ENTR ERShares Entrepreneurs ETF

PERMITTED INVESTMENT ACTIVITIES AND CERTAIN ASSOCIATED RISKS

Set forth below are descriptions of permitted investment activities for the Funds and certain of their associated risks. The activities are organized into various categories. To the extent that an activity overlaps two or more categories, the activity is referenced only once in this section. Not all of the Funds participate in all of the investment activities described below. In addition, with respect to any particular Fund, to the extent that an investment activity is described in such Fund's Prospectus as being part of its principal investment strategy, the information provided below regarding such investment activity is intended to supplement, but not supersede, the information contained in the Prospectus, and the Fund may engage in such investment activity in accordance with the limitations set forth in the Prospectus. To the extent an investment activity is described in this SAI that is not referenced in the Prospectus, a Fund under normal circumstances will not engage in such investment activity with more than 15% of its assets unless otherwise specified below. Unless otherwise noted or required by applicable law, the percentage limitations included in this SAI apply at the time of purchase of a security.

For purposes of monitoring the investment policies and restrictions of the Funds (with the exception of the loans of portfolio securities policy described below), the amount of any securities lending collateral held by a Fund will be excluded in calculating total assets.

DEBT SECURITIES

Asset-Backed Securities

Asset-backed securities are securities that are secured or "backed" by pools of various types of assets on which cash payments are due at fixed intervals over set periods of time. Asset-backed securities are created in a process called securitization. In a securitization transaction, an originator of loans or an owner of accounts receivable of a certain type of asset class sells such underlying assets in a "true sale" to a special purpose entity, so that there is no recourse to such originator or owner. Payments of principal and interest on asset-backed securities typically are tied to payments made on the pool of underlying assets in the related securitization. Such payments on the underlying assets are effectively "passed through" to the asset-backed security holders on a monthly or other regular, periodic basis. The level of seniority of a particular asset-backed security will determine the priority in which the holder of such asset-backed security is paid, relative to other security holders and parties in such securitization. Examples of underlying assets include consumer loans or receivables, home equity loans, automobile loans or leases, and timeshares, although other types of receivables or assets also may be used as underlying assets.

While asset-backed securities typically have a fixed, stated maturity date, low prevailing interest rates may lead to an increase in the prepayments made on the underlying assets. This may cause the outstanding balances due on the underlying assets to be paid down more rapidly. As a result, a decrease in the originally anticipated interest from such underlying securities may occur, causing the asset-backed securities to pay-down in whole or in part prior to their original stated maturity date. Prepayment proceeds would then have to be reinvested at the lower prevailing interest rates. Conversely, prepayments on the underlying assets may be less than anticipated, causing an extension in the duration of the asset-backed securities.

Delinquencies or losses that exceed the anticipated amounts for a given securitization could adversely impact the payments made on the related asset-backed securities. This is a reason why, as part of a securitization, asset-backed securities are often accompanied by some form of credit enhancement, such as a guaranty, insurance policy, or subordination. Credit protection in the form of derivative contracts may also be purchased. In certain securitization transactions, insurance, credit protection, or both may be purchased with respect to only the most senior classes of asset-backed securities, on the underlying collateral pool, or both. The extent and type of credit enhancement varies across securitization transactions.

In addition to the normal risks associated with debt securities discussed elsewhere in this SAI and the Prospectus(es), asset-backed securities carry additional risks including, but not limited to, the possibility that (i) the pace of payments on underlying assets may be faster or slower than anticipated or payments may be in default; (ii) the creditworthiness of the credit support provider may deteriorate; and (iii) such securities may become less liquid or harder to value as a result of market conditions or other circumstances.

Bank Obligations

Bank obligations include certificates of deposit, time deposits, bankers' acceptances and other short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks, domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such obligations issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, a Fund may be subject to additional investment risks that are different in some respects from those incurred by a Fund that invests only in debt obligations of domestic issuers. Such risks include possible future political, regulatory or economic developments, the possible imposition of foreign withholding and other taxes (at potentially confiscatory levels) on amounts realized on such obligations, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions that might adversely affect the payment of principal and interest on these obligations and the possible seizure or nationalization of foreign deposits. In addition, foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements and to different regulatory, accounting, auditing, reporting and recordkeeping standards than those applicable to domestic branches of U.S. banks.

Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time.

Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits that may be held by a Fund will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation ("FDIC"). Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations, bearing fixed, floating or variable interest rates.

