonds are more
sensitive to economic news and their issuers have a less secure financial
condition.
There can be no assurance that the investment objective of the
Portfolio will be achieved.
The value of the Portfolio will fluctuate over time. You could lose
money if you sell when the Portfolio's price is lower than when you invested.
There is no assurance that the Portfolio will meet its investment goal. Future
returns will not necessarily resemble past performance. The Portfolio does not
represent a complete investment program.
INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
global fixed-income research and the sophistication of its analytical systems.
Using a team-oriented approach, J.P. Morgan seeks to gain insights in a broad
range of distinct areas, and when consistent with the Portfolio's investment
approach, takes positions in many different areas, helping the Portfolio to
limit exposure to concentrated sources of risk.
In managing the Portfolio, J.P. Morgan employs a three-step process that
combines sector allocation, fundamental research for identifying Portfolio
securities, and duration management.
Sector Allocation. The sector allocation team meets monthly, analyzing the
fundamentals of a broad range of sectors in which the Portfolio may invest. The
team seeks to enhance performance and manage risk by underweighting or
overweighting sectors.
Security Selection. Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the Portfolio managers make buy and sell decisions according to the Portfolio's
goal and strategy.
Duration Management. Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish the Portfolio's target duration, a common
measurement of a security's sensitivity to interest rate movements. For
securities owned by the Portfolio, duration measures the average time needed to
receive the present value of all principal and interest payments by analyzing
cash flows and interest rate movements. The Portfolio's duration is generally
shorter than the Portfolio's average maturity because the maturity of a security
only measures the time until final payment is due. The Portfolio's target
duration typically remains relatively close to the duration of the market as a
whole, as represented by the Portfolio's benchmark. The strategists closely
monitor the Portfolio and make tactical adjustments as necessary.
INVESTMENTS
This table discusses the customary types of securities which can be
held by the Portfolio. In each case the principal types of risk (along with
their definitions) are listed.
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ASSET-BACKED SECURITIES Interests in a stream of payments from specific assets,
such as auto or credit card receivables.
Risk: credit, interest rate, market, prepayment
Permitted, but not typically used
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BANK OBLIGATIONS Negotiable certificates of deposit, time deposits and bankers'
acceptances.
Risk: credit, liquidity, political
Permitted, but not typically used (Domestic only)
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COMMERCIAL PAPER Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
Risk: credit, interest rate, liquidity, market, political
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MORTAGES (directly held) Domestic debt instrument which gives the lender a lien
on property as security for the loan payment.
Risk: credit, environmental, extension, interest rate, liquidity, market,
natural event, political, prepayment, valuation Permitted, but no current
intention of use
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PRIVATE PLACEMENTS Bonds or other investments that are sold directly to an
institutional investor.
Risk: credit, interest rate, liquidity, market, valuation
----REPURCHASE
AGREEMENTS Contracts whereby the Portfolio agrees to purchase a security and
resell it to the seller on a particular date and at a specific price.
Risk: credit
Permitted, but not typically used
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REVERSE REPURCHASE AGREEMENTS Reverse repurchase agreement contracts whereby the
Portfolio sells a security and agrees to repurchase it from the buyer on a
particular date and at a specific price. Considered a form of borrowing.
Risk: credit
Permitted, but not typically used. All forms of borrowing (including securities
lending and reverse repurchase agreements) in the aggregate may not exceed 33
1/3 of the Portfolio's total assets.
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SWAPS Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk it.
Risk: credit, interest rate, leverage, market, political
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SYNTHETIC VARIABLE RATE INSTRUMENTS Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the Portfolio.
Risk: credit, interest rate, leverage, liquidity, market
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TAX EXEMPT MUNICIPAL SECURITIES Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
Risk: credit, interest rate, market, natural event, political At least 65%
of assets must be in New York municipal securities and at least 80% of assets
must be in tax exempt securities.
----------------------------U.S.
GOVERNMENT SECURITIES Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
Risk: interest rate
----------------------ZERO
COUPON, PAY-IN-KIND, AND DEFERRED PAYMENT SECURITIES Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
Risk: credit, interest rate, liquidity, market, political, valuation
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RISK RELATED TO CERTAIN SECURITIES HELD BY THE NEW YORK TAX EXEMPT BOND
PORTFOLIO:
CREDIT RISK The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.
ENVIRONMENTAL RISK The risk that an owner or operator of real estate may be
liable for the costs associated with hazardous or toxic substances located on
the property.
EXTENSION RISK The risk a rise in interest rates will extend the life of a
mortgage (directly held) to a date later than the anticipated prepayment date,
causing the value of the investment to fall.
INTEREST RATE RISK The risk a change in interest rates will adversely affect the
value of an investment. The value of fixed income securities generally moves in
the opposite direction of interest rates (decreases when interest rates rise and
increases when interest rates fall).
LEVERAGE RISK The risk of gains or losses disproportionately higher than
the amount invested
LIQUIDITY RISK The risk the holder may not be able to sell the security at the
time or price it desires.
MARKET RISK The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.
NATURAL EVENT RISK The risk of a natural disaster, such as a hurricane or
similar event, will cause severe economic losses and default in payments by the
issuer of the security.
POLITICAL RISK The risk governmental policies or other political actions will
negatively impact the value of the investment.
PREPAYMENT RISK The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
VALUATION RISK The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
This table discusses the main elements that make up the Portfolio's
overall risk characteristics. It also outlines the Portfolio's policies toward
various securities, including those that are designed to help the Portfolio
manage risk.
Potential risks Policies to balance risk
Market conditions
-Under normal circumstances the Portfolio plans -The Portfolio's price yield
and total to remain fully invested in bonds and other return will fluctuate in
response to fixed income securities bond market movements
-The value of most bonds will fall -The Portfolio seeks to limit risk and
enhance when interest rates rise; the longer a yields through careful
management, sector bond's maturity and the lower its allocation, individual
securities selection and credit quality, the more its value duration management
typically falls -During severe market downturns, the Portfolio has the option of
investing up to 100% of assets - Adverse market conditions may from in
investment-grade short-term securities time cause the Portfolio to take
temporary defensive positions that are -J.P. Morgan monitors interest rate
trends, as inconsistent with its principal well as geographic and demographic
information investment strategies and may hinder related to mortgage prepayments
the Portfolio from achieving its investment objective
CREDIT QUALITY
-The default of an issuer would leave -The Portfolio maintains its own policies
for the Portfolio with unpaid interest or balancing credit quality against
potential principal yields and gains in light of its investment goals
-J.P. Morgan develops its own ratings of unrated -Junk bonds (those rated
BB/Ba or securities and makes a credit quality lower) have a higher risk of
default, determination for unrated securities tend to be less liquid, and may be
more difficult to value
MANAGEMENT CHOICES
-The Portfolio could underperform its -J.P. Morgan focuses its active
management on benchmark due to its sector, those areas where it believes its
commitment to securities, or duration choices research can most enhance returns
and manage risks in a consistent way
DERIVATIVES
-Derivatives such as futures, options -The Portfolio uses derivatives, such
as and swaps that are used for hedging futures, options and swaps for hedging
and for the Portfolio or specific securities risk management (i.e., to adjust
duration or may not fully offset the underlying yield curve exposure, or to
establish or adjust positions(1) and this could result in exposure to particular
securities, markets, or losses to the Portfolio that would not currencies); risk
management may include have otherwise occurred management of the Portfolio's
exposure relative to its benchmark; the Portfolio is permitted to -Derivatives
used for risk management enter into futures, options and swaps may not have the
intended effects and transactions, however, these transactions result may result
in losses or missed in taxable gains or losses so it is expected opportunities
that the Portfolio will utilize them infrequently. -The counterparty to a
derivatives contract could default -The Portfolio only establishes hedges that
it expect will be highly correlated with underlying -Certain types of
derivatives involve positions costs to the Portfolio which can reduce returns
-While the Portfolio may use derivatives that may use derivatives that
incidentally involve -Derivatives that involve leverage leverage, it does not
use them for the specific could magnify losses purpose of leveraging its
Portfolio
SECURITIES LENDING
-When the Portfolio lends a security, -J.P. Morgan maintains a list of
approved there is a risk that the loaned borrowers securities may not be
returned if the borrower defaults -The Portfolio receives collateral equal to at
least 100% of the current value of securities -The collateral will be subject to
the loaned risks of the securities in which it is invested -The lending agents
indemnify the Portfolio against borrower default
-J.P. Morgan's collateral investment guidelines limit the quality and
duration of collateral investment to minimize losses
-Upon recall, the borrower must return the
securities loaned within the normal settlement
period
ILLIQUID HOLDINGS
-The Portfolio could have -The Portfolio may not invest more than 15% of
difficulty valuing these holdings net assets in illiquid holdings
precisely
-To maintain adequate liquidity to meet
-The Portfolio could be unable to redemption, the Portfolio may hold sell these
holdings at the time or investment-grade short-term securities (including price
desired repurchase agreements) reverse repurchase
agreements) and, for temporary or extraordinary
purposes, may borrow from banks up to 33 1/3% of
the value of its total assets
WHEN ISSUED AND DELAYED DELIVERY
SECURITIES
-When the Portfolio buys securities -The Portfolio uses segregated accounts to
offset before issue or for delayed leverage risk delivery, it could be exposed
to leverage risk if it does not use segregate accounts
SHORT-TERM TRADING
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
-Increased trading would raise the -The Portfolio may use short-term trading to take
Portfolio's transaction costs advantage of attractive or unexpected
opportunities or to meet demands generated by
shareholder activity. The Portfolio's turnover
-Increased short-term capital gains rate for the for the fiscal year ended July 31,
distribution would raise investors' 2000 was 86%.
income tax liability
</TABLE>
--------
(1)A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on changes in the value of a securities index. An option is the right to
buy or sell a set quantity of an underlying instrument at a predetermined price.
A swap is a privately negotiated agreement to exchange one stream of payments
for another.
Item 6. Management, Organization, and Capital Structure
BUSINESS STRUCTURE
The New York Tax Exempt Bond Portfolio (the "Portfolio") is a no-load
non-diversified open-end management investment company which was organized as a
trust under the laws of the State of New York on June 16, 1993. Beneficial
interests in the Portfolio are issued solely in private placement transactions
that do not involve any "public offering" within the meaning of Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"). Investments in the
Portfolio may only be made by other investment companies, insurance company
separate accounts, common or commingled trust funds or similar organizations or
entities that are "accredited investors" within the meaning of Regulation D
under the 1933 Act. This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" within the meaning
of the 1933 Act.
MANAGEMENT AND ADMINISTRATION
The Board of Trustees provides broad supervision over the affairs of the
Portfolio. The Portfolio has retained the services of J.P. Morgan Investment
Management Inc. ("JPMIM" or the "Advisor") as investment adviser and Morgan
Guaranty Trust Company of New York ("Morgan"), as administrative services agent.
The Portfolio has retained the services of Funds Distributor, Inc. ("FDI") as
co-administrator (the "Co-Administrator").
The Portfolio has not retained the services of a principal underwriter or
distributor, since interests in the Portfolio are offered solely in private
placement transactions. FDI, acting as agent for the Portfolio, serves as
exclusive placement agent of interests in the Portfolio. FDI receives no
additional compensation for serving in this capacity.
The Portfolio has entered into an Amended and Restated Portfolio Fund Services
Agreement, dated July 11, 1996, with Pierpont Group, Inc. ("Pierpont Group") to
assist the Trustees in exercising their overall supervisory responsibilities for
the Portfolio. The fees to be paid under the agreement approximate the
reasonable cost of Pierpont Group in providing these services to the Portfolio
and other registered investment companies subject to similar agreements with
Pierpont Group. Pierpont Group was organized in 1989 at the request of the
Trustees of the J.P. Morgan Family of Funds (formerly The Pierpont Family of
Funds) for the purpose of providing these services at cost to those funds. See
Item 14 in Part B. The principal offices of Pierpont Group are located at 461
Fifth Avenue, New York, New York 10017.
------------------------------------------------------- ------------------------
Advisory services 0.30% of the Portfolio's average net assets Administrative
services (fee shared with Funds Portfolio's pro-rata portions of 0.09% of the
first Distributor, Inc.) $7 billion of average net assets in J.P.
Morgan-advised Portfolios, plus 0.04% of average
net assets over $7 billion
------------------------------------------------------- ------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in a fund.
Item 7. Shareholder Information
INVESTING
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act. Investments in the Portfolio may only be made by
other investment companies, insurance company separate accounts, common or
commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All investments
are made at net asset value next determined after an order is received in "good
order" by the Portfolio. The net asset value of the Portfolio is determined at
the Valuation Time on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio. However,
because the Portfolio intends to be as fully invested at all times as is
reasonably practicable in order to enhance the yield on its assets, investments
must be made in federal funds (i.e., monies credited to the account of the
Custodian by a Federal Reserve Bank).
The Portfolio may, at its own option, accept securities in payment for
investments in its beneficial interests. The securities delivered in kind are
valued by the method described in Net Asset Value as of the business day prior
to the day the Portfolio receives the securities. Securities may be accepted in
payment for beneficial interests only if they are, in the judgment of Advisor,
appropriate investments for the Portfolio. In addition, securities accepted in
payment for beneficial interests must: (i) meet the investment objective and
policies of the Portfolio; (ii) be acquired by the Portfolio for investment and
not for resale; (iii) be liquid securities which are not restricted as to
transfer either by law or liquidity of market; and (iv) if stock have a value
which is readily ascertainable as evidenced by a listing on a stock exchange,
over-the-counter ("OTC") market or by readily available market quotations from a
dealer in such securities. The Portfolio reserves the right to accept or reject
at its own option any and all securities offered in payment for beneficial
interests.
The Portfolio and FDI reserve the right to cease accepting investments at any
time or to reject any investment order.
ADDING TO YOUR ACCOUNT
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each Portfolio Business Day. At the Valuation Time on each such
day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected at the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio to the Valuation Time on such day plus or minus, as
the case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effective as of the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
Valuation Time on such day, plus or minus, as the case may be, the amount of net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in the Portfolio as of the
Valuation Time on the following Portfolio Business Day.
SELLING SHARES
An investor in the Portfolio may reduce all or any portion of its investment at
the net asset value next determined after a request in "good order" is furnished
by the investor to the Portfolio. The proceeds of a reduction will be paid by
the Portfolio in federal funds normally on the next Portfolio Business Day after
the reduction is effected, but in any event within seven days. Investments in
the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any reduction may
be suspended or the payment of the proceeds therefrom postponed during any
period in which the New York Stock Exchange (the "NYSE") is closed (other than
weekends or holidays) or trading on the NYSE is restricted or, to the extent
otherwise permitted by the 1940 Act, if an emergency exists.
Redemption in Kind
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute Portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified Portfolio of
investments or adversely affect the liquidity of the Portfolio or the investor's
Portfolio, as the case may be.
ACCOUNT AND TRANSACTION POLICIES
Business Hours and NAV Calculations
The net asset value of the Portfolio is determined each business day other than
the holidays listed in Part B ("Portfolio Business Day"). This determination is
made once each Portfolio Business Day as of the close of trading on the NYSE
(normally 4:00pm eastern time)(the "Valuation Time").
DIVIDENDS AND DISTRIBUTIONS
It is intended that the Portfolio's assets, income and distributions will be
managed in such a way that an investor in the Portfolio will be able to satisfy
the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio.
Investor inquiries may be directed to FDI at 60 State Street, Boston,
Massachusetts 02109,(617) 557-0700.
TAX CONSIDERATIONS
Under the anticipated method of operation of the Portfolio, the Portfolio will
not be subject to any income tax. However, each investor in the Portfolio will
be taxable on its share (as determined in accordance with the governing
instruments of the Portfolio) of the Portfolio's ordinary income and capital
gain in determining its income tax liability. The determination of such share
will be made in accordance with the Internal Revenue Code of 1986, as amended
(the "Code"), and regulations promulgated thereunder.
ITEM 8. DISTRIBUTION AGREEMENTS: Not applicable
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B-37
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
Description of the Portfolio and
its Investments and Risks . . . . . . . . . . . . . . B-1
Management of the Portfolio . . . . . . . . . . . . . B-22
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . . B-26
Investment Advisory and Other Services . . . . . . . .B-26
Brokerage Allocation and Other Practices . . . . . .. B-31
Capital Stock and Other Securities . . . . . . . . .. B-32
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . . . . .. B-34
Tax Status . . . . . . . . . . . . . . . . . . . . . .B-34
Underwriters . . . . . . . . . . . . . . . . . . . .. B-36
Calculations of Performance Data . . . . . . . . . .. B-36
Financial Statements . . . . . . . . . . . . . . . ...B-36
Appendix A . . . . . . . . . . . . . . . . . . . . ...B-36
Appendix B . . . . . . . . . . . . . . . . . .B-36
ITEM 12. PORTFOLIO HISTORY.
Not applicable.
ITEM 13. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS.
The investment objective of The New York Tax Exempt Bond Portfolio (the
"Portfolio") is to provide a high level of tax exempt income for New York
residents consistent with moderate risk of capital. The Portfolio attempts to
achieve its investment objective by investing primarily in municipal securities
issued by New York State and its political subdivisions and by agencies,
authorities and instrumentalities of New York and its political subdivisions.