Commercial Paper

Commercial paper (including variable amount master demand notes, see "Floating and Variable Rate Obligations" below), refers to short-term, unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and typically has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations which permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payee of such notes whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes.

Asset-Backed Commercial Paper . Securities that are issued from commercial paper conduits are called asset-backed commercial paper securities. Credit support for such securities falls into two categories: liquidity protection and protection against ultimate default under the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that scheduled payments on the securities or underlying pool are made in a timely fashion. Protection against ultimate default ensures payment on at least a portion of the assets in the pool. This protection may be provided through guarantees, insurance policies or letters of credit obtained from third parties, through various means of structuring the transaction, such as by issuing senior and subordinated instruments or through a combination of these approaches. The degree of credit support provided on each issue is based generally on historical information relating to the level of credit risk associated with the payments. Delinquency or loss that exceeds the anticipated amount or a downgrade or loss of credit support could adversely impact the value of or return on an investment in an asset-backed commercial paper security.

Commercial paper is also subject to the risks generally associated with debt securities discussed elsewhere in this SAI and the Prospectus(es).

Convertible Securities

A convertible security is generally a debt obligation or preferred stock that may be converted within a specified period of time into a certain amount of common stock of the same or a different issuer. A convertible security provides a fixed-income stream and the opportunity, through its conversion feature, to participate in the capital appreciation resulting from a market price advance in its underlying common stock. As with a straight fixed-income security, a convertible security tends to increase in market value when interest rates decline and decrease in value when interest rates rise. Like a common stock, the value of a convertible security also tends to increase as the market value of the underlying stock rises, and it tends to decrease as the market value of the underlying stock declines. Because its value can be influenced by both interest-rate and market movements, a convertible security tends not to be as sensitive to interest rates as a similar fixed-income security, and tends not to be as sensitive to changes in share price as its underlying stock.

Investing in convertible securities is subject to certain risks in addition to those generally associated with debt securities discussed elsewhere in this SAI and the Prospectus(es). Certain convertible securities, particularly securities that are convertible into securities of an issuer other than the issuer of the convertible security, may be or become illiquid and, therefore, may be more difficult to resell in a timely fashion or for a fair price, which could result in investment losses.

The creditworthiness of the issuer of a convertible security is important because the holder of a convertible security will have recourse only to the issuer. In addition, a convertible security may be subject to conversion or redemption by the issuer, but only after a specified date and under circumstances established at the time the security is issued. This feature may require a holder to convert the security into the underlying common stock, even if the value of the underlying common stock has declined substantially. In addition, companies that issue convertible securities frequently are small- and mid-capitalization companies and, accordingly, carry the risks associated with investments in such companies.

While the Funds use the same criteria to evaluate the credit quality of a convertible debt security that they would use for a more conventional debt security, a convertible preferred stock is treated like a preferred stock for a Fund's credit evaluation, as well as financial reporting and investment limitation purposes. Preferred stock is subordinated to all debt obligations in the event of insolvency, and an issuer's failure to make a dividend payment is generally not an event of default entitling the preferred shareholders to take action. Preferred stock generally has no maturity date, so its market value is dependent on the issuer's business prospects for an indefinite period of time. In addition, distributions on preferred stock generally are taxable as dividend income, rather than interest payments, for federal income tax purposes.

Custodial Receipts for Treasury Securities

These securities are typically represented by participations in trusts that hold U.S. Treasury securities, such as Treasury Investors Growth Receipts and Certificates of Accrual on Treasury Securities, or other obligations where the trust participations evidence ownership in either the future interest payments or the future principal payments on the obligations. These participations are normally issued at a discount to their "face value," and can exhibit greater price volatility than ordinary debt securities because of the way in which their principal and interest are returned to investors.

Dollar Roll Transactions

Dollar roll transactions are transactions wherein a Fund sells fixed-income securities, typically mortgage-backed securities,and makes a commitment to purchase similar, but not identical, securities at a later date from the same party. Like a forward commitment, during the roll period no payment is made for the securities purchased and no interest or principal payments on the security accrue to the purchaser, but the Fund assumes the risk of ownership. A Fund is compensated for entering into dollar roll transactions by the difference between the current sales price and the forward price for the future purchase, as well as by the interest earned on the cash proceeds of the initial sale. Like other when-issued securities or firm commitment agreements, dollar roll transactions involve the risk that the market value of the securities sold by a Fund may decline below the price at which the Fund is committed to purchase similar securities. In the event the buyer of securities from a Fund under a dollar roll transaction becomes insolvent, the Fund's use of the proceeds of the transaction may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligation to repurchase the securities. A Fund will engage in dollar roll transactions for the purpose of acquiring securities for its portfolio and not for investment leverage.

Fixed-Income Securities

A fixed-income security is an interest-bearing security issued by a company or governmental unit. The issuer of a fixed-
income security has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the fixed-income security's face value) periodically or on a specified maturity date. An issuer may have the right to redeem or "call" a fixed-income security before maturity, in which case the investor may have to reinvest the proceeds at lower market rates. The value of fixed-rate fixed-income securities will tend to fall when interest rates rise and rise when interest rates fall. The value of "floating-rate" or "variable-rate" fixed-income securities, on the other hand, fluctuate much less in response to market interest-rate movements than the value of fixed-rate fixed-income securities. Fixed-income securities may be senior or subordinated obligations. Senior obligations generally have the first claim on a corporation's earnings and assets and, in the event of liquidation, are paid before subordinated debt. Fixed-income securities may be unsecured (backed only by the issuer's general creditworthiness) or secured (also backed by specified collateral).

Fixed-Income securities are interest-bearing investments which promise a stable stream of income; however, the prices of such securities are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Longer-term securities are affected to a greater extent by interest rates than shorter-term securities. The values of fixed-income securities also may be affected by changes in the credit rating or financial condition of the issuing entities. Certain securities that may be purchased by the Fund, such as those rated "Baa" or lower by Moody's Investors Service, Inc. ("Moody's") and "BBB" or lower by Standard & Poor's Rating Group ("S&P") and Fitch Investors Service, Inc. ("Fitch") tend to be subject to greater issuer credit, risk to greater market fluctuations and pricing uncertainty, and to less liquidity than lower yielding, higher-rated fixed-income securities. If a security held by a Fund is downgraded, such Fund may continue to hold the security until such time as the adviser determines it to be advantageous for the Fund to sell the security. The ratings of Fitch, Moody's and S&P are more fully described in Appendix A. Investing in fixed-income securities is subject to certain risks including, among others, credit and
interest rate risk, as more fully described in the Prospectus(es).

Floating- and Variable-Rate Obligations

Floating- and variable-rate obligations include obligations such as demand notes and bonds. Variable-rate demand notes include master demand notes that are obligations that permit a Fund to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the Fund, as lender, and the borrower. The interest rate on a floating-rate demand obligation is based on a referenced lending rate, such as a bank's prime rate, and is adjusted automatically each time such rate is adjusted. The interest rate on a variable-rate demand obligation is adjusted automatically at specified intervals. The issuer of such obligations ordinarily has a right, after a given period, to prepay at its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days notice to the holders of such obligations. Frequently, such obligations are secured by letters of credit or other credit support arrangements provided by banks. Such features often include unconditional and irrevocable letters of credit that are issued by a third party, usually a bank, savings and loan association or insurance company which assumes the obligation for payment of principal and interest in the event of default by the issuer. Letters of credit are designed to enhance liquidity and ensure repayment of principal and any accrued interest if the underlying variable-rate demand obligation should default. Some variable rate obligations feature other credit enhancements, such as standby bond purchase agreements ("SBPAs"). An SBPA can feature a liquidity facility that is designed to provide funding for the purchase price of variable rate obligations that are unable to be successfully remarketed for resale. The liquidity facility provider is obligated solely to advance funds for the purchase of tendered variable rate bonds that fail to be remarketed and does not guarantee the repayment of principal or interest. The liquidity facility provider's obligations under the SBPA are subject to conditions, including the continued creditworthiness of the underlying borrower or issuer, and the facility may terminate upon the occurrence of certain events of default or at the expiration of its term. In addition, a liquidity facility provider may be unable or unwilling to perform its obligations. A Fund may be unable to timely dispose of a variable rate obligation if the underlying issuer defaults and the letter of credit or liquidity facility provider is unable or unwilling to perform its obligations or the facility otherwise terminates and a successor letter of credit or liquidity provider is not immediately obtained. The potential adverse impact to a Fund resulting from the inability of a letter of credit or liquidity facility provider to meet its obligations could be magnified to the extent the provider also furnishes credit support for other variable-rate obligations held by the Fund.