These securities earn income exempt from federal and New York State and local
income taxes but, in certain circumstances, may be subject to alternative
minimum tax. In addition, the Portfolio may invest in municipal securities
issued by states other than New York, by territories and possessions of the
United States and by the District of Columbia and their political subdivisions,
agencies and instrumentalities. These securities earn income exempt from federal
income taxes but, in certain circumstances, may be subject to alternative
minimum tax. The Portfolio is advised by J.P. Morgan Investment Management Inc.
("JPMIM" or the "Advisor"). In order to seek to enhance the Portfolio's after
tax return, the Portfolio may also invest in securities which earn income
subject to New York and/or federal income taxes. These securities include U.S.
government securities, corporate securities and municipal securities issued on a
taxable basis.
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective as set forth above and in Part A.
TAX EXEMPT OBLIGATIONS
The Portfolio may invest in bonds issued by or on behalf of New York
State, other states, territories and possessions of the United States and their
political subdivisions, agencies, authorities and instrumentalities. These
obligations may be general obligation bonds secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest, or they may be revenue bonds payable from specific revenue sources,
but not generally backed by the issuer's taxing power. Under normal
circumstances, the Portfolio will invest at least 65% of its total assets in
municipal securities issued by New York State and its political subdivisions and
their agencies, authorities and instrumentalities. The Portfolio may also invest
in debt obligations of municipal issuers other than New York. The municipal
securities in which the Portfolio invests are primarily municipal bonds and
municipal notes.
The Portfolio will invest in tax exempt obligations. Because of the
Portfolio's significant investment in New York municipal securities, its
performance will be affected by the condition of New York's economy, as well as
the fiscal condition of the State, its agencies and municipalities. The New York
State economy has shown signs of recovery fueled by the strength of downstate
financial services. However, the State's performance continues to lag national
averages. Despite strong revenue performance during fiscal 1997 budget
imbalances and limited reserves remain as structural concerns. The Advisor
currently views the New York economy and financial condition as fundamentally
stable. However, the possibility of a disruption to economic and financial
conditions which would adversely affect the creditworthiness and marketability
of New York municipal securities continues to exist. For a more detailed
discussion of the risks associated with investing in New York municipal
securities, see "Additional Information Regarding New York Municipal
Obligations". A description of the various types of tax exempt obligations which
may be purchased by the Portfolio appears below. See "Quality and
Diversification Requirements."
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds, as well as
municipal commercial paper and municipal demand obligations such as variable
rate demand notes and master demand obligations. The interest rate on variable
rate demand notes is adjustable at periodic intervals as specified in the notes.
Master demand obligations permit the investment of fluctuating amounts at
periodically adjusted interest rates. They are governed by agreements between
the municipal issuer and Morgan Guaranty Trust Company of New York ("Morgan"),
an affiliate of the Advisor, acting as agent, for no additional fee. Although
master demand obligations are not marketable to third parties, the Portfolio
considers them to be liquid because they are payable on demand. There is no
specific percentage limitation on these investments. Municipal notes are
subdivided into three categories of short-term obligations: municipal notes,
municipal commercial paper and municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Portfolio may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Portfolio to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. For a description of the attributes of master demand
obligations, see "Money Market Instruments" below. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Portfolio to be liquid because they are payable upon demand. The
Portfolio has no specific percentage limitations on investments in master demand
obligations.
Premium Securities. During a period of declining interest rates, many
municipal securities in which the Portfolio invests likely will bear coupon
rates higher than current market rates, regardless of whether the securities
were initially purchased at a premium. In general, such securities have market
values greater than the principal amounts payable on maturity, which would be
reflected in the net asset value of the Portfolio. The values of such "premium"
securities tend to approach the principal amount as they near maturity.
Puts. The Portfolio may purchase without limit, municipal bonds or
notes together with the right to resell the bonds or notes to the seller at an
agreed price or yield within a specified period prior to the maturity date of
the bonds or notes. Such a right to resell is commonly known as a "put." The
aggregate price for bonds or notes with puts may be higher than the price for
bonds or notes without puts. Consistent with the Portfolio's investment
objective and subject to the supervision of the Trustees, the purpose of this
practice is to permit the Portfolio to be fully invested in tax exempt
securities while preserving the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions, and to purchase at a
later date securities other than those subject to the put. The principal risk of
puts is that the writer of the put may default on its obligation to repurchase.
The Advisor will monitor each writer's ability to meet its obligations under
puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of interests
in the Portfolio and from recent sales of Portfolio securities are insufficient
to meet obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to the expiration date in
order to take advantage of alternative investment opportunities or in the event
the Advisor revises its evaluation of the creditworthiness of the issuer of the
underlying security. In determining whether to exercise puts prior to their
expiration date and in selecting which puts to exercise, the Advisor considers
the amount of cash available to the Portfolio, the expiration dates of the
available puts, any future commitments for securities purchases, alternative
investment opportunities, the desirability of retaining the underlying
securities in the Portfolio and the yield, quality and maturity dates of the
underlying securities.
The Portfolio values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Portfolio were to invest in municipal bonds and notes with maturities of 60 days
or more that are subject to puts separate from the underlying securities, the
puts and the underlying securities would be valued at fair value as determined
in accordance with procedures established by the Board of Trustees. The Board of
Trustees would, in connection with the determination of the value of a put,
consider, among other factors, the creditworthiness of the writer of the put,
the duration of the put, the dates on which or the periods during which the put
may be exercised and the applicable rules and regulations of the Securities and
Exchange Commission (the "SEC"). Prior to investing in such securities, the
Portfolio, if deemed necessary based upon the advice of counsel, will apply to
the SEC for an exemptive order, which may not be granted, relating to the
amortized valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Portfolio's policy is to
enter into put transactions only with municipal securities dealers who are
approved by the Advisor. Each dealer will be approved on its own merits, and it
is the Portfolio's general policy to enter into put transactions only with those
dealers which are determined to present minimal credit risks. In connection with
such determination, the Advisor reviews regularly the list of approved dealers,
taking into consideration, among other things, the ratings, if available, of
their equity and debt securities, their reputation in the municipal securities
markets, their net worth, their efficiency in consummating transactions and any
collateral arrangements, such as letters of credit, securing the puts written by
them. Commercial bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. Other put
writers will have outstanding debt rated Aa or better by Moody's Investors
Service, Inc. ("Moody's") or AA or better by Standard & Poor's Ratings Group
("Standard & Poor's"), or will be of comparable quality in the Advisor's opinion
or such put writers' obligations will be collateralized and of comparable
quality in the Advisor's opinion. The Trustees have directed the Advisor not to
enter into put transactions with any dealer which in the judgment of the Advisor
become more than a minimal credit risk. In the event that a dealer should
default on its obligation to repurchase an underlying security, the Portfolio is
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from such dealer.
Entering into a put with respect to a tax exempt security may be
treated, depending upon the terms of the put, as a taxable sale of the tax
exempt security by the Portfolio with the result that, while the put is
outstanding, the Portfolio will no longer be treated as the owner of the
security and the interest income derived with respect to the security will be
treated as taxable income to the Portfolio.
NON-MUNICIPAL SECURITIES
The Portfolio may invest in bonds and other debt securities of domestic
issuers to the extent consistent with its investment objective and policies. The
Portfolio may invest in non-municipal securities including obligations of the
U.S. government and its agencies and instrumentalities, bank obligations, debt
securities of corporate issuers, asset-backed securities and repurchase
agreements. The Portfolio will invest in non-municipal securities when, in the
opinion of the Advisor, these securities will enhance the after tax income to
investors who are subject to federal and New York State income taxes in the
highest tax bracket. Under normal circumstances, the Portfolio's holdings of
non-municipal securities and municipal securities of tax-exempt issuers outside
New York State will not exceed 35% of its total assets. A description of these
investments appears below. See "Quality and Diversification Requirements." For
information on short-term investments in these securities, see "Money Market
Instruments."
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Portfolio accrues income with respect to zero
coupon and pay-in-kind securities prior to the receipt of cash payments.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals. While interest
payments are not made on such securities, holders of such securities are deemed
to have received "phantom income." Because the Portfolio will distribute
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the applicable Portfolio will have fewer assets with which to purchase
income producing securities. Zero coupon, pay-in-kind and deferred payment
securities may be subject to greater fluctuation in value and lesser liquidity
in the event of adverse market conditions than comparably rated securities
paying cash interest at regular interest payment periods.
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
MONEY MARKET INSTRUMENTS
The Portfolio will invest in money market instruments that meet the
quality requirements described below except that short-term municipal obligation
of New York State issuers may be rated MIG-2 by Moody's or SP-2 by Standard &
Poor's. Under normal circumstances, the Portfolio will purchase these securities
to invest temporary cash balances or to maintain liquidity to meet withdrawals.
However, the Portfolio may also invest in money market instruments as a
temporary defensive measure taken during, or in anticipation of, adverse market
conditions. A description of the various types of money market instruments that
may be purchased by the Portfolio appears below. Also see "Quality and
Diversification Requirements."
U.S. TREASURY SECURITIES. The Portfolio may invest in direct obligations of
the U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities, which are backed by the full faith
and credit of the United States, include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Portfolio must look principally to the federal agency issuing
or guaranteeing the obligation for ultimate repayment and may not be able to
assert a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Portfolio
may invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
BANK OBLIGATIONS. The Portfolio, unless otherwise noted in Part A or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total and are organized under the laws
of the United States or any state, (ii) foreign branches of these banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). The Portfolio will not invest in obligations for which the
Advisor, or any of its affiliated persons, is the ultimate obligor or accepting
bank.
Commercial Paper. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan has the right to increase or
decrease the amount provided to the borrower under an obligation. The borrower
has the right to pay without penalty all or any part of the principal amount
then outstanding on an obligation together with interest to the date of payment.
Since these obligations typically provide that the interest rate is tied to the
Federal Reserve commercial paper composite rate, the rate on master demand
obligations is subject to change. Repayment of a master demand obligation to
participating accounts depends on the ability of the borrower to pay the accrued
interest and principal of the obligation on demand which is continuously
monitored by Morgan. Since master demand obligations typically are not rated by
credit rating agencies, the Fund may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Advisor to have
a credit quality which satisfies the Fund's quality restrictions. See "Quality
and Diversification Requirements." Although there is no secondary market for
master demand obligations, such obligations are considered by the Fund to be
liquid because they are payable upon demand. The Fund does not have any specific
percentage limitation on investments in master demand obligations. It is
possible that the issuer of a master demand obligation could be a client of
Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Portfolio's Trustees. In a repurchase agreement, the Portfolio
buys a security from a seller that has agreed to repurchase the same security at
a mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by the
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolio invest
in repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. The
Portfolio will always receive securities as collateral whose market value is,
and during the entire term of the agreement remains, at least equal to 100% of
the dollar amount invested by the Portfolio in the agreement plus accrued
interest, and the Portfolio will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
custodian. If the seller defaults, the Portfolio might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Portfolio may be delayed or
limited.
The Portfolio may make investments in other debt securities, including
without limitation corporate bonds and other obligations described in this Part
B.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Portfolio until settlement takes place. At the time
the Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction, reflect the value each
day of such securities in determining its net asset value and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
with the custodian a segregated account with liquid assets, consisting of cash,
U.S. Government securities or other appropriate securities, in an amount at
least equal to such commitments. On delivery dates for such transactions, the
Portfolio will meet its obligations from maturities or sales of the securities
held in the segregated account and/or from cash flow. If the Portfolio chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other Portfolio
obligation, incur a gain or loss due to market fluctuation. Also, the Portfolio
may be disadvantaged if the other party to the transaction defaults. It is the
current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the 1940 Act or
any order pursuant thereto. These limits currently require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of the
Portfolio's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group,
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio. As a shareholder of another investment
company, the Portfolio would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Portfolio bears directly in connection with its own operations.
The Securities and Exchange Commission ("SEC") has granted the Portfolio an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Portfolio
may invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Portfolio in an amount sufficient to offset any doubling
up of investment advisory and shareholder servicing fees.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act, a reverse repurchase agreement is also
considered as the borrowing of money by the Portfolio and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Portfolio to be
magnified. The Portfolio will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, the Portfolio will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period, which exceeds the duration of the reverse repurchase
agreement. The Portfolio will establish and maintain with the Custodian a
separate account with a segregated Portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. All
forms of borrowing (including reverse repurchase agreements and securities
lending) are limited in the aggregate and may not exceed 33 1/3% of the
Portfolio's total assets.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Portfolio at least equal at all times to 100%
of the market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Portfolio any income accruing
thereon. Loans will be subject to termination by the Portfolio in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities,
which occurs during the term of the loan, inures to the Portfolio and its
respective investors. The Portfolio may pay reasonable finders' and custodial
fees in connection with a loan. In addition, the Portfolio will consider all
facts and circumstances including the creditworthiness of the borrowing
financial institution, the Portfolio will not make any loans in excess of one
year. The Portfolio will not lend its securities to any officer, Trustee, Member
of the Advisory Board, Director, employee or other affiliate of the Portfolio,
the Advisor or the exclusive placement agent, unless otherwise permitted by
applicable law. All forms of borrowing (including reverse repurchase agreements
and securities lending) are limited in the aggregate and may not exceed 33 1/3%
of the Portfolio's total assets.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the Portfolio's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Portfolio
may acquire investments that are illiquid or have limited liquidity, such as
private placements or investments that are not registered under the Securities
Act of 1933, as amended (the "1933 Act"), and cannot be offered for public sale
in the United States without first being registered under the 1933 Act. An
illiquid investment is any investment that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which it is
valued by the Portfolio. The price the Portfolio pays for illiquid securities or
receives upon resale may be lower than the price paid or received for similar
securities with a more liquid market. Accordingly the valuation of these
securities will reflect any limitations on their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor approved by the Trustees. The Trustees will monitor
the Advisor's implementation of these guidelines on a periodic basis.
As to illiquid investments, the Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the 1933 Act, before it may be sold, the Portfolio may
be obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
SYNTHETIC VARIABLE RATE INSTRUMENTS. The Portfolio may invest in
certain synthetic variable rate instruments. Such instruments generally involve
the deposit of a long-term tax exempt bond in a custody or trust arrangement and
the creation of a mechanism to adjust the long-term interest rate on the bond to
a variable short-term rate and a right (subject to certain conditions) on the
part of the purchaser to tender it periodically to a third party at par. Morgan
will review the structure of synthetic variable rate instruments to identify
credit and liquidity risks (including the conditions under which the right to
tender the instrument would no longer be available) and will monitor those
risks. In the event that the right to tender the instrument is no longer
available, the risk to the Portfolio will be that of holding the long-term bond.
In the case of some types of instruments credit enhancement is not provided, and
if certain events, which may include (a) default in the payment of principal or
interest on the underlying bond, (b) downgrading of the bond below investment
grade or (c) a loss of the bond's tax exempt status, occur, then (i) the put
will terminate, and (ii) the risk to the Portfolio will be that of holding a
long-term bond.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may purchase and sell (a) exchange traded and
over-the-counter (OTC) put and call options on fixed income securities, indexes
of fixed income securities and futures contracts on fixed income securities and
indexes of fixed income securities and (b) futures contracts on fixed income
securities and indexes of fixed income securities. Each of these instruments is
a derivative instrument as its value derives from the underlying asset or index.
The Portfolio may use futures contracts and options for hedging and
risk management purposes. The Portfolio may not use futures contracts and
options for speculation.
The Portfolio may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Portfolio's overall strategy in a manner deemed
appropriate to the Advisor and consistent with the Portfolio's objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary Portfolio securities transactions, and there can be no guarantee that
their use will increase the Portfolio's return. While the use of these
instruments by the Portfolio may reduce certain risks associated with owning its
Portfolio securities, these techniques themselves entail certain other risks. If
the Advisor applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Portfolio's return. Certain strategies limit the Portfolio's possibilities to
realize gains as well as its exposure to losses. The Portfolio could also
experience losses if the prices of its options and futures positions were poorly
correlated with its other investments, or if it could not close out its
positions because of an illiquid secondary market. In addition, the Portfolio
will incur transaction costs, including trading commissions and option premiums,
in connection with its futures and options transactions and these transactions
could significantly increase the Portfolio's turnover rate.
The Portfolio may purchase put and call options on securities, indexes
of securities and futures contracts or purchase and sell futures contracts, only
if such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Portfolio's net assets, and (ii) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets. In addition, the Portfolio will not purchase or sell
(write) futures contracts, options on futures contracts or commodity options for
risk management purposes if, as a result, the aggregate initial margin and
options premiums required to establish these positions exceed 5% of the net
asset value of the Portfolio.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
Portfolio obtains the right (but not the obligation) to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Portfolio pays the current market price for the option (known as the option
premium). Options have various types of underlying instruments, including
specific securities, indexes of securities, indexes of securities, indexes of
securities prices, and futures contracts. The Portfolio may terminate its
position in a put option it has purchased by allowing it to expire or by
exercising the option. The Portfolio may also close out a put option position by
entering into an offsetting transaction, if a liquid market exits. If the option
is allowed to expire, the Portfolio will lose the entire premium it paid. If the
Portfolio exercises a put option on a security, it will sell the instrument
underlying the option at the strike price. If the Portfolio exercises an option
on an index, settlement is in cash and does not involve the actual sale of
securities. If an option is American style, it may be exercised on any day up to
its expiration date. A European style option may be exercised only on its
expiration date.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, a Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. The Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. If the market is not
liquid for a put option the Portfolio has written, however, the Portfolio must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. The Portfolio may purchase or sell put and call
options on any securities index based on securities in which the Portfolio may
invest. Options on securities indexes are similar to options on securities,
except that the exercise of securities index options is settled by cash payment
and does not involve the actual purchase or sale of securities. In addition,
these options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. The Portfolio, in purchasing or selling index options, is
subject to the risk that the value of its Portfolio securities may not change as
much as an index because the Portfolio's investments generally will not match
the composition of an index.