There generally is no established secondary market for certain variable-rate obligations, such as those not supported by letters of credit, SBPAs or other credit support arrangements, because they are direct lending arrangements between the lender and borrower. Accordingly, where these obligations are not secured by letters of credit, SBPAs or other credit support arrangements, a Fund is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations may not be rated by credit rating agencies and a Fund may invest in obligations which are not so rated only if the adviser determines that at the time of investment the obligations are of comparable quality to the other obligations in which such Fund may invest. The adviser, on behalf of a Fund, monitors the creditworthiness of the issuers of the floating- and variable-rate demand obligations in such Fund's portfolio. Floating- and variable-rate instruments are subject to interest-rate and credit risks and other risks generally associated with debt securities.The floating- and variable-rate instruments that the Funds may purchase include certificates of participation in such instruments.

Insurance Funding Agreements

A Fund may invest in funding agreements issued by domestic insurance companies. Funding agreements are short-term,
privately placed, debt obligations of insurance companies that offer a fixed- or floating-rate of interest. These investments are not readily marketable and therefore are considered to be illiquid securities. (See the section entitled "Illiquid Securities").

Guaranteed Investment Contracts

The Funds may invest in guaranteed investment contracts ("GICs") issued by insurance companies. Pursuant to such contracts, a Fund makes cash contributions to a deposit fund of the insurance company's general account. The insurance company then credits to the deposit fund on a monthly basis guaranteed interest at a rate based on an index. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and these charges will be deducted from the value of the deposit fund. A Fund will purchase a GIC only when the adviser has determined that the GIC presents minimal credit risks to the Fund and is of comparable quality to instruments in which the Fund may otherwise invest. Because a Fund may not receive the principal amount of a GIC from the insurance company on seven days' notice or less, a GIC may be considered an illiquid investment. The term of a GIC will be one year or less.

High Yield Securities

Each Fund may invest in high-yield securities. High yield securities (also known as "junk bonds") are debt securities that are rated below investment-grade, are unrated and deemed by the adviser to be below investment-grade, or in default at the time of purchase. These securities have a much greater risk of default (or in the case of bonds currently in default, of not returning principal) and tend to be more volatile than higher-rated securities of similar maturity. The value of these debt securities can be affected by overall economic conditions, interest rates, and the creditworthiness of the individual issuers. These securities tend to be less liquid and more difficult to value than higher-rated securities.

The market values of certain high yield and comparable unrated securities tend to be more sensitive to individual corporate developments and changes in economic conditions than investment-grade securities. In addition, issuers of high yield and comparable unrated securities often are highly leveraged and may not have more traditional methods of financing available to them. Their ability to service their debt obligations, especially during an economic downturn or during sustained periods of high interest rates, may be impaired.

The risk of loss due to default by such issuers is significantly greater because high yield and comparable unrated securities generally are unsecured and frequently are subordinated to senior indebtedness. A Fund may incur additional expenses to the extent that it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The existence of limited markets for high yield and comparable unrated securities may diminish the Fund's ability to: (i) obtain accurate market quotations for purposes of valuing such securities and calculating its net asset value; and (ii) sell the securities either to meet redemption requests or to respond to changes in the economy or in financial markets.

Letters of Credit

Certain of the debt obligations (including certificates of participation, commercial paper and other short-term obligations) which a Fund may purchase may be backed by an unconditional and irrevocable letter of credit of a bank, savings and loan association or insurance company which assumes the obligation for payment of principal and interest in the event of default by the issuer. Only banks, savings banks and insurance companies which, in the opinion of the adviser, are of comparable quality to issuers of other permitted investments of the Fund, may be used for letter of credit-backed investments.

Loan Participations

A loan participation gives a Fund an undivided proportionate interest in a loan or instrument originated by a bank or other institution. Loan participations may carry a demand feature permitting the holder to tender the interests back to the bank or other institution. Loan participations, however, typically do not provide the Fund with any right to enforce compliance by the borrower, nor any rights of set-off against the borrower, and the Fund may not directly benefit from any collateral supporting the loan in which it purchased a loan participation. As a result, the Fund assumes the credit risk of both the borrower and the lender that is selling the loan participation.

Money Market Instruments

Investments in the following types of high-quality money market instruments are permitted: (i) U.S. Government obligations; (ii) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; (iii) commercial paper; and (iv) repurchase agreements. A Fund also may invest in short-term U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that at the time of investment: (i) have more than $10 billion, or the equivalent in other currencies, in total assets; and (ii) in the opinion of the adviser, are of comparable quality to obligations of U.S. banks which may be purchased by the Funds.

Mortgage-Related Securities

Mortgage-Backed Securities . Mortgage-backed securities, also called mortgage pass-through securities, are issued in securitizations (see "Asset-Backed Securities" section) and represent interests in "pools" of underlying residential mortgage loans that serve as collateral for such securities. Similar to asset-backed securities, the monthly payments made by the individual borrowers on the underlying residential mortgage loans are effectively "passed through" to the mortgage-backed securities (net of administrative and other fees paid to various parties) as monthly principal and interest payments.

The stated maturities of mortgage-backed securities may be shortened by unscheduled prepayments of principal on the underlying mortgage loans, and the expected maturities may be extended in rising interest-rate environments. Therefore, it is not possible to predict accurately the maturity of a particular mortgage-backed security. Variations in the maturities of mortgage-backed securities will affect the yield of each such security and the portfolio as a whole. Rates of prepayment of principal on the underlying mortgage loans in mortgage-backed securitizations that are faster than expected may expose the mortgage-backed securities issued in such securitizations to a lower rate of return and require reinvestment of proceeds at lower prevailing interest rates. Also, if a mortgage-backed security has been purchased at a premium, but is backed by underlying mortgage loans that are subject to prepayment, if prepayments are made on such underlying collateral, then the value of the premium effectively would be lost or reduced.

Like other fixed-income securities, when interest rates rise, the value of mortgage-backed securities generally will decline and may decline more than other fixed-income securities as the expected maturity extends. Conversely, when interest rates decline, the value of mortgage-backed securities having underlying collateral with prepayment features may not increase as quickly as other fixed-income securities as the expected maturity shortens. Payment of principal and interest on some mortgage-backed securities issued or guaranteed by a government agency (but not the market value of the securities themselves) is guaranteed by a government association, such as the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), or by a government-sponsored entity, such as the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") or Federal National Mortgage Association ("FNMA" or "Fannie Mae"). Unlike FHLMC and FNMA, which act as both issuers and guarantors of mortgage-backed securities, GNMA only provides guarantees of mortgage-backed securities. Only GNMA guarantees are backed by the full faith and credit of the U.S. Government. Mortgage-backed securities issued or guaranteed by FHLMC or FNMA are not backed by the full faith and credit of the U.S. Government. FHLMC and FNMA are authorized to borrow money from the U.S. Treasury or the capital markets, but there can be no assurance that they will be able to raise funds as needed or that their existing capital will be sufficient to satisfy their guarantee obligations. Mortgage-backed securities created by private issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. Collateralized mortgage obligations, commercial mortgage-backed securities, adjustable rate mortgage securities and mortgage participation certificates are the primary types of mortgage-backed securities utilized by the Funds.

Collateralized Mortgage Obligations ("CMOs") . CMOs are debt obligations that may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. Each CMO is structured so that multiple classes of securities are issued from such CMO, with each class bearing a different stated maturity. Payments of principal on the underlying securities, including prepayments, are first "passed through" to investors holding the class of securities with the shortest maturity; investors holding classes of securities with longer maturities receive payments on their securities only after the more senior classes have been retired. A longer duration or greater sensitivity to interest rate fluctuations generally increases the risk level of the CMO.

Commercial Mortgage-Backed Securities ("CMBS") . CMBS are securities that are secured by mortgage loans on commercial real property. Many of the risks of investing in CMBS reflect the risks of investing in the real estate securing the underlying mortgage loans, such as office buildings, hotels, and shopping malls. These risks include the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a commercial property to attract and retain tenants. While CMBS are sold both in public transactions registered with the SEC and in private placement transactions, CMBS may be less liquid and exhibit greater price volatility than other types of mortgage-backed or asset-backed securities.

Adjustable Rate Mortgage Securities ("ARMS") . ARMS are securities that are secured by mortgage loans with adjustable interest rates and may be issued or guaranteed by a government agency such as GNMA, by government-sponsored entities such as FNMA or FHLMC, or by a private issuer. The mortgage loans underlying ARMS guaranteed by GNMA are typically federally insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, whereas the mortgage loans underlying ARMS issued by FNMA or FHLMC are typically conventional residential mortgages which are not so insured or guaranteed, but which conform to specific underwriting, size and maturity standards.