For a number of reasons, a liquid market may not exist and thus the
Portfolio may not be able to close out an option position that it has previously
entered into. When the Portfolio purchases an OTC option, it will be relying on
its counterparty to perform its obligations, and the Portfolio may incur
additional losses if the counterparty is unable to perform.
EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the
Portfolio will be traded on a securities exchange or will be purchased or sold
by securities dealers (OTC options) that meet creditworthiness standards
approved by the Advisor. While exchange-traded options are obligations of the
Options Clearing Corporation, in the case of OTC options, the Portfolio relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when the Portfolio purchases an OTC option, it relies on the
dealer from which it purchased the option to make or take delivery of the
underlying securities. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction.
Provided that the Portfolio has arrangements with certain qualified
dealers who agree that the Portfolio may repurchase any option it writes for a
maximum price to be calculated by a predetermined formula, the Portfolio may
treat the underlying securities used to cover written OTC options as liquid. In
these cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
FUTURES CONTRACTS
The Portfolio may purchase and sell futures contracts. When the
Portfolio purchases a futures contract, it agrees to purchase a specified
quantity of an underlying instrument at a specified future date or to make cash
payment based on the value of a securities index. When the Portfolio sells a
futures contract, it agrees to sell a specified quantity of the underlying
instrument at a specified future date or to receive a cash payment based on the
value of a securities index. The price at which the purchase and sale will take
place is fixed when the Portfolio enters into the contract. Futures can be held
until their delivery dates or the position can be (and normally is) closed out
before then. There is no assurance, however, that a liquid market will exist
when the Portfolio wishes to close out a particular position.
When the Portfolio purchases a futures contract, the value of the
futures contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Portfolio's exposure to positive and negative price fluctuations in
the underlying instrument, much as if it had purchased the underlying instrument
directly. When the Portfolio sells a futures contract, by contrast, the value of
its futures position will tend to move in a direction contrary to the value of
the underlying instrument. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Portfolio buys or sells a futures contract
it will be required to deposit "initial margin" with its custodian in a
segregated account in the name of its futures broker, known as a futures
commission merchant (FCM). Initial margin deposits are typically equal to a
small percentage of the contract's value. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments equal to the change in value on a daily basis. The party that
has a gain may be entitled to receive all or a portion of this amount. The
Portfolio may be obligated to make payments of variation margin at a time when
it is disadvantageous to do so. Furthermore, it may not always be possible for
the Portfolio to close out its futures positions. Until it closes out a futures
position, the Portfolio will be obligated to continue to pay variation margin.
Initial and variation margin payments do not constitute purchasing on margin for
purposes of the Portfolio's investment restrictions. In the event of the
bankruptcy of an FCM that holds margin on behalf of the Portfolio, the Portfolio
may be entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to the
Portfolio.
The Portfolio will segregate liquid assets in connection with its use
of options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Portfolio's assets could impede
Portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
Options on Futures Contracts. The Portfolio may purchase and sell write
put and call options, including put and call options on futures contracts.
Futures contracts obligate the buyer to take and the seller to make delivery at
a future date of a specified quantity of a financial instrument or an amount of
cash based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Portfolio are paid by the Portfolio into a segregated
account, in the name of the FCM, as required by the 1940 Act and the SEC's
interpretations thereunder.
COMBINED POSITIONS. The Portfolio may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the
Portfolio's current or anticipated investments exactly. The Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Portfolio's options
or futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance that
a liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require the Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and OTC Options" above
for a discussion of the liquidity of options not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. Although
the Portfolio will not be a commodity pool, certain derivatives subject the
Portfolio to the rules of the Commodity Futures Trading Commission which limit
the extent to which the Portfolio can invest in such derivatives. The Portfolio
may invest in futures contracts and options with respect thereto for hedging
purposes without limit. However, the Portfolio may not invest in such contracts
and options for other purposes if the sum of the amount of initial margin
deposits and premiums paid for unexpired options with respect to such contracts,
other than for bona fide hedging purposes, exceeds 5% of the liquidation value
of the Portfolio's assets, after taking into account unrealized profits and
unrealized losses on such contracts and options; provided, however, that in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation.
In addition, the Portfolio will comply with guidelines established by
the SEC with respect to coverage of options and futures contracts by mutual
funds, and if the guidelines so require, will set aside appropriate liquid
assets in a segregated custodial account in the amount prescribed. Securities
held in a segregated account cannot be sold while the futures contract or option
is outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a large percentage of the
Portfolio's assets could impede Portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
SWAPS AND RELATED SWAP PRODUCTS. The Portfolio may engage in swap
transactions, including, but not limited to, interest rate, currency, securities
index, basket, specific security and commodity swaps, interest rate caps, floors
and collars and options on interest rate swaps (collectively defined as "swap
transactions").
The Portfolio may enter into swap transactions for any legal purpose
consistent with its investment objective and policies, such as for the purpose
of attempting to obtain or preserve a particular return or spread at a lower
cost than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date, or to gain
exposure to certain markets in the most economical way possible. The Portfolio
will not sell interest rate caps, floors or collars if it does not own
securities with coupons, which provide the interest that the Portfolio may be
required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis
for calculating the payments that the parties have agreed to exchange. For
example, one swap counterparty may agree to pay a floating rate of interest
(e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a
quarterly basis in exchange for receipt of payments calculated based on the same
notional amount and a fixed rate of interest on a semi-annual basis. In the
event the Portfolio is obligated to make payments more frequently than it
receives payments from the other party, it will incur incremental credit
exposure to that swap counterparty. This risk may be mitigated somewhat by the
use of swap agreements which call for a net payment to be made by the party with
the larger payment obligation when the obligations of the parties fall due on
the same date. Under most swap agreements entered into by the Portfolio,
payments by the parties will be exchanged on a "net basis", and the Portfolio
will receive or pay, as the case may be, only the net amount of the two
payments.
The amount of the Portfolio's potential gain or loss on any swap
transaction is not subject to any fixed limit. Nor is there any fixed limit on
the Portfolio's potential loss if it sells a cap or collar. If the Portfolio
buys a cap, floor or collar, however, the Portfolio's potential loss is limited
to the amount of the fee that it has paid. When measured against the initial
amount of cash required to initiate the transaction, which is typically zero in
the case of most conventional swap transactions, swaps, caps, floors and collars
tend to be more volatile than many other types of instruments.
The use of swap transactions, caps, floors and collars involves
investment techniques and risks which are different from those associated with
Portfolio security transactions. If the Advisor is incorrect in its forecasts of
market values, interest rates, and other applicable factors, the investment
performance of the Portfolio will be less favorable than if these techniques had
not been used. These instruments are typically not traded on exchanges.
Accordingly, there is a risk that the other party to certain of these
instruments will not perform its obligations to the Portfolio or that the
Portfolio may be unable to enter into offsetting positions to terminate its
exposure or liquidate its position under certain of these instruments when it
wishes to do so.
Such occurrences could result in losses to the Portfolio.
The Advisor will, however, consider such risks and will enter into swap
and other derivatives transactions only when it believes that the risks are not
unreasonable.
The Portfolio will maintain cash or liquid assets in a segregated
account with its custodian in an amount sufficient at all times to cover its
current obligations under its swap transactions, caps, floors and collars. If
the Portfolio enters into a swap agreement on a net basis, it will segregate
assets with a daily value at least equal to the excess, if any, of the
Portfolio's accrued obligations under the swap agreement over the accrued amount
the Portfolio is entitled to receive under the agreement. If the Portfolio
enters into a swap agreement on other than a net basis, or sells a cap, floor or
collar, it will segregate assets with a daily value at least equal to the full
amount of the Portfolio 's accrued obligations under the agreement.
The Portfolio will not enter into any swap transaction, cap, floor, or
collar, unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as
set forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset the Portfolio 's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value
of the instrument are recognized as unrealized gains or losses by marking to
market to reflect the market value of the instrument. When the instrument is
terminated, the Portfolio will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and the Portfolio's basis in the contract.
The federal income tax treatment with respect to swap transactions,
caps, floors, and collars may impose limitations on the extent to which the
Portfolio may engage in such transactions.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Portfolio is registered as a non-diversified investment company,
which means that the Portfolio is not limited by the 1940 Act in the proportion
of its assets that may be invested in the obligations of a single issuer. Thus,
the Portfolio may invest a greater proportion of its assets in the securities of
a smaller number of issuers and, as a result, may be subject to greater risk
with respect to its Portfolio securities. The Portfolio, however, will comply
with the diversification requirements imposed by the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company. See "Taxes".
It is the current policy of the Portfolio that under normal
circumstances at least 90% of total assets will consist of securities that at
the time of purchase are rated Baa or better by Moody's or BBB or better by
Standard & Poor's. The remaining 10% of total assets may be invested in
securities that are rated B or better by Moody's or Standard & Poor's. See
"Below Investment Grade Debt" below. In each case, the Portfolio may invest in
securities which are unrated, if in the Advisor's opinion, such securities are
of comparable quality. Securities rated Baa by Moody's or BBB by Standard &
Poor's are considered investment grade, but have some speculative
characteristics. Securities rated Ba or B by Moody's and BB or B by Standard &
Poor's are below investment grade and considered to be speculative with regard
to payment of interest and principal. These standards must be satisfied at the
time an investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment.
For purposes of diversification under the Code and concentration under
the 1940 Act, identification of the issuer of municipal bonds or notes depends
on the terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision is
regarded as the sole issuer. Similarly, in the case of an industrial development
revenue bond or pollution control revenue bond, if the bond is backed only by
the assets and revenues of the subdivision, such subdivision is regarded as the
sole issuer. Similarly, in the case of an industrial development revenue bond or
pollution control revenue bond, if the bond is backed only by the assets and
revenues of the nongovernmental user, the nongovernmental user is regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor. Since securities issued or guaranteed by
states or municipalities are not voting securities, there is no limitation on
the percentage of a single issuer's securities which the Portfolio may own so
long as it does not invest more than 5% of its total assets that are subject to
the diversification limitation in the securities of such issuer, except
obligations issued or guaranteed by the U.S. Government. Consequently, the
Portfolio may invest in a greater percentage of the outstanding securities of a
single issuer than would an investment company, which invests in voting
securities. See "Investment Restrictions" below.
The Portfolio invests principally in a Portfolio of "investment grade" tax
exempt securities. An investment grade bond is rated, on the date of investment,
within the four highest ratings of Moody's, currently Aaa, Aa, A and Baa or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment, within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or Prime
2 by Moody's and A-1 or A-2 by Standard & Poor's. The Portfolio may also invest
up to 10% of its total assets in securities, which are "below investment grade."
Such securities must be rated, on the date of investment, B or better by Moody's
or Standard & Poor's, or of comparable quality. The Portfolio may invest in debt
securities, which are not rated or other debt securities to which these ratings
are not applicable, if in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Portfolio invests in any commercial paper, bank obligation, repurchase
agreement, or any other money market instruments, the investment must have
received a short term rating of investment grade or better (currently Prime-3 or
better by Moody's or A-3 or better by Standard & Poor's) or the investment must
have been issued by an issuer that received a short term investment grade rating
or better with respect to a class of investments or any investment within that
class that is comparable in priority and security with the investment being
purchased by the Portfolio. If no such ratings exist, the investment must be of
comparable investment quality in the Advisor's opinion, but will not be eligible
for purchase if the issuer or its parent has long term outstanding debt rated
below BBB.
BELOW INVESTMENT GRADE DEBT. Certain lower rated securities purchased
by the Portfolio, such as those rated Ba or B by Moody's or BB or B by Standard
& Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
higher coupons or interest rates than investments in higher quality securities,
lower quality fixed income securities involve greater risk of loss of principal
and income, including the possibility of default or bankruptcy of the issuers of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Portfolio invests in such lower quality securities, the achievement of
its investment objective may be more dependent on the Advisor's own credit
analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Portfolio's
Portfolio securities for purposes of determining the Portfolio's net asset
value. See Appendix A for more detailed information on these ratings.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
RISK MANAGEMENT
The Portfolio may employ non-hedging risk management techniques.
Examples of such strategies include synthetically altering the duration of its
Portfolio or the mix of securities in its Portfolio. For example, if the Advisor
wishes to extend maturities in a fixed income Portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long-term securities, it might cause the Portfolio to
purchase futures contracts on long-term debt securities. Similarly, if the
Advisor wishes to decrease fixed income securities or purchase equities, it
could cause the Portfolio to sell futures contracts on debt securities and
purchase futures contracts on a stock index. Such non-hedging risk management
techniques are not speculative, but because they involve leverage include, as do
all leveraged transactions, the possibility of losses as well as gains that are
greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.
Special Factors Affecting the Portfolio. The Portfolio intends to
invest a high proportion of its assets in municipal obligations in New York
Municipal Securities. Payment of interest and preservation of principal is
dependent upon the continuing ability of New York issuers and/or obligors of New
York Municipal Securities to meet their obligations thereunder.
The fiscal stability of New York is related, at least in part, to the
fiscal stability of its localities and authorities. Various New York agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by New York through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such New York agencies,
authorities and localities, in the past the State has had to provide special
assistance, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. The presence of such aid in the future
should not be assumed. To the extent that New York agencies and local
governments require State assistance to meet their financial obligations, the
ability of New York to meet its own obligations as they become due or to obtain
additional financing could be adversely affected.
For further information concerning New York Municipal Obligations, see Appendix
B. The summary set forth above and in Appendix B is based on information from an
official statement of New York general obligation municipal obligations and does
not purport to be complete.
PORTFOLIO TURNOVER. The Portfolio turnover rates for the fiscal years
ended March 31, 1999, for the four months ended July 31, 1999 and for the fiscal
year ended July 31, 2000 were: 44%, 8% (not annualized) and 86% respectively. A
rate of 100% indicates that the equivalent of all of the Portfolio's assets have
been sold and reinvested in a year. High Portfolio turnover may result in the
realization of substantial net capital gains. To the extent net short term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes. See Item 20 below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio.
Except where otherwise noted, these investment restrictions are "fundamental"
policies which, under the 1940 Act, may not be changed without the vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio. A "majority of the outstanding voting securities" is defined in
the 1940 Act as the lesser of (a) 67% or more of the voting securities present
at a security holders meeting if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy, or (b) more than 50% of
the outstanding voting securities. The percentage limitations contained in the
restrictions below apply at the time of the purchase of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof, are amended or modified, the Portfolio may not:
1. Purchase any security which would cause the Portfolio to concentrate
its investments in the securities of issuers primarily engaged in any
particular industry except as permitted by the SEC;
2. Issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
3. Borrow money, except to the extent permitted by applicable law;
4. Underwrite securities of other issuers, except to the extent that the
Portfolio, in disposing of Portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
5. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Portfolio may (a) invest in securities or other
instruments directly or indirectly secured by real estate, (b) invest
in securities or other instruments issued by issuers that invest in
real estate, and (c) make direct investments in mortgages;
6. Purchase or sell commodities or commodity contracts unless acquired as
a result of ownership of securities or other instruments issued by
persons that purchase or sell commodities or commodities contracts; but
this shall not prevent the Portfolio from purchasing, selling and
entering into financial futures contracts (including futures contracts
on indices of securities, interest rates and currencies), options on
financial futures contracts (including futures contracts on indices of
securities, interest rates and currencies), warrants, swaps, forward
contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities;
and
7. The Portfolio may make loans to other persons, in accordance with the
Portfolio's investment objective and policies and to the extent
permitted by applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Portfolio and may be changed
by the Trustees. These non-fundamental investment policies require that the
Portfolio may not:
1. Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration
of over seven calendar days, if as a result thereof, more than 15% of
the market value of the Portfolio's net assets would be in investments
which are illiquid;
2. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued or
delayed delivery securities, or to short sales that are covered in
accordance with SEC rules; and
3. Acquire securities of other investment companies, except as permitted by
the 1940 Act or any order
pursuant thereto.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
ITEM 13. MANAGEMENT OF THE PORTFOLIO.
The Trustees of the Portfolio, their principal occupations during the
past five years and dates of birth are set forth below. The mailing address of
the Trustees is c/o Pierpont Group, Inc., 461 Fifth Avenue, New York, New York
10017.
Frederick S. Addy - Trustee; Retired; Prior to April 1994, Executive
Vice President and Chief Financial Officer Amoco Corporation. His date of birth
is January 1, 1932.
William G. Burns - Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His date
of birth is November 2, 1932.
Arthur C. Eschenlauer - Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His date of birth is May 23, 1934.
Matthew Healey2 - Trustee, Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc. ("Pierpont Group ") since prior to 1993. His date of birth
is August 23, 1937.
Michael P. Mallardi - Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His date of
birth is March 17, 1934.
The Trustees of the Portfolio are the same as the Trustees of each of
the other Master Portfolios (as defined below), the J.P. Morgan Funds, the J.P.
Morgan Institutional Funds and J.P. Morgan Series Trust. In accordance with
applicable state requirements, a majority of the disinterested Trustees have
adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
Trustees of the Master Portfolios, the J.P. Morgan Funds and the J.P. Morgan
Institutional Funds, up to and including creating a separate board of trustees.
Each Trustee is currently paid an annual fee of $75,000 for serving as
Trustee of the Master Portfolios (as defined below), the J.P. Morgan Funds, the
J.P. Morgan Institutional Funds and J.P. Morgan Series Trust and is reimbursed
for expenses incurred in connection with service as a Trustee. The Trustees may
hold various other directorships unrelated to the Portfolio.
Trustee compensation expenses paid by the Portfolio for the calendar
year ended December 31, 1999 are set forth below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------- --------------------------------- -----------------------------------------
TOTAL TRUSTEE COMPENSATION ACCRUED BY
THE MASTER PORTFOLIOS(*), J.P. MORGAN
AGGREGATE TRUSTEE COMPENSATION FUNDS AND J.P. MORGAN SERIES TRUST
PAID BY THE PORTFOLIO DURING DURING 1999(**)
NAME OF TRUSTEE 1999
---------------------------------------- --------------------------------- -----------------------------------------
---------------------------------------- --------------------------------- -----------------------------------------
Frederick S. Addy, $511 $75,000
Trustee
---------------------------------------- --------------------------------- -----------------------------------------
---------------------------------------- --------------------------------- -----------------------------------------
William G. Burns, $511 $75,000
Trustee
---------------------------------------- --------------------------------- -----------------------------------------
---------------------------------------- --------------------------------- -----------------------------------------
Arthur C. Eschenlauer, $511 $75,000
Trustee
---------------------------------------- --------------------------------- -----------------------------------------
---------------------------------------- --------------------------------- -----------------------------------------
Matthew Healey, $511 $75,000
Trustee (***), Chairman
And Chief Executive
Officer
---------------------------------------- --------------------------------- -----------------------------------------
---------------------------------------- --------------------------------- -----------------------------------------
Michael P. Mallardi, $511 $75,000
Trustee
---------------------------------------- --------------------------------- -----------------------------------------
</TABLE>
(*) Includes the Portfolio and 18 other Portfolios (collectively, the
"Master Portfolios") for which JPMIM acts as investment adviser.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 22 investment companies (comprised
of 19 investment companies comprising the Master Portfolios, the J.P.
Morgan Funds, the J.P. Morgan Institutional Funds and J.P. Morgan
Series Trust) in the fund complex.
(***) During 1999, Pierpont Group paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc. compensation in the amount of $153,800, contributed
$23,100 to a defined contribution plan on his behalf and paid $17,300 in
insurance premiums for his benefit.
The Trustees of the Portfolio, in addition to reviewing actions of the
Portfolio's various service providers, decide upon matters of general policy. On
January 15, 1994 the Portfolio entered into a Portfolio Fund Services Agreement
with Pierpont Group to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio's affairs. Pierpont Group was
organized in July 1989 to provide services for The Pierpont Family of Funds, and
the Trustees are the equal and sole shareholders of Pierpont Group. The
Portfolio has agreed to pay Pierpont Group a fee in an amount representing its
reasonable costs in performing these services to the Portfolio and other
registered investment companies subject to similar agreements with Pierpont
Group. These costs are periodically reviewed by the Trustees.
The aggregate fees paid to Pierpont Group by the Portfolio for the
fiscal years ended March 31, 1999, for the four months ended July 31, 1999 and
for the fiscal years end July 31, 2000: $6,630, $2,300 and $4,457 respectively.
The Portfolio has no employees; its executive officers (listed below), other
than the Chief Executive Officer and the officers who are employees of the
Advisor, are provided and compensated by Funds Distributor, Inc. ("FDI"), a
wholly owned, indirect subsidiary of Boston Institutional Group, Inc. The
Portfolio's officers conduct and supervise the business operations of the
Portfolio.
Members of the Advisory Board.
The Trustees determined as of January 26, 2000 to establish an advisory
board and appoint four members ("Members of the Advisory Board") thereto. Each
member serves at the pleasure of the Trustees. The advisory board is distinct
from the Trustees and provides advice to the Trustees as to investment,
management and operations of the Trust; but has no power to vote upon any matter
put to a vote of the Trustees. The advisory board and the members thereof also
serve each of J.P. Morgan Funds, J.P. Morgan Series Trusts, and collectively,
together with the Trust (the "Trusts") and the Master Portfolios. It is also the
current intention of the Trustees that the Members of the Advisory Board will be
proposed at the next shareholders' meeting, expected to be held within a year
from the date hereof, for election as Trustees of the Trusts and the Master
Portfolios. The creation of the Advisory Board and the appointment of the
members thereof was designed so that the Board of Trustees will continuously
consist of persons able to assume the duties of Trustees and be fully familiar
with the business and affairs of each of the Trusts and the Master Portfolios,
in anticipation of the current Trustees reaching the mandatory retirement age of
seventy. Each member of the Advisory Board is paid an annual fee of $75,000 for
serving in this capacity for the Trust, each of the Master Portfolios, the J.P.
Morgan Funds and the J.P. Morgan Series Trust and is reimbursed for expenses
incurred in connection for such service. The members of the Advisory Board may
hold various other directorships unrelated to these funds. The mailing address
of the Members of the Advisory Board is c/o Pierpont Group, Inc., 461 Fifth
Avenue, New York, New York 10017. Their names, principal occupations during the
past five years and dates of birth are set forth below:
Ann Maynard Gray; Former President, Diversified Publishing Group and
Vice President, Capital Cities/ABC, Inc. Her date of birth is August 22, 1945.
John R. Laird; Retired; Former Chief Executive Officer, Shearson Lehman
Brothers and The Boston Company.
His date of birth is June 21, 1942.
Gerard P. Lynch; Retired; Former Managing Director, Morgan Stanley
Group and President and Chief Operating Officer, Morgan Stanley Services, Inc.
His date of birth is October 5, 1936.
James J. Schonbachler; Retired; Prior to September, 1998, Managing
Director, Bankers Trust Company and Chief Executive Officer and Director,
Bankers Trust A.G., Zurich and BT Brokerage Corp. His date of birth is January
26, 1943.
The officers of the Portfolio, their principal occupations during the
past five years and dates of birth are set forth below. The business address of
each of the officers unless otherwise noted is 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1995. His address is c/o Pierpont Group, Inc., 461 Fifth Avenue,
New york, New York, 10017. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI since
prior to 1995.
Her date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. His date of birth is March 31,
1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice
President and Senior Counsel of FDI and an officer of certain investment
companies distributed or administered by FDI. From June 1994 to January 1996,
Ms. Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark,
Inc. Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. His date of birth is December 24, 1964.
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Her date of birth is July 5, 1972.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Prior to September 1995,
Ms. Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 522 Fifth Avenue, New York, New York 10036. Her date of
birth is March 13, 1966.
GEORGE A. RIO; President and Treasurer. Executive Vice President and Client
Service Director of FDI since April 1998. From June 1995 to March 1998, Mr. Rio
was Senior Vice President and Senior Key Account Manager for Putnam Mutual
Funds. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves as Manager of the Funds
Infrastructure group and is responsible for the management of special projects.
Prior to January 2000, she served as Manager of the Tax Group in the Funds
Administration group and was responsible for U.S. mutual fund tax matters. Her
address is 60 Wall Street, New York, New York 10260. Her date of birth is
September 26, 1965.
ELBA VASQUEZ; Vice President and Assistant Secretary. Vice President of FDI
since February 1999. Ms. Vasquez served as a Sales Associate for FDI from May
1996. Prior to that she served in various mutual fund sales and marketing
positions for U.S. Trust Company of New York. Her date of birth is December 14,
1961.
The Portfolio's Declaration of Trust provides that it 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 Portfolio, unless, as to liability to the Portfolio or its
investors, 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 unless with respect to any other matter it is finally
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interests of the Portfolio. 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.
CODES OF ETHICS
The Trust, FDI and the Advisor have adopted codes of ethics
pursuant to Rule 17j-1 under the 1940 Act. Each of these codes permits personnel
subject to such code to invest in securities, including securities that may be
purchased or held by the funds. Such purchases, however, are subject to
procedures reasonably necessary to prevent access persons from engaging in any
unlawful conduct set forth in Rule 17j-1.
ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of July 31, 1999, the J.P. Morgan Institutional New York Tax Exempt
Bond Fund and the J.P. Morgan New York Tax Exempt Bond Fund (series of the J.P.
Morgan Institutional Funds and the J.P. Morgan Funds, respectively) (the
"Funds") owned 58% and 42%, respectively, of the outstanding beneficial
interests in the Portfolio. So long as the Funds control the Portfolio, they may
take actions without the approval of any other holders of beneficial interest,
if any, in the Portfolio.
Each of the Funds has informed the Portfolio that whenever it is
requested to vote on matters pertaining to the Portfolio (other than a vote by a
Portfolio to continue the operation of the Portfolio upon the withdrawal of
another investor in the Portfolio), it will hold a meeting of its shareholders
and will cast its vote as instructed by those shareholders.
None of the officers or Trustees of the Portfolio own any of the
outstanding beneficial interests in the Portfolio.
ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is JPMIM, a
wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), a
registered investment adviser under the Investment Advisers Act of 1940, as
amended. The Advisor, whose principal offices are at 522 Fifth Avenue, New York,
New York 10036 manages employee benefit funds of corporations, labor unions and
state and local governments and the accounts of other institutional investors,
including investment companies. Certain of the assets of employee benefit
accounts under its management are invested in commingled pension trust funds for
which the Advisor serves as trustee.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of approximately $373 billion.
Morgan, whose principal offices are at 60 Wall Street, New York, New
York 10260, is a New York trust company, which conducts a general banking and
trust business. Morgan is subject to regulation by the New York State Banking
Department and is a member bank of the Federal Reserve System. Through offices
in New York City and abroad, Morgan offers a wide range of services, primarily
to governmental, institutional, corporate and high net worth individual
customers in the United States and throughout the world. The firm, through its
predecessor firms, has been in business for over a century and has been managing
investments since 1913. Morgan is also a wholly owned subsidiary of J.P. Morgan,
is a bank holding company organized under the laws of the State of Delaware.
The basis of the Advisor's investment process is fundamental investment
research, as the firm believes that fundamentals should determine an asset's
value over the long term. Morgan currently employs approximately 415 research
analysts, capital market researchers, portfolio managers and traders, and has
one of the largest research staffs in the money management industry. The Advisor
has investment management divisions located in New York, London, Tokyo,
Frankfurt and Singapore to cover companies, industries and countries on site.
The Advisor's fixed income investment process is based on analysis of real
rates, sector diversification and quantitative and credits analysis.
The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts, which
are managed or advised by the Advisor, have varying investment objectives and
the Advisor invests assets of such accounts in investments substantially similar
to, or the same as, those which are expected to constitute the principal
investments of the Portfolio. Such accounts are supervised by officers and
employees of the Advisor who may also be acting in similar capacities for the
Portfolio. See Item 17 below.
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio is currently Lehman
Brothers New York 1 to 17 Years Municipal Bond Index. Previously the Portfolio
used the Lehman Brother 1-16 Year municipal Bond Index, which is composed of
tax-exempt securities of various states and measures overall tax-exempt bond
market performance, as a comparative broad-based securities market index. The
Portfolio has chosen the Lehman Brothers New York 1 to 17 Years Municipal Bond
Index because it measures New York tax-exempt bond market performance universe
of securities in which the Portfolio invests.
The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of
certain investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.30% of the
Portfolio's average daily net assets. For the fiscal years ended March 31, 1999,
for the four months ended July 31, 1999 and for the fiscal year ended July 31,
2000, the advisory fees paid by the Portfolio were $796,521, $298,444 and
$809,418 respectively.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
annually thereafter (i) by a vote of the holders of a majority of the
Portfolio's outstanding securities or by its Trustees and (ii) by a vote of a
majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" as defined by the 1940 Act cast in person at a meeting
called for the purpose of voting on such approval. The Investment Advisory
Agreement will terminate automatically if assigned and is terminable at any time
without penalty by a vote of a majority of the Trustees of the Portfolio or by a
vote of the holders of a majority of the Portfolio's voting securities on 60
days' written notice to the Advisor and by the Advisor on 90 days' written
notice to the Portfolio.
CO-ADMINISTRATOR. Under the Portfolio's Co-Administration Agreement
dated August 1, 1996, FDI serves as the Portfolio's Co-Administrator. The Co-
Administration Agreement may be renewed or amended by the Trustees without an
investor vote. The Co-Administration Agreement is terminable at any time without
penalty by a vote of a majority of the Trustees of the Portfolio on not more
than 60 days' written notice nor less than 30 days' written notice to the other
party. The Co-Administrator may, subject to the consent of the Trustees of the
Portfolio, subcontract for the performance of its obligations, provided,
however, that unless the Portfolio expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Portfolio; (ii)
provides officers for the Portfolio; (iii) files Portfolio regulatory documents
and mails Portfolio communications to Trustees and investors; and (iv) maintains
related books and records.
For its services under the Co-Administration Agreement, the Portfolio
has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Portfolio is based on the ratio of its net assets to the
aggregate net assets of the J.P. Morgan Funds, the J.P. Morgan Institutional
Funds, the Master Portfolios, and certain other investment companies subject to
similar agreements with FDI. The administrative fees paid by the Portfolio to
FDI period for the fiscal years ended March 31, 1999 and for the fiscal year
ended July 31, 2000: $3,052 and $1,437 respectively.
For the four months ended July 31, 1999: $880.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into a
Restated Administrative Services Agreement (the "Services Agreement") with
Morgan, pursuant to which Morgan is responsible for certain administrative and
related services provided to the Portfolio, including services related to tax
compliance, financial statements, calculation of performance data, oversight of
service providers and certain regulatory and Board of Trustees matters.
Under the Services Agreement, effective August 1, 1996, the Portfolio
has agreed to pay Morgan fees equal to its allocable share of an annual
complex-wide charge. This charge is calculated daily based on the aggregate net
assets of the Master Portfolios and J.P. Morgan Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their aggregate average daily net assets
in excess of $7 billion, less the complex-wide fees payable to FDI. The portion
of this charge payable by the Portfolio is determined by the proportionate share
that its net assets bear to the total net assets of the J.P. Morgan Funds, the
J.P. Morgan Institutional Funds, the Master Portfolios, the other investors in
the Master Portfolios for which Morgan provides similar services and J.P. Morgan
Series Trust.
For the fiscal years ended March 31, 1999, for the four months ended
July 31, 1999 and for the fiscal year ended July 31, 2000: $73,366, $25,575 and
$68,240 respectively, in administrative services fees.
PLACEMENT AGENT. FDI, a registered broker-dealer, also serves as
exclusive placement agent for the Portfolio. FDI is a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. FDI's principal business address
is 60 State Street, Suite 1300, Boston, Massachusetts 02109.
CUSTODIAN. The Bank of New York ("BONY"), One Wall Street, New York,
New York 10286, serves as the Trust's custodian and fund accounting agent.
Pursuant to the Custodian Contract and Fund Accounting Agreement with the Trust,
BONY is responsible for holding portfolio securities and cash and maintaining
the books of account and records of the Fund's portfolio transactions.
INDEPENDENT ACCOUNTANTS. The independent accountants of the Portfolio
are PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of the Portfolio, assists in the preparation and/or review of the
Portfolio's federal and state income tax returns and consults with the Portfolio
as to matters of accounting and federal and state income taxation.
EXPENSES. In addition to the fees payable to the service providers
identified above, the Portfolio is responsible for usual and customary expenses
associated with its operations. Such expenses include organization expenses,
legal fees, insurance costs, the compensation and expenses of the Trustees,
registration fees under federal securities laws, and extraordinary expenses
applicable to the Portfolio. Such expenses also include brokerage expenses.
ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales
of Portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of Portfolio securities on
behalf of the Portfolio. See Item 13 above.
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally
to accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short term trading
consistent with its objective.
In connection with Portfolio transactions for the Portfolio, the
Advisor intends to seek best execution on a competitive basis for both purchases
and sales of securities.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
Portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any Portfolio transactions for the
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of the Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
The Portfolio's Portfolio securities will not be purchased from or
through or sold to or through the exclusive placement agent or Advisor or any
other "affiliated person" (as defined in the 1940 Act) of the exclusive
placement agent or Advisor when such entities are acting as principals, except
to the extent permitted by law. In addition, the Portfolio will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
Investment decisions made by the Advisor are the product of many
factors in addition to basic suitability for the particular Portfolio or other
client in question. Thus, a particular security may be bought or sold for
certain clients even though it could have been bought or sold for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the same security. The
Portfolio may only sell a security to other Portfolios or accounts managed by
the Advisor or its affiliates in accordance with procedures adopted by the
Trustees.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
customers, including other Master Portfolios, the Advisor, to the extent
permitted by applicable laws and regulations, may, but is not obligated to,
aggregate the securities to be sold or purchased for the Portfolio with those to
be sold or purchased for other customers in order to obtain best execution,
including lower brokerage commissions if appropriate. In such event, allocation
of the securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Portfolio. In
some instances, this procedure might adversely affect the Portfolio.