ARMS are also offered by private issuers. These securities generally offer a higher rate of return in the form of interest payments, but because they offer no direct or indirect governmental guarantees, they also involve greater credit and interest rate risk. However, many private issuers or servicers of ARMS guarantee or provide private insurance for timely payment of interest and principal. In addition, the Funds may purchase some mortgage-related securities through private placements that are restricted as to further sale. The value of these securities may fluctuate more than that of other mortgage-related securities.

Mortgage Participation Certificates ("PCs") . Mortgage PCs and guaranteed mortgage certificates ("GMCs") are both issued by the FHLMC. PCs resemble GNMA certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on an underlying pool of mortgages. GMCs also represent a pro rata interest in a pool of mortgages, but pay interest semi-annually and return principal once a year in guaranteed minimum payments. PCs and GMCs differ from bonds in that principal is paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity.

Other Mortgage-Backed Securities . As new types of mortgage-backed securities are developed and offered to investors, the adviser will, consistent with each Fund's investment objective, policies, restrictions and quality standards, consider making investments in such new types of mortgage-backed securities.

Credit Risk . Credit risk reflects the risk that a holder of mortgage-backed securities may not receive all or part of its principal because the issuer, or any credit enhancer and/or the underlying mortgage borrowers have defaulted on their obligations. Credit risk is increased for mortgage-backed securities that are subordinated to another security (i.e., if the holder of a mortgage-backed security is entitled to receive payments only after payment obligations to holders of the other security are satisfied). The more deeply subordinated the security, the greater the credit risk associated with the security will be. Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, typically entail greater credit risk than mortgage-backed securities guaranteed by a government association or government-sponsored enterprise. The performance of mortgage-backed securities issued by private issuers generally depends on the financial health of those institutions and the performance of the mortgage pool backing such securities. An unexpectedly high rate of defaults on mortgages held by a mortgage pool may limit substantially the pool's ability to make payments of principal or interest to the holder of such mortgage-backed
securities, particularly if such securities are subordinated, thereby reducing the value of such securities and in some cases rendering them worthless. The risk of such defaults is generally higher in the case of mortgage pools that include so-called "subprime" mortgages.

Interest Rate Risk . The interest rates on mortgage loans underlying ARMS generally are readjusted at periodic intervals ranging from one year or less to several years in response to changes in a predetermined, commonly recognized interest rate index. The adjustable rate feature should reduce, but will not eliminate, price fluctuations in such securities resulting from actual or anticipated fluctuations in market interest rates. The value of each Fund's ARMS may fluctuate to the extent interest rates on underlying mortgages differ from prevailing market interest rates during periods between interest rate reset dates. Accordingly, investors could experience some loss if they redeem their shares of the Funds or if the Funds sell these portfolio securities before the interest rates on the underlying mortgages are adjusted to reflect prevailing market interest rates. The interest rates on mortgages underlying other types of mortgage-backed securities generally do not reset at periodic intervals. Accordingly, non-ARMS have greater exposure to interest rate risk than ARMS.

Municipal Bonds

Municipal bonds are debt obligations issued to obtain funds for various public purposes. The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. General obligation bonds are supported by the municipality's general taxing authority, while revenue bonds are supported by the revenues from one or more particular project or activity. Industrial development bonds are a specific type of revenue bond backed by the credit and security of a private user. Certain types of industrial development bonds are issued by or on behalf of public authorities to obtain funds to finance privately operated facilities. Under the Internal Revenue Code, certain revenue bonds are considered "private activity bonds" and interest paid on such bonds is treated as an item of tax preference for purposes of calculating federal alternative minimum tax liability.

Certain of the municipal obligations held by the Funds may be insured as to the timely payment of principal and interest. The insurance policies usually are obtained by the issuer of the municipal obligation at the time of its original issuance. In the event that the issuer defaults on interest or principal payment, the insurer will be notified and will be required to make payment to the bondholders. Although the insurance feature is designed to reduce certain financial risks, the premiums for insurance and the higher market price sometimes paid for insured obligations may reduce a Fund's current yield. Insurance generally will be obtained from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch or otherwise rated investment grade. To the extent that securities held by a Fund are insured as to principal and interest payments by insurers whose claims- paying ability rating is downgraded by Moody's, S&P or Fitch, the value of such securities may be affected. There is, however, no guarantee that the insurer will meet its obligations. Moreover, the insurance does not guarantee the market value of the insured obligation or the net asset value of the Fund's shares. In addition, such insurance does not protect against market fluctuations caused by changes in interest rates and other factors. A Fund also may purchase municipal obligations that are additionally secured by bank credit agreements or escrow accounts. The credit quality of companies which provide such credit enhancements will affect the value of those securities.