If the Portfolio effects a closing purchase transaction with respect to
an option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
ITEM 17. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred, but an
investor may withdraw all or any portion of its investment at any time at net
asset value. Certificates representing an investor's beneficial interest in the
Portfolio are issued only upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
vote of investors (with the vote of each being in proportion to the amount of
its investment). Changes in fundamental policies will be submitted to investors
for approval. Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also have
the right to remove one or more Trustees without a meeting by a declaration in
writing by a specified percentage of the outstanding interests in the Portfolio.
Upon liquidation of the Portfolio, investors would be entitled to share pro rata
in the net assets of the Portfolio available for distribution to investors.
The "net income" of the Portfolio will consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of the Portfolio. All the net income of the
Portfolio is allocated pro rata among the investors in the Portfolio.
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of the investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) will be sufficient. The Portfolio may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment) or (ii) by the Trustees by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Portfolio's Declaration of Trust further provides that obligations
of the Portfolio are not binding upon the Trustees individually but only upon
the property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, 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.
As of July 31, 2000, the J.P. Morgan Institutional New York Tax Exempt
Bond Fund, (formerly J.P. Morgan Institutional New York Total Return Bond Fund)
and the J.P. Morgan New York Tax Exempt Bond Fund, (formerly J.P. Morgan New
York Total Return Bond Fund) (series of J.P. Morgan Institutional Funds and J.P.
Morgan Funds, respectively) (the "Funds") owned 58% and 42%, respectively, of
the outstanding beneficial interests in the Portfolio. So long as the Funds
control the Portfolio, they may take actions without the approval of any other
holders of beneficial interest, if any, in the Portfolio.
ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
The Portfolio computes its net asset value once daily on Monday through
Friday at the time described in Part A. The net asset value will not be computed
on the days the following legal holidays are observed: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. On days when the U.S.
trading markets close early, the Portfolio will close for purchases and
redemptions at the same time. The Portfolio may also close for purchases and
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. The days on which net asset value is
determined are the Portfolio's business days.
Listed options on debt securities traded on U.S. option exchanges shall
be valued at their closing price on such exchanges. Futures on debt securities
and related options traded on commodities exchanges shall be valued at their
closing price as of the close of such commodities exchanges, which is currently
4:15 p.m., New York time. Options and future traded on foreign exchanges shall
be valued at the last sale or close price available prior to the calculation of
the Funds' net asset value. Non-listed OTC options and swaps shall be valued at
the closing price provided by a counterparty or third-party broker.
Fixed income securities with a maturity of 60 days or more are
generally valued using bid quotations readily available from and supplied daily
by pricing services or brokers. If such prices are generally not readily
available from the Fund's pricing services or brokers, such securities are
priced in accordance with fair value procedures adopted by the Trustees. Such
fair value procedures include the use of pricing services, which use prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. Fixed income securities with a remaining maturity of less than 60
days are valued by the amortized cost method.
ITEM 19. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts. However each investor in the Portfolio will be
taxable on its share (as determined in accordance with the governing instruments
of the Portfolio) of the Portfolio's ordinary income and capital gain in
determining its income tax liability. The determination of such share will be
made in accordance with the Code, and regulations promulgated thereunder.
Although, as described above, the Portfolio will not be subject to
federal income tax, it will file appropriate income tax returns.
It is intended that the Portfolio's assets will be managed in such a
way that an investor in the Portfolio will be able to satisfy the requirements
of Subchapter M of the Code.
The Portfolio intends to qualify to allocate tax exempt interest to its
investors by having, at the close of each quarter of its taxable year, at least
50% of the value of its total assets consist of tax exempt securities. Tax
exempt interest is that part of income earned by the Portfolio, which consists
of interest, received by the Portfolio on tax exempt securities. In view of the
Portfolio's investment policies, it is expected that a substantial portion of
all income will be tax exempt income, although the Portfolio may from time to
time realize net short-term capital gains and may invest limited amounts in
taxable securities under certain circumstances.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put option is acquired
or a call option is written thereon or the straddle rules described below are
otherwise applicable. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by the Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Any gain or loss realized on the redemption or exchange of Portfolio
shares by a shareholder who is not a dealer in securities will be treated as
long-term capital gain or loss if the shares have been held for more than one
year, and otherwise as short-term capital gain or loss. Long-term capital gain
of an individual holder is subject to maximum tax rate of 20%. However, any loss
realized by a shareholder upon the redemption or exchange of shares in the
Portfolio held for six months or less (i) will be treated as a long-term capital
loss to the extent of any long-term capital gain distributions received by the
shareholder with respect to such shares, and (ii) will be disallowed to the
extent of any exempt-interest dividends received by the shareholder with respect
to such shares. In addition, no loss will be allowed on the redemption or
exchange of shares of the Portfolio, if within a period beginning 30 days before
the date of such redemption or exchange and ending 30 days after such date, the
shareholder acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Portfolio. Investors are urged to
consult their tax advisors concerning the limitations on the deductibility of
capital losses.
Options and futures contracts entered in by the Portfolio may create
"straddles" for U.S. federal income tax purposes and this may affect the
character and timing of gains or losses realized by the Portfolio on options and
futures contracts or on the underlying securities.
Certain options and futures held by the Portfolio at the end of each
fiscal year will be required to be "marked to market" for federal income tax
purposes -- i.e., treated as having been sold at market value. For options and
futures contracts, 60% of any gain or loss recognized on these deemed sales and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss regardless of
how long the Portfolio has held such options or futures.
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local
taxes in jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states,
which have income tax laws, might differ from treatment under the federal income
tax laws. Investors should consult their own tax advisors with respect to any
state or local taxes.
OTHER TAXATION. The investment by an investor in the Portfolio does not
cause the investor to be liable for any income or franchise tax in the State of
New York. Investors are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Portfolio.
ITEM 20. UNDERWRITERS.
The exclusive placement agent for the Portfolio is FDI, which receives
no additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
ITEM 21. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 22. FINANCIAL STATEMENTS.
The Portfolio's July 31, 2000 annual report filed with the SEC pursuant
to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder is incorporated
herein by reference (Accession Number 0000912057-00-042943, filed September 28,
2000).
<PAGE>
Appendix A-3
i:\dsfndlgl\mastfeed\nytrb\port\amend8.doc
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small
degree.
A - Debt rated A have a strong capacity to pay interest and repay
principal they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt 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 for debt in
higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
A - Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
SHORT-TERM TAX-EXEMPT NOTES
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest
rating assigned by Standard & Poor's and has a very strong or
strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are
given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory
capacity to pay principal and
interest.
MOODY'S
CORPORATE AND MUNICIPAL BONDS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - 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:
- Leading market positions in well established industries. - High rates of
return on funds employed. - Conservative capitalization structures with moderate
reliance on debt and ample asset protection. - Broad margins in earnings
coverage of fixed financial charges and high internal cash generation. - Well
established access to a range of financial markets and assured sources of
alternate liquidity.
SHORT-TERM TAX EXEMPT NOTES
MIG-1 The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy 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 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
<PAGE>
Appendix B-26
i:
APPENDIX B
ADDITIONAL INFORMATION CONCERNING NEW YORK MUNICIPAL OBLIGATIONS
The following information constitutes only a brief summary, does not
purport to be a complete description, and is based primarily on information
drawn from the Annual Information Statement of the State of New York (the
"State") available as of the date of this Statement of Additional Information.
While the Fund has not independently verified this information, it has no reason
to believe that such information is not correct in all material respects.
The State's fiscal year begins on April 1st and ends on March 31st. On
March 30, 2000, the State adopted the debt service portion of the State budget
for the 2000-01 fiscal year; on May 5, 2000, it enacted the remainder of the
budget. The Governor approved the budget as passed by the Legislature. Prior to
passing the budget in its entirety for the 2000-01 fiscal year, the State
enacted appropriations that permitted the State to continue its operations.
Following enactment of the 2000-01 budget, the State prepared a
Financial Plan for the 2000-01 fiscal year (the "2000-01 Financial Plan") that
sets forth projected receipts and disbursements based on the actions taken by
the Legislature. For fiscal year 2000-01, General Fund disbursements, including
transfers to support capital projects, debt service and other funds, were
estimated at $38.92 billion, an increase of $1.75 billion or 4.72% over
1999-2000. Projected spending under the 2000-01 enacted budget was $992 million
above the Governor's Executive Budget recommendations.
The 2000-01 Financial Plan projected closing balances in the General
Fund and other reserves of $3.2 billion, including $1.71 billion in the General
Fund. This closing balance is comprised of $675 million in reserves for
potential labor costs resulting from new collective bargaining agreements and
other spending commitments, $547 million in the Tax Stabilization Reserve Fund
(TSRF) (for use in case of unanticipated deficits), $150 million in the
Contingency Reserve Fund (CRF) (which helps offset litigation risks), and $338
million in the Community Projects Fund (CPF) (which finances legislative
initiatives). In addition to the $1.71 billion balance in the General Fund, $1.2
billion was projected for reserve in the STAR Special Revenue Fund and $250
million in the Debt Reduction Reserve Fund (DRRF).
Several developments arising from negotiations on the budget will
affect State finances in subsequent years. First, a portion of Legislative
additions to the 2000-01 Executive Budget will recur at higher spending levels
in 2001-02 and beyond, including increased funding for school aid, tuition
assistance, and prescription drug coverage for the elderly. Second, the
Legislature enacted the Debt Reform Act of 2000 (Debt Reform Act). The Debt
Reform Act, which applies to new State-supported debt issued on or after April
1, 2000, imposes caps on new debt outstanding and new debt service costs,
restricts the use of debt to capital purposes only, and restricts the maximum
term of State debt issuances to no more than 30 years. Finally, the State
adopted an additional tax relief package that will reduce tax receipts by $1.2
billion when fully effective; this package includes the elimination or reduction
of gross receipts taxes on energy ($330 million), the expansion of the "Power
for Jobs" energy tax credit program ($125 million), a college tuition deduction
or credit taken against personal income taxes ($200 million), and reduction of
the marriage penalty for taxpayers who file jointly ($200 million).
Many complex political, social and economic forces influence the
State's economy and finances, which in turn may affect the State Financial Plan.
These forces may affect the State unpredictably from fiscal year to fiscal year
and are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan also is based upon
forecasts of national and State economic activity. Economic forecasts frequently
have failed to predict accurately the timing and magnitude of changes in the
national and State economies. The Division of Budget (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 the State's Annual Information Statement and summarized
below, and those projections may be changed materially and adversely from time
to time. See the section entitled "Special Considerations" below for a
discussion of risks and uncertainties faced by the State.
2000-01 State Financial Plan
Four governmental fund types comprise the State Financial Plan: the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. The State's fund structure adheres to the accounting
standards of the Governmental Accounting Standards Board.
General Fund
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 2000-01 fiscal year, the General Fund (exclusive of transfers) is
expected to account for approximately 46.6 % of All Governmental Funds
disbursements and 67.8 % of total State Funds disbursements. General Fund moneys
also are transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
Total receipts and transfers from other funds are projected to be
$39.72 billion in 2000-01, an increase of $2.32 billion over 1999-2000. Total
General Fund disbursements and transfers to other funds are projected to be
$39.29 billion, an increase of $2.12 billion over 1999-2000.
On July 31, 2000, the State released the first of three quarterly
updates to the 2000-01 Financial Plan (the "July Update"). In the July Update,
the State continues to project the 2000-01 Financial Plan will remain in
balance. At the end of the first quarter of the 2000-01 fiscal year, the General
Fund had a cash balance of $6.75 billion, $446 million above the estimate in the
Financial Plan. Total General Fund receipts and transfers from other funds
totaled $14.93 billion in the first quarter, $464 million higher than the
Financial Plan cashflow projections. Total General Fund disbursements and
transfers to other funds totaled $9.35 billion in the first quarter, $18 million
above the cashflow projections, which is attributable to the timing of payments
and not anticipated to affect year-end totals.
Projected General Fund Receipts
Total General Fund receipts and transfers in 2000-01 are projected to
be $39.72 billion, an increase of $2.32 billion from the $37.40 billion recorded
in 1999-2000. This total includes $36.35 billion in tax receipts, $1.34 billion
in miscellaneous receipts, and $2.03 billion in transfers from other funds. The
transfer of $3.4 billion net resources through the tax refund reserve account
from 1999-2000 to the 2000-01 fiscal period has the effect of exaggerating the
growth in State receipts from year to year by depressing reported 1999-2000
figures and inflating 2000-01 projections.
The Personal Income Tax is imposed on the income of individuals,
estates and trusts and is based, with certain modifications, on federal
definitions of income and deductions. Net General Fund personal income tax
collections are projected to reach $24.33 billion in 2000-01, well over half of
all General Fund receipts and nearly $4 billion above the reported 1999-2000
collection total. Much of this increase is associated with the $3.4 billion net
impact of the transfer of the surplus from 1999-2000 to the current year as
partially offset by the diversion of an additional $1.99 billion in income tax
receipts to the School Tax Relief (STAR) fund. The STAR program was created in
1997 as a State-funded local property tax relief program funded through the use
of personal income tax receipts. Adjusted for these transactions, the growth in
net income tax receipts is roughly $1.3 billion, an increase of almost 5 %.
This growth is largely a function of two factors: (i) the 9 % growth in
income tax liability projected for tax year 2000; and (ii) the impact of the
1999 tax year settlement recorded early in the 2000-01 fiscal year.
The most significant statutory changes made this fiscal year provide
for an increase, phased-in over two years, in the earned income tax credit from
25% to 30% of the federal credit.
User taxes and fees are comprised of three-quarters of the State's 4%
sales and use tax, cigarette, alcoholic beverage, container, and auto rental
taxes, and a portion of the motor fuel excise levies. This category also
includes receipts from the motor vehicle registration fees and alcoholic
beverage license fees. Dedicated transportation funds outside of the General
Fund receive a portion of motor fuel tax and motor vehicle registration fees and
all of the highway use taxes. Receipts from user taxes and fees are projected to
total $7.02 billion, a decrease of $583 million below reported collections in
the prior year.
The sales tax and cigarette tax components of this category account for
virtually all of the 2000-01 decline. Growth in base sales tax yield, after
adjusting for tax law and other changes, is projected at 4.5%. Modest decreases
in motor fuel and alcoholic beverage taxes over 1999-2000 levels also are
expected. However, receipts from auto rental taxes are estimated to increase
modestly.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as
gross-receipts-based taxes on utilities and gallonage-based petroleum business
taxes.
Total business tax collections in 2000-01 are now projected to be $4.23
billion, $332 million below results for the prior fiscal year. The
year-over-year decline in projected receipts in this category is largely
attributable to statutory changes. These include the first year impact of a
scheduled corporation franchise tax rate reduction, a reduction in the cap on
tax liability for non-life insurers, and the expansion of the economic
development zone (renamed Empire Zones, effective May 19, 2000) and zone
equivalent areas tax credits. Ongoing tax reductions include the second year of
the corporation franchise rate reduction, the gross receipts tax rate cut from
3.25% to 2.5%, the continuation of the "Power for Jobs" program, and the use of
tax credits for investments in certified capital companies.
Other taxes include the estate and gift tax, the real property gains
tax and pari-mutual taxes. Taxes in this category are now projected to total
$766 million, $341 million below last year's amount. The primary factors
accounting for most of the expected decline are legislation enacted previously
that repealed both the real property gains tax and the gift tax and
significantly reduced estate tax rates, and the incremental effects of tax
reductions in the pari-mutual tax.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Miscellaneous
receipts are expected to total $1.34 billion, down $309 million from the prior
year amount. This reflects the loss of non-recurring receipts received in
1999-2000 and the phase-out of the medical provider assessments completed in
January 2000.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, including the 1% sales tax used
to support payments to Local Government Assistance Corporation (LGAC).
Transfers from other funds are expected to total $2.03 billion, or $108
million less than total receipts from this category during 1999-2000. Total
transfers of sales taxes in excess of LGAC debt service requirements are
expected to decrease by approximately $74 million, while transfers from all
other funds are expected to decrease by $34 million.
Projected General Fund Disbursements
General Fund disbursements, including transfers to support capital
projects, debt service and other funds, are estimated in the July Update to be
at $39.29 billion in 2000-01, an increase of $370 million over the Financial
Plan enacted in May 2000. The entire net increase in disbursements reflects the
cost of labor agreements ratified by State employee unions and approved by the
State Legislature.
Following the pattern of the last three fiscal years, education
programs receive the largest share of new funding contained in the 2000-01
Financial Plan. School aid is expected to grow by $850 million or 8.0% over
1999-2000 levels (on a State fiscal year basis). Outside of education, the
largest growth in spending is for State Operations ($801 million increase); and
general State charges ($104 million).
The Financial Plan also reflects the use of resources from the Health
Care Reform Act of 2000 (HCRA 2000) that will help finance several health and
mental hygiene programs in Special Revenue Funds, including prescription drug
assistance for the elderly, supplemental Medicare insurance, and other public
health services.
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
largest areas of spending in this category are for aid to elementary and
secondary schools (43%) and for the State's share of Medicaid payments to
providers (21%). Grants to Local Governments are projected in the July Update to
be at $26.87 billion in 2000-01, an increase of $1.23 billion over 1999-2000.
Under the 2000-01 enacted budget, General Fund spending on school aid
is projected at $11.47 billion on a State fiscal year basis, an increase of $850
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. For all
other educational programs, disbursements are projected to grow by $376 million
to $3.23 billion.
Spending for Medicaid in 2000-01 is projected to total $5.59 billion,
an increase of 4% from 1999-2000. Welfare spending is projected at $1.20
billion, a decrease of $77 million from the prior year. Disbursements for all
other health and social welfare programs are projected to total $1.93 billion,
an increase of $262 million.
The remaining disbursements primarily support community-based mental
hygiene programs, local transportation programs, and revenue sharing payments to
local governments. Revenue sharing and other general purpose aid to local
governments is projected at $923 million.
State operations pays for the costs of operating the Executive,
Legislative, and Judicial branches of government, including the prison system,
mental hygiene institutions, and the State University system (SUNY). Spending in
State operations is projected in the July Update to be $7.40 billion, an
increase of $801 million over the prior year. The growth reflects $324 million
for new labor contacts, offset by $30 million in savings from efficiencies in
agency operations, a $38 million reduction in one-time receipts from the State
University, and a $56 million decrease in Federal grants from the Department of
Correctional Services. The State's overall workforce is expected to remain
stable at around 195,000 employees.
General State charges account for the costs of providing fringe
benefits to State employees and retirees of the Executive, Legislature, and
Judiciary. These payments, many of which are mandated by statute and collective
bargaining agreements, include employer contributions for pensions, social
security, health insurance, workers' compensation, and unemployment insurance.
General State charges also cover State payments-in-lieu-of-taxes to local
governments for certain State-owned lands, and the costs of defending lawsuits
against the State and its public officers.
Disbursements in this category are estimated at $2.19 billion, an
increase of $104 million from the prior year. The change primarily reflects
higher health insurance rates in calendar year 2000, primarily to cover the
increasing cost of providing prescription drug benefits for State employees. The
2000-01 spending estimate continues to assume the $250 million in offset funds
related to the dissolution of the Medical Malpractice Insurance Association
(MMIA), which is the last year these funds are expected to be available.
This category accounts for debt service on short-term obligations of
the State, i.e., the interest costs of the State's commercial paper program. The
commercial paper program is expected to have a maximum of $45 million
outstanding during 2000-01, as this program is being replaced with additional
variable rate general obligation bonds. The majority of the State's debt service
is for long-term bonds, and is shown in the Financial Plan as a transfer to the
General Debt Service Fund.
Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources.
Long-term debt service transfers are projected at $2.26 billion in
2000-01, an increase of $18 million from 1999-2000. The increase reflects debt
service costs from prior-year bond sales (net of refunding savings), and certain
sales planned to occur during the 2000-01 fiscal year to support new capital
spending, primarily for economic development, the environment and education.
Transfers for capital projects provide General Fund support for
projects that are not financed with bond proceeds, dedicated taxes, other
revenues, or federal grants. Transfers in this category are projected to total
$234 million in 2000-01, an increase of $23 million from the prior year.
All other transfers, which reflect the remaining transfers from the
General Fund to other funds, are estimated to total $294 million in 2000-01, a
decline of $94 million from 1999-2000.
The Debt Reduction Reserve Fund (DRRF) is assumed by DOB to be
reclassified from the General Fund to the Capital Projects fund type in 2000-01.
The 2000-01 Financial Plan reflects the deposit of an additional $250 million in
General Fund receipts to DRRF in 2000-01, as well as $250 million in one-time
resources from the State's share of tobacco settlement proceeds.
Non-recurring Resources
The DOB estimates that the 2000-01 State Financial Plan contains new
actions that provide non-recurring resources or savings totaling approximately
$36 million, excluding use of the 1999-2000 surplus.
General Fund Closing Balance
The July Update projects a closing balance of $1.34 billion in the
General Fund for 2000-01, a decrease of $370 million from the Financial Plan
enacted in May 2000. The planned use of labor reserves to finance approved labor
agreements accounts for the decline. The closing balance is comprised of $305
million in remaining reserves for collective bargaining and other purposes, $547
million in the Tax Stabilization Reserve Fund (for unanticipated budget
shortfalls), $150 million in the Contingency Reserve Fund (for litigation
risks), and $338 million in the Community Projects Fund (for legislative
initiatives). The closing fund balance does not include additional reserves of
$1.2 billion in the School Tax Relief (STAR) Special Reserve Fund (for future
STAR payments) and $250 million in the Debt Reduction Reserve Fund (for 2001-02
debt reduction).
Outyear Projections of Receipts and Disbursements
State law requires the Governor to propose a balanced budget each year.
Preliminary analysis by DOB indicates that the State will have a 2001-02 budget
gap of approximately $2 billion, which is comparable with gaps projected
following enactment of recent state budgets. This estimate includes projected
costs of new collective bargaining agreements, no assumed operating
efficiencies, and the planned application of approximately $1.2 billion in STAR
tax reduction reserves. In recent years, the State has closed projected budget
gaps which DOB estimates have ranged from $5.0 billion to less than $1 billion.
DOB will formally update its projections of receipts and disbursements for
future years as part of the Governor's 2001-02 Executive Budget submission. The
revised expectations for these years will reflect the cumulative impact of tax
reductions and spending commitments enacted over the last several years as well
as new 2001-02 Executive Budget recommendations.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. The State assumes that savings from initiatives by State agencies to
deliver services more efficiently, workforce management efforts, maximization of
federal and non-General Fund spending offsets, and other actions necessary to
help bring projected disbursements and receipts into balance.
From 1999-2000 through 2002-03, the State expects to receive $1.54
billion under the nationwide settlement with cigarette manufacturers. Counties,
including New York City, are projected to receive settlement payments of $1.47
billion over the same period. The State plans to use $1.29 billion in tobacco
settlement money over the next three years to finance health programs under HCRA
2000 ($1.01 billion) and projected increased costs in Medicaid ($274 million).
The remaining $250 million in one-time tobacco payments from 1999-2000 will be
deposited to DRRF.
Other Governmental Funds
In addition to the General Fund, the State Financial Plan includes
Special Revenue Funds, Capital Projects Funds and Debt Service Funds which are
discussed below. Amounts below do not include other sources and uses of funds
transferred to or from other fund types.
All Governmental Funds spending is estimated at $77.53 billion in
2000-01, an increase of $4.17 billion or 5.7% above the prior year. When
spending for the STAR tax relief program is excluded, spending growth is 4.6%.
The spending growth is comprised of changes in the General Fund ($1.81 billion
excluding transfers), Special Revenue Funds ($2.03 billion), Capital Projects
Funds ($124 million) and Debt Service Funds ($206 million).
Special Revenue Funds
Total disbursements for programs supported by Special Revenue Funds are
projected at $33.25 billion, an increase of $2.03 billion or 6.5% over
1999-2000. Special Revenue Funds include federal grants and State special
revenue funds.
Federal grants are projected to comprise 69% of all Special Revenue
Funds spending in 2000-01, comparable to prior years. Disbursements from federal
funds are estimated at $22.87 billion, an increase of $798 million or 3.6%.
Medicaid is the largest program within federal funds, accounting for over half
of total spending in this category. In 2000-01, Medicaid spending is projected
at $14.93 billion, an increase of $396 million over 1999-2000. The remaining
growth in federal funds is primarily for the Child Health Plus program, which is
estimated at to increase by $86 million in 2000-01, as well as increased
spending in various social service programs.
State special revenue spending is projected to be $10.38 billion, an
increase of $1.23 billion or 13.5% from the last fiscal year. The spending
reflects the next phase of the STAR program valued at $2.0 billion (up $785
million from 1999-2000), and $617 million in additional spending resulting from
HCRA 2000. This growth is offset by decreased spending of $176 million due to
the elimination of medical provider assessments on January 1, 2000.
Capital Projects Funds
Spending from Capital Projects Funds in 2000-01 is projected at $4.35
billion, an increase of $124 million or 2.9% from last fiscal year. The increase
is attributed to $184 million for new capital projects, primarily for
transportation, economic development, the environment and education and planned
increases for school construction and economic development programs.
Debt Service Funds
Spending from Debt Service Funds is estimated at $3.79 billion in
2000-01, up $206 million or 5.7% from 1999-2000. Transportation purposes,
including debt service on bonds issued for State and local highway and bridge
programs financed through the New York State Thruway Authority and supported by
the Dedicated Highway and Bridge Trust Fund, account for $127 million of the
year-to-year growth. Debt service for educational purposes, including State and
City University programs financed through the Dormitory Authority, will increase
by $59 million. The remaining growth is for a variety of programs in mental
health and corrections, and for general obligation financings.
GAAP-Basis Financial Plan (2000-01)
State law requires the State to update its projected GAAP-basis
financial results for the current fiscal year on or before September first of
each year. The State bases its GAAP projections on the cash estimates in the
July Update and the actual results for 1999-2000 as reported by the State
Comptroller on July 28, 2000.
The State ended 1999-2000 with an accumulated General Fund surplus of
$3.93 billion, as measured by GAAP, marking the third consecutive fiscal year
that has ended with an accumulated surplus. During 2000-01, the State expects to
close the fiscal year with a positive GAAP balance of $1.84 billion in the
General Fund.
The GAAP-basis General Fund Financial Plan for 2000-01 projects tax
revenues of $34.22 billion and miscellaneous revenues of $3.04 billion, which
will finance projected expenditures of $39.31 billion and net financing uses of
$43 million.
Special Considerations
Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions by the federal government could impact
projected budget gaps for the State. These gaps would result from a disparity
between recurring revenues and the costs of 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.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the 2000-01 Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and events that are not
subject to the State's control. The 2000-01 Financial Plan is based upon
forecasts of national and State economic activity developed through both
internal analysis and review of national and State economic forecasts prepared
by commercial forecasting services and other public and private forecasters.
Many uncertainties exist in forecasts of both the national and State economies,
including consumer attitudes toward spending, the extent of corporate and
governmental restructuring, the condition of the financial sector, 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 2000-01 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
collection 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, potential collective bargaining
agreements, 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, collective
bargaining negotiations and changes in the demand for and use of State services.
An ongoing risk to the 2000-01 Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The 2000-01 Financial Plan contains projected reserves of $150
million in 2000-01 for such events, but assumes no significant federal
disallowance or other federal actions that could affect State finances.
Additional risks to the 2000-01 Financial Plan arise out of actions at
the federal level. The Personal Responsibility and Work Opportunity
Reconciliation Act of 1996 created a new Temporary Assistance to Needy Families
program (TANF) partially funded with a fixed federal block grant to states.
Congress has recently debated proposals under which the federal government would
take a portion of state reserves from the TANF block grant for use in funding
other federal programs. It has also considered proposals that would lower the
State's share of mass transit operating assistance. Finally, several proposals
to alter federal tax law that have surfaced in recent years could adversely
affect State revenues, since many State taxes depend on federal definitions of
income. While Congress has not enacted these proposals, it may do so in the
future, or it may take other actions that could have an adverse effect on State
finances.
The 2000-01 Financial Plan assumes the availability of certain
resources to finance portions of General Fund spending for fringe benefits,
health and welfare programs. These resources could become unavailable or
decrease, placing additional pressures on budget balance.
The Division of the Budget 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 projections. In the past, the State
has taken management actions to address potential Financial Plan shortfalls, and
may take similar actions should adverse variances occur in its projections for
the current fiscal year.
GAAP-Basis Results for Prior Fiscal Years
1999-2000 Fiscal Year
The State completed its 1999-2000 fiscal year with a combined
governmental funds operating surplus of $3.03 billion, which included operating
surpluses in the General Fund ($2.23 billion), in Special Revenue Funds ($665
million), in Debt Service Funds ($38 million) and in Capital Projects Funds ($99
million).
General Fund
The State reported a General Fund operating surplus of $2.23 billion
for the 1999-2000 fiscal year, as compared to an operating surplus of $1.08
billion for the 1998-99 fiscal year. The operating surplus for 1999-2000
resulted in part from higher personal income tax receipts, and increases in
taxes receivable and other assets of $754 million and $137 million,
respectively, and decreases in deferred revenues, due to other funds and other
liabilities of $134 million. These gains were partially offset by decreases in
accounts receivable and money due from other funds of $77 million, increases in
payables to local governments and accrued liabilities of $80 million and $175
million, respectively, and an increase in tax refunds payable of $537 million.
The State reported an accumulated fund balance of $3.92 billion in the
General Fund for 1999-2000. The accumulated fund balance is $50 million higher
after a restatement by the State Comptroller to reflect the reclassification of
the Debt Reduction Reserve Fund to the General Fund.
General Fund revenues increased $2.30 billion (6.4%) over the prior
fiscal year with increases in personal income and consumption and use taxes, and
miscellaneous revenues. Business tax and other tax revenues fell from the prior
fiscal year. Personal income taxes grew $1.98 billion, an increase of nearly
9.7%. The increase in personal income taxes was caused by strong employment and
wage growth and the continued strong performance of the financial markets during
1999. Consumption and use taxes increased $327 million, or 4.5%, to reflect a
continuing high level of consumer confidence. Miscellaneous revenues increased
$303 million (14.1%), primarily due to growth in investment earnings, fees,
licenses, royalties and rents and reimbursements from regulated industries used
to fund State administrative costs (e.g., banking and insurance). These
increases were partially offset by decreases in business and other taxes.
Business taxes decreased nearly $301 million, or 6.2%, because of prior year
refunds and the application of credit carryforwards which were applied against
current year (1999) liabilities. Other taxes decreased $12 million, or 1.1%.
General Fund expenditures increased $1.39 billion (3.9%) from the prior
fiscal year, with the largest increases occurring in education, health and
environment. Education expenditures grew $739 million (6.1%) due mainly to an
increase in spending for support for public schools, handicapped pupil education
and municipal and community colleges. Health and environment expenditures
increased over $215 million (33.5%) primarily reflecting increased spending for
local health programs. Personal service costs increased $202 million (3.3%)
principally as a result of increases in wages as required by recently approved
collective bargaining agreements. Non-personal service costs increased $264
million (11.7%) due primarily to increased spending for goods and services.
Net other financing sources in the General Fund increased $192 million
(45.9%) primarily because transfers of surplus revenues from the Debt Service
Funds increased by nearly $100 million and transfers from the Abandoned Property
Fund and the Hospital Bad Debt and Charity Accounts increased by nearly $120
million.
Special Revenue, Debt Service and Capital Projects Fund Types
An operating surplus of $665 million was reported for the Special
Revenue Funds for the 1999-2000 fiscal year which increased the accumulated fund
balance to $2.14 billion after restatement of prior year fund balances. As a
result of legislation enacted during the fiscal year ended March 31, 2000, the
Hospital Bad Debt and Charity Accounts were reclassified to Special Revenue
Funds thereby increasing the beginning fund balance by $1.01 billion. Revenues
increased $2.15 billion over the prior fiscal year (6.9%) as a result of
increases in tax, federal grants, and miscellaneous revenues. Expenditures
increased $1.49 billion (5.4%) as a result of increased costs for local
assistance grants and non-personal service. Net other financing uses increased
$174 million (4.5%).
Debt Service Funds ended the 1999-2000 fiscal year with an operating
surplus of $38 million and, as a result, the accumulated fund balance increased
to $2.06 billion. Revenues increased $200 million (7.4%) primarily because of
increases in dedicated taxes. Debt service expenditures increased $429 million
(15.0%). Net other financing sources increased $113 million (36.1%) due
primarily to increases in transfers from the General Fund.
An operating surplus of $99 million was reported in the Capital
Projects Funds for the State's 1999-2000 fiscal year and, as a result, the
accumulated fund balance deficit decreased to $129 million. Revenues increased
$93 million (3.7%) primarily because federal grant revenues increased $90
million for transportation projects. Expenditures increased $84 million (2.3%)
primarily because of increases capital construction spending for transportation
projects. Net other financing sources decreased by $63 million (4.6%).
1998-99 Fiscal Year
The State completed its 1998-99 fiscal year with a combined
governmental funds operating surplus of $1.32 billion, which included operating
surpluses in the General Fund ($1.078 billion), in Debt Service Funds ($209
million) and in Capital Projects Funds ($154 million) offset, in part, by an
operating deficit in Special Revenue Funds ($117 million).
1997-98 Fiscal Year
The State completed its 1997-98 fiscal year with a combined
governmental funds operating surplus of $1.80 billion, which included an
operating surplus in the General Fund of $1.56 billion, in Capital Projects
Funds of $232 million and in Special Revenue Funds of $49 million, offset, in
part, by an operating deficit of $43 million in Debt Service Funds.
Cash-Basis Results for Prior Fiscal Years
General Fund 1997-98 through 1999-2000
New York State's financial operations have improved during recent
fiscal years. During its last eight fiscal years, the State has recorded
balanced budgets on a cash basis, with positive year-end fund balances.
1999-2000 Fiscal Year
The State ended its 1999-2000 fiscal year in balance on a cash basis,
with a General Fund cash surplus as reported by the DOB of $1.51 billion. As in
recent years, strong growth in receipts above forecasted accounts produced most
of the year-end surplus. Spending was also modestly below projections, further
adding to the surplus.
The State reported a General Fund closing balance of $1.17 billion, an
increase of $275 million from the prior fiscal year. The balance was held in
four accounts within the General Fund: the Tax Stabilization Reserve Fund
(TSRF), the Contingency Reserve Fund (CRF) the Debt Reduction Reserve Fund
(DRRF) and the Community Projects Fund (CPF). The balance is comprised of $547
million in the TSRF after a deposit of $74 million in 1999-2000; $107 million in
the CRF; $250 million in the DRRF; and $263 million in the CPF.