From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on municipal obligations. For example, under federal tax legislation enacted in 1986, interest on certain private activity bonds must be included in a shareholder's federal alternative minimum taxable income. Moreover, a Fund cannot predict what legislation, if any, may be proposed in the state legislature regarding the state income tax status of interest on such obligations, or which proposals, if any, might be enacted. Such proposals, while pending or if enacted, might materially and adversely affect the availability of municipal obligations generally for investment by the Fund and the liquidity and value of the Fund's portfolio. In such an event, the Fund would re-evaluate its investment objective and policies and consider possible changes in its structure or possible dissolution.

A Fund invests in municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for federal income tax purposes. Such opinion may have been issued as of a date prior to the date that the Fund acquires the municipal security. Subsequent to a Fund's acquisition of such a municipal security, however, the security may be determined to pay, or to have paid, taxable income. As a result, the treatment of dividends previously paid or to be paid by a Fund as "exempt-interest dividends" could be adversely affected, subjecting the Fund's shareholders to increased federal income tax liabilities. Under highly unusual circumstances, the Internal Revenue Service may determine that a municipal bond issued as tax-exempt should in fact be taxable. If any Fund held such a bond, it might have to distribute taxable income or reclassify as taxable, ordinary income that was previously distributed as exempt-interest dividends.

Taxable Municipal Obligations . There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan.

Municipal Leases

A Fund may invest in municipal leases and participations therein, which arrangements frequently involve special risks.
Municipal leases are obligations in the form of a lease, installment purchase or conditional sales contract (which typically provide for the title to the leased asset to pass to the governmental issuer) which is issued by state or local governments to acquire equipment and facilities. Interest income from such obligations is generally exempt from local and state taxes in the state of issuance. "Participations" in such leases are undivided interests in a portion of the total obligation. Participations entitle their holders to receive a pro rata share of all payments under the lease. The obligation of the issuer to meet its obligations under such leases is often subject to the appropriation by the appropriate legislative body, on an annual or other basis, of funds for the payment of the obligations. Investments in municipal leases are thus subject to the risk that the legislative body will not make the necessary appropriation and the issuer will not otherwise be willing or able to meet its obligation.

Municipal Market Data Rate Locks

The Fund may purchase and sell Municipal Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock permits the
Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. By using an MMD Rate Lock, the Fund can create a synthetic long or short position, allowing the Fund to select what the manager believes is an attractive part of the yield curve. The Fund will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain or to increase the Fund's yield, for example, during periods of steep interest rate yield curves (i.e., wide differences between short term and long term interest rates). An MMD Rate Lock is a contract between the Fund and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if the Fund buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to the Fund equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, the Fund will make a payment to the counterparty equal to the actual level minus the specified level, multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by the Fund. In connection with investments in MMD Rate Locks, there is a risk that municipal yields will move in the opposite direction than anticipated by the Fund, which would cause the Fund to make payments to its counterparty in the transaction that could adversely affect the Fund's performance. The Fund has no obligation to enter into MMD Rate Locks and may not do so.

Municipal Notes

Municipal notes include, but are not limited to, tax anticipation notes ("TANs"), bond anticipation notes ("BANs"), revenue
anticipation notes ("RANs") and construction loan notes. Notes sold as interim financing in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuer.

TANs . An uncertainty in a municipal issuer's capacity to raise taxes as a result of such events as a decline in its tax base or a rise in delinquencies could adversely affect the issuer's ability to meet its obligations on outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds into a general fund that is used to meet obligations other than those of the outstanding TANs. Use of such a general fund to meet various obligations could affect the likelihood of making payments on TANs.

BANs . The ability of a municipal issuer to meet its obligations on its BANs is primarily dependent on the issuer's adequate access to the longer term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal of, and interest on, BANs.

RANs . A decline in the receipt of certain revenues, such as anticipated revenues from another level of government, could
adversely affect an issuer's ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal of, and interest on, RANs.

RAWs . Revenue anticipation warrants, or reimbursement warrants, are issued to meet the cash flow needs of state
governments at the end of a fiscal year and in the early weeks of the following fiscal year. These warrants are payable from unapplied money in a state's general fund, including the proceeds of RANs issued following enactment of a state budget or the proceeds of refunding warrants issued by the state, and are typically subordinated in right of payment to RANs.