The closing fund balance excludes $3.97 billion that the State
deposited into the tax refund reserve account at the close of 1999-2000 to pay
for tax refunds in 2000-01 of which $521 million was made available as a result
of the Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 2000. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1999-2000, while increasing reported receipts in 2000-01.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1999-2000 fiscal year totaled $37.40 billion,
an increase of 1.6% from 1998-99 levels. General Fund disbursements and
transfers to other funds totaled $37.17 billion for the 1999-2000 fiscal year,
an increase of 1.6% from the prior fiscal year.
1998-99 Fiscal Year
The State ended its 1998-99 fiscal year on March 31, 1999, in balance
on a cash basis, with a General Fund cash surplus as reported by DOB of
approximately $1.82 billion. The cash surplus was derived primarily from
higher-than-projected tax collections as a result of continued economic growth,
particularly in the financial markets and securities industries.
The General Fund had a closing balance of $892 million, an increase of
$254 million from the prior fiscal year. The TSRF closing balance was $473
million, following an additional deposit of $73 million in 1998-99. The CRF
closing balance was $107 million, in following a $39 million deposit in 1998-99.
The CPF closed the fiscal year with a balance of $312 million. The General Fund
closing balance did not include $2.31 billion in the tax refund reserve account,
of which $521 million was made available as a result of the LGAC financing
program and was required to be on deposit on March 31, 1999.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1998-99 fiscal year totaled $36.82 billion, an
annual increase of 6.2% over 1997-98. General Fund disbursements and transfers
to other funds were $36.57 billion, an annual increase of 6.1%.
1997-98 Fiscal Year
The State ended its 1997-98 fiscal year in balance on a cash basis,
with a General Fund cash surplus as reported by DOB of approximately $2.04
billion. The cash surplus was derived primarily from higher-than-anticipated
receipts and lower spending on welfare, Medicaid, and other entitlement
programs.
The General Fund closing balance was $638 million, an increase of $205
million from the prior fiscal year. The balance included $400 million in the
TSRF, after a required deposit of $15 million (repaying a transfer made in
1991-92) and an additional deposit of $68 million made from the 1997-98 surplus.
(The CRF closing balance was $68 million, following a $27 million deposit from
the surplus. The CPF closed the fiscal year with a balance of $170 million. The
General Fund closing balance did not include $2.39 billion in the tax refund
reserve account, of which $521 million was made available as a result of the
LGAC financing program and was required to be on deposit on March 31, 1998.)
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1997-98 fiscal year totaled $34.67 billion, an
increase of 4.9% from the previous fiscal year. General Fund disbursements and
transfers to other funds totaled $34.47 billion, an increase of 4.8%.
Other Governmental Funds (1997-98 through 1999-2000)
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 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, the
Metropolitan Transportation Authority (MTA) and other transit entities.
In the Special Revenue Funds, disbursements increased from $27.65
billion to $31.22 billion over the last three years, primarily as a result of
increased costs for the federal share of Medicaid and the initial costs of the
STAR program. Other activity reflected dedication of taxes for mass
transportation purposes, new lottery games, and new fees for criminal justice
programs.
Disbursements in the Capital Projects Funds increased over the
three-year period from $3.57 billion to $4.22 billion, primarily for education,
environment, public protection and transportation programs. The composition of
this fund type's receipts also has changed as dedicated taxes, federal grants
and reimbursements from public authority bonds increased, while general
obligation bond proceeds declined.
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 ongoing costs 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. Disbursements in this fund
type increased from $3.09 billion to $3.59 billion over the three-year period.
The New York Economy
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 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.
New York's employment remained strong for the first six months of 2000.
Most industry sectors experienced employment gains, with the service sector
accounting for the largest increases. The July forecast makes no change in the
employment outlook from the forecast contained in the Financial Plan enacted in
May 2000. Strong job growth is expected to continue throughout the rest of 2000.
Total employment growth of 2.1% is expected to exceed national employment
growth, although less than the 2.6% growth in 1999. As in the recent past,
employment increases are expected to be concentrated in the services sector.
Wage growth for 2000 is expected to be 8.2%, while personal income growth is
estimated at 6.5%.
Given the importance of the securities industry in the New York State
economy, a significant change in stock market performance during the forecast
horizon could result in financial sector profits and bonuses that are
significantly different from those embodied in the forecast. Any actions by the
Federal Reserve Board to moderate inflation by increasing interest rates more
than anticipated may have an adverse impact in New York given the sensitivity of
financial markets to interest rate shifts and the prominence of these markets in
the New York economy. In addition, there is a possibility that
greater-than-anticipated mergers, downsizing, and relocation of firms caused by
deregulation and global competition may have a significant adverse effect on
employment growth.
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 in the past. However, it remains an important sector
of the State economy, particularly for the upstate economy, as high
concentrations of manufacturing industries for transportation equipment, optics
and imaging, materials processing, and refrigeration, heating, and electrical
equipment products are located in the upstate region.
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 about one-fifth of total wages.
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.
Economic and Demographic Trends
In the calendar years 1987 through 1998, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover. However, the situation has been
improving during recent years. In 1999, for the first time in 13 years, the
employment growth rate of the State surpassed the national growth rate. Although
the State unemployment rate has been higher than the national rate since 1991,
the gap between them has narrowed in recent years.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York 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.
Debt and Other Financing Activities
Financing activities of the State include general obligation debt and
State-guaranteed debt, to which the full faith and credit of the State has been
pledged, as well as lease-purchase and contractual-obligation financings, moral
obligation and other financings through public authorities and municipalities,
where the State's legal obligation to make payments to those public authorities
and municipalities for their debt service is subject to annual appropriation by
the Legislature.
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.
The State's 2000-01 borrowing plan projects issuances of $367 million
in general obligation bonds, including $45 million for purposes of redeeming the
remaining outstanding BANs. The State does not anticipate issuing new BANs
during the 2000-01 fiscal year. The State is expected to issue up to $276
million in COPs to finance equipment purchases (including costs of issuance,
reserve funds, and other costs) during the 2000-01 fiscal year. Of this amount,
it is anticipated that approximately $76 million will be used to finance agency
equipment acquisitions. Approximately $200 million is expected to finance the
purchase of new welfare computer systems designed to improve case management,
fraud detection and child support collection capabilities.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.91 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 2000-01.
Public Authorities
The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. For the purposes of this AIS, public
authorities refer to public benefit corporations, created pursuant to State law,
other than local authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt that apply to the State
itself and may issue bonds and notes within the amounts and restrictions set
forth in 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 and adversely affected if any of its public authorities were to
default on their respective obligations. As of December 31, 1999, there were 17
public authorities that had outstanding debt of $100 million or more, and the
aggregate outstanding debt, including refunding bonds, of these State public
authorities was $95 billion, only a portion of which constitutes State-supported
or State-related debt.
The State has numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue-producing public facilities. Public authorities generally pay their
operating expenses and debt service costs from revenues generated by the
projects they finance or operate, such as tolls charged for the use of highways,
bridges or tunnels, charges for public power, electric and gas utility services,
rentals charged for housing units, and charges for occupancy at medical care
facilities. In addition, State legislation authorizes several financing
techniques for 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, the affected localities may seek additional State assistance if
local assistance payments are diverted. Some authorities also receive moneys
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 provide transit and commuter services.
Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of the
date of this AIS, LIPA has issued over $7 billion in bonds secured solely by
ratepayer charges. LIPA's debt is not considered either State-supported or
State-related debt.
Metropolitan Transportation Authority
The MTA oversees the operation of subway and bus lines in New York City
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 services in the New York metropolitan
area through the MTA's subsidiaries, the Long Island Rail Road Company, the
Metro-North Commuter Railroad Company, and the Metropolitan Suburban Bus
Authority. In addition, the Staten Island Rapid Transit Operating Authority, an
MTA subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (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 on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies. If
current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes--including a surcharge
on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1% regional sales and use
tax--that provide revenues for mass transit purposes, including assistance to
the MTA. Since 1987, State law also 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. In 1993, the State dedicated a portion of certain
additional State petroleum business tax receipts to fund operating or capital
assistance to the MTA. The 2000-01 enacted budget provides State assistance to
the MTA totaling approximately $1.35 billion and initiates a five-year State
transportation plan that includes nearly $2.2 billion in dedicated revenue
support for the MTA's 2000-04 Capital Program. This capital commitment includes
an additional $800 million of newly dedicated State petroleum business tax
revenues, motor vehicle fees, and motor fuel taxes not previously dedicated to
the MTA.
State legislation accompanying the 2000-01 enacted State budget
increased the aggregate bond cap for the MTA, TBTA and TA to $16.5 billion in
order to finance a portion of the $17.1 billion MTA capital plan for the 2000-04
Capital Program. On May 4, 2000, the Capital Program Review Board approved the
MTA's $17.1 billion capital program for transit purposes for 2000 through 2004.
The 2000-04 Capital Program is the fifth capital plan since the Legislature
authorized procedures for the adoption, approval and amendment of MTA capital
programs and is designed to upgrade the performance of the MTA's transportation
system by investing in new rolling stock, maintaining replacement schedules for
existing assets, bringing the MTA system into a state of good repair, and making
major investments in system expansion projects such as the Second Avenue Subway
project and the East Side Access project.
The currently approved 2000-04 Capital Program assumes the issuance of
an estimated $8.9 billion in new money bonds. The remainder of the plan is
projected to be financed with assistance from the Federal Government, the State,
the City of New York, and from various other revenues generated from actions
taken by the MTA. In addition, $1.6 billion in State support is projected to be
financed using proceeds from State general obligation bonds under the proposed
$3.8 billion Transportation Infrastructure Bond Act of 2000, if approved by the
voters in the November 2000 general election. Further, the enacted State budget
authorized the MTA to undertake a major debt restructuring initiative which will
enable the MTA to refund approximately $13.7 billion in bonds, consolidate its
credit sources, and obviate the need for debt service reserves. The
authorization for debt restructuring includes outstanding bonds secured by
service contracts with the State.
There can be no assurance that all 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 2000-04 Capital
Program or parts thereof will not be delayed or reduced. Should funding levels
fall below current projections, the MTA would have to revise its 2000-04 Capital
Program accordingly. If the 2000-04 Capital Program is delayed or reduced,
ridership and fare revenues may decline, which could, among other things, impair
the MTA's ability to meet its operating expenses without additional assistance.
The City of New York
The fiscal health of the State also may be affected by the fiscal
health of New York City, which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and meet its cash requirements. The State also may be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets.
In recent years, the State constitutional debt limit would have
prevented the City from entering into new capital contracts. To prevent
disruptions in the capital program, two actions were taken to increase the
City's capital financing capacity: (i) the State Legislature created the New
York City Transitional Finance Authority (TFA) in 1997, and (ii) in 1999, the
City created TSASC, Inc., a not-for-profit corporation empowered to issue
tax-exempt debt backed by tobacco settlement revenues. During the 2000
legislative session, the State enacted legislation that increased the borrowing
authority of the TFA by $4 billion, to $11.5 billion, which the City expects
will provide sufficient financing capacity to continue its capital program over
the next four fiscal years.
Fiscal Oversight
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
(NYC MAC) to provide financing assistance to the City; the New York State
Financial Control Board (the Control Board) to oversee the City's financial
affairs; and the Office of the State Deputy Comptroller for the City of New York
(OSDC) to assist the Control Board in exercising its powers and
responsibilities. A "control period" existed from 1975 to 1986, during which the
City was subject to certain statutorily-prescribed fiscal controls. The Control
Board terminated the control period 1986 when certain statutory conditions were
met. State law requires the Control Board to reimpose a control period 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 or impaired access to the public credit markets.
Currently, the City and its Covered Organizations (i.e., those
organizations which receive or may receive moneys from the City directly,
indirectly or contingently) operate under the City's Financial Plan. The City's
Financial Plan summarizes its capital, revenue and expense projections and
outlines proposed gap-closing programs for years with projected budget gaps. The
City's projections set forth in its 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.
Monitoring Agencies
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with its Financial Plan. According to staff reports, economic
growth in New York City has been very strong in recent years, led by a surge in
Wall Street profitability which resulted in increased tax revenues and produced
a substantial surplus for the City in City fiscal years 1996-97, 1997-98 and
1998-99. Recent staff reports also indicate that the City projects a surplus for
City fiscal year 1999-2000. Although several sectors of the City's economy have
expanded over the last several years, especially tourism, media, business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the performance of the
national economy. In addition, the size of recent tax reductions has increased
to over $2.3 billion in City fiscal year 1999-2000 through the expiration of a
personal income tax surcharge, the repeal of the non-resident earnings tax and
the elimination of the sales tax on clothing items costing less than $110. The
Mayor has proposed additional tax reductions that would raise the total worth of
recent tax cuts to $3.7 billion by City fiscal year 2003-04. Staff reports have
indicated that recent City budgets have been balanced in part through the use of
nonrecurring resources and that the City's Financial Plan relies in part on
actions outside its direct control. These reports also have indicated that the
City has not yet brought its long-term expenditure growth in line with recurring
revenue growth and that the City is likely to continue to face substantial gaps
between forecast revenues and expenditures in future years that must be closed
with reduced expenditures and/or increased revenues. 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.
Other Localities
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional oversight or financial assistance is not
included in the projections of the State's receipts and disbursements for the
State's 2000-01 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 2000-01 totals $200.4 million. The 2000-01 enacted budget increased
General Purpose State Aid for local governments by $11 million to $562 million.
While the distribution of General Purpose State Aid for local
governments was originally based on a statutory formula, in recent years both
the total amount appropriated and the shares appropriated to specific localities
have been determined by the Legislature. A State commission established to study
the distribution and amounts of general purpose local government aid failed to
agree on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1998, the total indebtedness
of all localities in the State, other than New York City, was approximately
$20.3 billion. A small portion (approximately $80 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
(other than New York City) authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-three localities had outstanding indebtedness for deficit financing at
the close of their fiscal year ending in 1998.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities also may face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, also may adversely
affect localities and necessitate State assistance.
Litigation
General
The legal proceedings listed below involve State finances and programs
and miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 2000-01
fiscal year or thereafter.
The State is party to other claims and litigation which its legal
counsel has advised are not probable of adverse court decisions or are not
deemed adverse and material. Although the amounts of potential losses resulting
from this litigation, if any, are not presently determinable, it is the State's
opinion that its ultimate liability in these cases is not expected to have a
material and adverse effect on the State's financial position in the 2000-01
fiscal year or thereafter.
The General Purpose Financial Statements for the 1999-2000 fiscal year
report estimated probable awarded and anticipated unfavorable judgments of $895
million, of which $132 million is expected to be paid during the 1999-2000
fiscal year.
Adverse developments in the proceedings described below, other
proceedings for which there are unanticipated, unfavorable and material
judgments, or the initiation of new proceedings could affect the ability of the
State to maintain a balanced 2000-01 Financial Plan. The State believes that the
proposed 2000-01 Financial Plan includes sufficient reserves to offset the costs
associated with the payment of judgments that may be required during the 2000-01
fiscal year. These reserves include (but are not limited to) amounts
appropriated for Court of Claims payments and projected fund balances in the
General Fund. In addition, any amounts ultimately required to be paid by the
State may be subject to settlement or may be paid over a multi-year period.
There can be no assurance, however, that adverse decisions in legal proceedings
against the State would not exceed the amount of all potential 2000-01 Financial
Plan resources available for the payment of judgments, and could therefore
affect the ability of the State to maintain a balanced 2000-01 Financial Plan.
Tax Law
In New York Association of Convenience Stores, et al. v. Urbach, et
al., petitioners, New York Association of Convenience Stores, National
Association of Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek
Stores, Inc. are seeking to compel respondents, the Commissioner of Taxation and
Finance and the Department of Taxation and Finance, to enforce sales and excise
taxes imposed, pursuant to Tax Law Articles 12-A, 20 and 28, on tobacco products
and motor fuel sold to non-Indian consumers on Indian reservations. In orders
dated August 13, 1996 and August 24, 1996, the Supreme Court, Albany County,
ordered, inter alia, that there be equal implementation and enforcement of said
taxes for sales to non-Indian consumers on and off Indian reservations, and
further ordered that, if respondents failed to comply within 120 days, no
tobacco products or motor fuel could be introduced onto Indian reservations
other than for Indian consumption or, alternately, the collection and
enforcement of such taxes would be suspended statewide. Respondents appealed to
the Appellate Division, Third Department, and invoked CPLR 5519(a)(1), which
provides that the taking of the appeal stayed all proceedings to enforce the
orders pending the appeal. Petitioners' motion to vacate the stay was denied. In
a decision entered May 8, 1997, the Third Department modified the orders by
deleting the portion thereof that provided for the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco products. The Third Department held, inter alia, that petitioners had
not sought such relief in their petition and that it was an error for the
Supreme Court to have awarded such undemanded relief without adequate notice of
its intent to do so. On May 22, 1997, respondents appealed to the Court of
Appeals on other grounds, and again invoked the statutory stay. On October 23,
1997, the Court of Appeals granted petitioners' motion for leave to cross appeal
from the portion of the Third Department's decision that deleted the statewide
suspension of the enforcement and collection of the sales and excise taxes on
motor fuel and tobacco. On July 9, 1998, the New York Court of Appeals reversed
the order of the Appellate Division, Third Department, and remanded the matter
to the Supreme Court, Albany County, for further proceedings. The Court held
that the petitioners had standing to assert an equal protection claim, but that
their claim did not implicate racial discrimination. The Court remanded the case
to Supreme Court, Albany County, for resolution of the question of whether there
was a rational basis for the Tax Department's policy of non-enforcement of the
sales and excise taxes on reservation sales of cigarettes and motor fuel to
non-Indians. In a footnote, the Court stated that, in view of its disposition of
the case, petitioners' cross-appeal regarding the statewide suspension of the
taxes is "academic." By decision and judgment dated July 9, 1999, the Supreme
Court, Albany County, granted judgment dismissing the petition. On September 2,
1999, petitioners appealed to the Appellate Division, Third Department, from the
July 9, 1999 decision and order. On August 3, 2000, the Third Department
affirmed the judgment dismissing the petition.
Line Item Veto
In an action commenced in June 1998 by the Speaker of the Assembly of
the State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998. On July 10, 1998, the State filed a motion to
dismiss this action. By order entered January 7, 1999, the Court denied the
State's motion to dismiss. On January 27, 1999, the State appealed that order.
By decision dated July 20, 2000, the Appellate Division reversed the January 7,
1999 order and dismissed the petition.
Real Property Claims
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County
of Oneida, the United States Supreme Court affirmed a judgment of the United
States Court of Appeals for the Second Circuit holding that the Oneida Indians
have a common-law right of action against Madison and Oneida Counties for
wrongful possession of 872 acres of land illegally sold to the State in 1795. At
the same time, however, the Court reversed the Second Circuit by holding that a
third-party claim by the counties against the State for indemnification was not
properly before the federal courts. The case was remanded to the District Court
for an assessment of damages, which action is still pending. The counties may
still seek indemnification in the State courts.
In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims for
250,000 acres, to add the State as a defendant, and to certify a class made up
of all individuals who currently purport to hold title within said 250,000 acre
area. These motions were argued March 29, 1999 and are still awaiting
determination. The District Court has not yet rendered a decision. By order
dated February 24, 1999, the District Court appointed a federal settlement
master. A conference scheduled by the District Court for May 26, 1999 to address
the administration of this case has been adjourned indefinitely.
Several other actions involving Indian claims to land in upstate New
York are also pending. Included are Cayuga Indian Nation of New York v. Cuomo,
et al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New
York, et al., both in the United States District Court for the Northern District
of New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions, but may
enhance others. In the Cayuga Indian Nation of New York case, by order dated
March 29, 1999, the United States District Court for the Northern District of
New York appointed a federal settlement master. In October 1999, the District
Court granted the Federal Government's motion to have the State held jointly and
severally liable for any damages owed to the plaintiffs. At the conclusion of
the damages phase of the trial of this case, a jury verdict of $35 million in
damages plus $1.9 million representing the fair rental value of the properties
at issue was rendered against the defendants. On July 17, 2000, a bench hearing
was commenced to determine whether prejudgment interest is appropriate and, if
so, the amount thereof. In the Canadian St. Regis Band of Mohawk Indians case,
the United States District Court for the Northern District of New York has
directed the parties to rebrief outstanding motions to dismiss brought by the
defendants. The State filed its brief on July 1, 1999. The motions were argued
in September 1999. No decision has been rendered on these motions. In Seneca
Nation of Indians, by order dated November 22, 1999, the District Court
confirmed the July 12, 1999 magistrate's report, which recommended granting the
State's motion to dismiss that portion of the action relating to the right of
way where the New York State Thruway crosses the Cattaraugus Reservation in Erie
and Chatauqua Counties and denying the State's motion to dismiss the Federal
Government's damage claims. The District Court has set a trial date of October
17, 2000 for that portion of the case related to the plaintiff's claim of
ownership of the islands in the Niagara River.
Civil Rights Claims
In an action commenced in 1980 (United States, et al. v. Yonkers Board
of Education, et al.), the United States District Court for the Southern
District of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to develop
and comply with a remedial educational improvement plan (EIP I). On January 19,
1989, the District Court granted motions by Yonkers and the NAACP to add the
State Education Department, the Yonkers Board of Education, and the State Urban
Development Corporation as defendants, based on allegations that they had
participated in the perpetuation of the segregated school system. On August 30,
1993, the District Court found that vestiges of a dual school system continued
to exist in Yonkers. On March 27, 1995, the District Court made factual findings
regarding the role of the State and the other State defendants (the State) in
connection with the creation and maintenance of the dual school system, but
found no legal basis for imposing liability. On September 3, 1996, the United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC ss.1983 and the
Equal Educational Opportunity Act, 20 USC ss.ss.1701, et seq., for the unlawful
dual school system, because the State, inter alia, had taken no action to force
the school district to desegregate despite its actual or constructive knowledge
of de jure segregation. By order dated October 8, 1997, the District Court held
that vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed educational
improvement plan (EIP II) to eradicate these vestiges of segregation. The
October 8, 1997 order of the District Court ordered that EIP II be implemented
and directed that, within 10 days of the entry of the order, the State make
available to Yonkers $450,000 to support planning activities to prepare the EIP
II budget for 1998-99 and the accompanying capital facilities plan. A final
judgment to implement EIP II was entered on October 14, 1997. On November 7,
1997, the State appealed that judgment to the Second Circuit. Additionally, the
Court adopted a requirement that the State pay to Yonkers approximately $9.85
million as its pro rata share of the funding of EIP I for the 1996-97 school
year. The requirement for State funding of EIP I was reduced to an order on
December 2, 1997 and reduced to a judgment on February 10, 1998. The State
appealed that order to the Second Circuit on December 31, 1997 and amended the
notice of appeal after entry of the judgment.
On June 15, 1998, the District Court issued an opinion setting forth
the formula for the allocation of the costs of EIP I and EIP II between the
State and the City for the school years 1997-98 through 2005-06. That opinion
was reduced to an order on July 27, 1998. The order directed the State to pay
$37.5 million by August 1, 1998 for estimated EIP costs for the 1997-98 school
year. The State made this payment, as directed. On August 24, 1998, the State
appealed that order to the Second Circuit. The city of Yonkers and the Yonkers
Board of Education cross appealed to the Second Circuit from that order. By
stipulation of the parties approved by the Second Circuit on November 19, 1998,
the appeals from the July 27, 1998 order were withdrawn without prejudice to
reinstatement upon determination of the State's appeal of the October 14, 1997
judgment discussed above.
On April 15, 1999, the District Court issued two additional orders. The
first order directed the State to pay to Yonkers an additional $11.3 million by
May 1, 1999, as the State's remaining share of EIP costs for the 1997-98 school
year. The second order directed the State to pay to Yonkers $69.1 million as its
share of the estimated EIP costs for the 1998-99 school year. The State made
both payments on April 30, 1999.
In a decision dated June 22, 1999, the Second Circuit found no basis
for the District Court's findings that vestiges of a dual system continued to
exist in Yonkers and reversed the order directing the implementation of EIP II.
The Second Circuit also affirmed the District Court's order requiring the State
to pay one-half of the cost of EIP I for the 1996-97 school year and remanded
the case to the District Court for further proceedings consistent with its
decision. On July 2, 1999 the NAACP filed a petition for rehearing of the June
22, 1999 decision before the Second Circuit, en banc. The State has joined in
the City of Yonkers motion to stay further implementation of EIP II pending the
decision on the petition for rehearing. By order dated August 5, 1999, the
Second Circuit granted the motion staying further implementation of EIP II
pending appeal.
On July 27, 1999, the City of Yonkers moved in the District Court to
modify the July 27, 1998 order to require the State to make payments for EIP
expenses each month from July 1999 through April 2000 of $9.22 million per month
instead of paying $92.2 million by May 1, 2000. By memorandum and order dated
July 29, 1999, the District Court denied this motion.
In a decision dated November 16, 1999, the Second Circuit vacated its
June 22, 1999 decision. In this decision, the Second Circuit again affirmed the
District Court's order requiring the State to pay one-half of the cost of EIP I
for the 1996-97 school year. The Second Circuit also found no basis for the
District Court's findings that vestiges of a dual system continued to exist in
Yonkers, and therefore vacated the District Court's EIP II order. The Second
Circuit, however, remanded to the District Court for the limited purpose of
making further findings on the existing record as to whether any other vestiges
of the dual system remain in the Yonkers public schools. On May 22, 2000, the
United States Supreme Court denied the State's petition for certiorari, seeking
leave to appeal the November 16, 1999 decision and the underlying September 3,
1996 decision.
On April 17, 2000, the District Court issued an additional order,
directing the State to pay to Yonkers $44.3 million as its share of the
estimated EIP costs for the 1999-2000 school year. On May 17, 2000, the State
appealed that order to the Second Circuit. The appeals of all of these funding
orders have been consolidated with the May 17, 2000 appeal of the April 17, 2000
order.
School Aid
In Campaign for Fiscal Equity, Inc., et al. v. State, et al. (Supreme
Court, New York County), plaintiffs challenge the funding for New York City
public schools. Plaintiffs seek a declaratory judgment that the State's public
school financing system violates article 11, section 1 of the State Constitution
and Title VI of the federal Civil Rights Act of 1964 and injunctive relief that
would require the State to satisfy State Constitutional standards. This action
was commenced in 1993. The trial of this action concluded July 27, 2000.
State Programs
Medicaid
Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April 1,
1995. Included are New York State Health Facilities Association, et al. v.
DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New York
Association of Homes and Services for the Aging v. DeBuono et al. (three cases),
Healthcare Association of New York State v. DeBuono and Bayberry Nursing Home et
al. v. Pataki, et al. Plaintiffs allege that the changes in methodology have
been adopted in violation of procedural and substantive requirements of State
and federal law.
In a consolidated action commenced in 1992, Medicaid recipients and
home health care providers and organizations challenge promulgation by the State
Department of Social Services (DSS) in June 1992 of a home assessment resource
review instrument (HARRI), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).
In a related case, Rodriguez v. DeBuono, on April 19, 1999, the United States
District Court for the Southern District of New York enjoined the State's use of
task based assessment, which is similar to the HARRI, unless the State assesses
safety monitoring as a separate task based assessment, on the grounds that its
use without such additional assessment violated federal Medicaid law and the
Americans with Disabilities Act. The State appealed from the April 19, 1999
order and on July 12, 1999 argued the appeal before the Second Circuit. By order
dated October 6, 1999, the Second Circuit reversed the April 19, 1999 order and
vacated the injunction.
On October 20, 1999, petitioners filed a request for rehearing en banc.
In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies
v. Dowling, Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical
Association v. Wing and New York State Psychiatric Association v. Wing. These
cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time-barred. In a judgment dated September 5,
1996, the Supreme Court, Albany County, dismissed Matter of New York State
Radiological Society v. Wing as time-barred. By order dated November 26, 1997,
the Appellate Division, Third Department, affirmed that judgment. By decision
dated June 9, 1998, the Court of Appeals denied leave to appeal. In a decision
entered December 15, 1998, the Appellate Division, First Department, dismissed
the remaining cases in accordance with the result in Matter of New York State
Radiological Society v. Wing. By decision dated July 8, 1999, the Court of
Appeals denied leave to appeal.
Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law ss.2807-d, which imposes a tax on the gross receipts hospitals and
residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2% and 3.8% assessments on gross receipts imposed pursuant to
Public Health Law ss.ss. 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii), respectively,
are unconstitutional. An order entered August 27, 1997 enforced the terms of the
decision. The State appealed that order. By decision and order dated August 31,
1998, the Appellate Division, Second Department, affirmed that order. On
September 30, 1998, the State moved for re-argument or, in the alternative, for
a certified question for the Court of Appeals to review. By order dated January
7, 1999, the motion was denied. A final order was entered in Supreme Court on
January 26, 1999. On February 23, 1999, the State appealed that order to the
Court of Appeals. In a decision entered December 16, 1999, the Court of Appeal
reversed the decision below and upheld constitutionality of the assessments. On
May 15, 2000, plaintiffs filed a petition for certiorari with the United States
Supreme Court seeking to appeal the December 6, 1999 decision. The State's
response is due June 15, 2000.
In Dental Society, et al. v. Pataki, et al. (United States District
Court, Northern District of New York, commenced February 2, 1999), plaintiffs
challenge the State's reimbursement rates for dental care provided under the
State's dental Medicaid program. Plaintiffs claim that the State's Medicaid fee
schedule violates Title XIX of the Social Security Act (42 U.S.C. ss. 1396a et
seq.) and the federal and State Constitutions. On June 25, 1999, the State filed
its answer. The parties have entered into a settlement agreement dated May 8,
2000 that will increase Medicare dental reimbursement rates prospectively over a
four-year period, beginning June 1, 2000.
Shelter Allowance
In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing. In a decision dated April 16,
1997, the Court held that the shelter allowance promulgated by the Legislature
and enforced through the State Department of Social Services regulations is not
reasonably related to the cost of rental housing in New York City and results in
homelessness to families in New York City. A judgment was entered on July 25,
1997, directing, inter alia, that the State (i) submit a proposed schedule of
shelter allowances (for the Aid to Dependent Children program and any successor
program) that bears a reasonable relation to the cost of housing in New York
City; and (ii) compel the New York City Department of Social Services to pay
plaintiffs a monthly shelter allowance in the full amount of their contract
rents, provided they continue to meet the eligibility requirements for public
assistance, until such time as a lawful shelter allowance is implemented, and
provide interim relief to other eligible recipients of Aid to Dependent Children
under the interim relief system established in this case. The State appealed to
the Appellate Division, First Department from each and every provision of this
judgment except that portion directing the continued provision of interim
relief. By decision and order dated May 6, 1999, the Appellate Division, First
Department, affirmed the July 25, 1997 judgment. By order dated July 8, 1999,
the Appellate Division denied the State's motion for leave to appeal to the
Court of Appeals from the May 6, 1999 decision and order. By order dated October
14, 1999, the Court of Appeals dismissed the State's motion for leave to appeal.
1 A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on changes in the value of a securities index. An option is the right to
buy or sell a set quantity of an underlying instrument at a predetermined price.
A swap is a privately negotiated agreement to exchange one stream of payments
for another. 2 Mr. Healey is an "interested person" of the Portfolio as that
term is defined in the 1940 Act.
<PAGE>
28
i:\d
PART C
ITEM 23. EXHIBITS
(a) Declaration of Trust of the Registrant.1
(b) Amended and Restated By-Laws of the Registrant.3
(c ) None
(d) Investment Advisory Agreement between the Registrant and Morgan
Guaranty Trust Company of New York ("Morgan").1
(d)(1) Investment Advisory Agreement between the Registrant and J.P. Morgan
Investment Management Inc.5
(e) None
(f) N/A
(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company ("State Street").4
(h) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc.4
(h)(1) Transfer Agency and Service Agreement between the Registrant and
State Street.1
(h)(2) Restated Administrative Services Agreement between the Registrant
and Morgan.4
(h)(3) Fund Services Agreement, as amended, between the Registrant and
Pierpont Group, Inc.4
(h)(4) Investment representation letters of initial investors.4
(i) None
(j) None
(k) N/A
(l) N/A
(m) N/A
(n) N/A
(o) None
(p) Codes of Ethics filed herewith
------------------- 1 Incorporated herein by reference from Amendment No. 1
to Registrant's Registration Statement on Form N-1A (the "Registration
Statement") as filed with the Securities and Exchange Commission ("SEC")on July
31, 1995. (Accession No. 0000922326-95-000019).
2 Incorporated herein by reference from Amendment No. 3 to Registrant's
Registration Statement as filed with the SEC on August 1, 1996.
(Accession No. 0000935490-96-000077).
3 Incorporated herein by reference from Amendment No. 4 to Registrant's
Registration Statement as filed with the SEC on May 12, 1997.
(Accession No.0001016964-97-000076).
4 Incorporated herein by reference from Amendment No. 5 to Registrant's
Registration Statement as filed with the SEC on July 14, 1997.
(Accession No. 0001016964-97-006119).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 25. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit hereto.
The Trustees and officers of the Registrant and the personnel of the
Registrant's co-administrator are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The business of J.P. Morgan is summarized in the Prospectus constituting
Part A of this Registration Statement, which is incorporated herein by
reference. The business or other connections of each director and officer of J.
P. Morgan is currently listed in the investment advisor registration on Form ADV
for J.P. Morgan (File No. 801-21011).
ITEM 27. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
J.P. Morgan Investment Management Inc. and Morgan Guaranty Trust Company of
New York, 522 Fifth Avenue, New York, New York 10036 and/or 60 Wall Street, New
York, New York 10260-0060 (records relating to its functions as investment
adviser and administrative services agent).
The Bank of New York, 1 Wall Street New York, New York 10086, (records
relating to its functions as fund accountant and custodian).
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109 (records relating to its functions as co-administrator and
exclusive placement agent).
Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017
(records relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York and State of New York, on the 28th day of November, 2000.
THE NEW YORK TAX EXEMPT BOND PORTFOLIO
By: /s/ Christopher Kelley
--------------------------------
Christopher Kelley
Vice President and Assistant Secretary
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
Ex. 99 Code of Ethics for Funds Distributor, Inc.
Code of Ethics for J.P. Morgan Funds
Code of Ethics for J.P. Morgan Investment Management