The values of outstanding municipal securities will vary as a result of changing market evaluations of the ability of their
issuers to meet the interest and principal payments (i.e., credit risk). Such values also will change in response to changes in the interest rates payable on new issues of municipal securities (i.e., market risk).

Municipal Securities

Stand-by Commitments . The Funds may purchase municipal securities together with the right to resell them to the seller or a third party at an agreed-upon price or yield within specified periods prior to their maturity dates. Such a right to resell is commonly known as a stand-by commitment, and the aggregate price which a Fund pays for securities with a stand-by commitment may be higher than the price which otherwise would be paid. The primary purpose of this practice is to permit a Fund to be as fully invested as practicable in municipal securities while preserving the necessary flexibility and liquidity to meet unanticipated redemptions. In this regard, a Fund acquires stand-by commitments solely to facilitate portfolio liquidity and does not exercise its rights thereunder for trading purposes. Stand-by commitments involve certain expenses and risks, including the inability of the issuer of the commitment to pay for the securities at the time the commitment is exercised, non-marketability of the commitment, and differences between the maturity of the underlying security and the maturity of the commitment.

The acquisition of a stand-by commitment does not affect the valuation or maturity of the underlying municipal securities. A Fund values stand-by commitments at zero in determining NAV. When a Fund pays directly or indirectly for a stand-by commitment, its cost is reflected as unrealized depreciation for the period during which the commitment is held. Stand-by commitments do not affect the average weighted maturity of the Fund's portfolio of securities.

Stripped Securities

Securities issued by the U.S. Treasury and certain securities issued by government authorities and government-sponsored enterprises are eligible to be stripped into interest components and principal components. Stripped securities are purchased by the Funds at a discount to their face value. These securities generally are structured to make a lump-sum payment at maturity and do not make periodic payments of principal or interest. Hence, the duration of these securities tends to be longer and they are therefore more sensitive to interest-rate fluctuations than similar securities that offer periodic payments over time. The Funds may not purchase stripped mortgage-backed securities.

Stripped securities may also include participations in trusts that hold U.S. Treasury securities where the trust participations evidence ownership in either the future interest payments or the future principal payments on the obligations. These participations are normally issued at a discount to their "face value," and can exhibit greater price volatility than ordinary debt securities.

U.S. Government Obligations

U.S. Government obligations include securities issued by the U.S. Treasury, U.S. Government agencies or U.S. Government sponsored entities. While U.S. Treasury obligations are backed by the "full faith and credit" of the U.S. Government, securities issued by U.S. Government agencies or government-sponsored entities may not be backed by the full faith and credit of the U.S. Government. The Government National Mortgage Association ("GNMA"), a wholly owned U.S. Government corporation, is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of mortgages insured by the Federal Housing Administration or the Department of Veterans Affairs. Government-sponsored entities (whose obligations are not backed by the full faith and credit of the U.S. Government) include the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the U.S. Government. FHLMC guarantees the timely payment of interest and ultimate collection or scheduled payment of principal, but its participation certificates are not backed by the full faith and credit of the U.S. Government. If a government-sponsored entity is negatively impacted by legislative or regulatory action, is unable to meet its obligations, or its creditworthiness declines, the performance of a Fund that holds securities of the entity will be adversely impacted. U.S. Government obligations are subject to low but varying degrees of credit risk, and are still subject to interest rate and market risk.

In addition to the securities discussed above, a Fund may also purchase debt guaranteed by the Federal Deposit Insurance Corporation ("FDIC"), an independent agency of the U.S. Government, through the FDIC's Temporary Liquidity Guarantee Program ("TLGP"). Under the TLGP, the FDIC guarantees newly issued senior unsecured debt issued on or before June 30, 2009 by FDIC-insured depository institutions, U.S. bank holding companies and financial holding companies and certain U.S. savings and loan holding companies (FDIC-backed debt). The expiration date of the FDIC's guarantee is the earlier of the maturity date of the FDIC-backed debt or June 30, 2012. FDIC-backed debt is backed by the full faith and credit of the U.S. Government, but is still subject to interest rate and market risk.

Recent Regulatory Events Related to FNMA and FHLMC

On September 7, 2008, both FNMA and FHLMC were placed under the conservatorship of the Federal Housing Finance Agency ("FHFA"). Under the plan of conservatorship, the FHFA assumed control of the operations of FNMA and FHLMC. In connection with the actions taken by the FHFA, the U.S. Treasury has been providing financial contributions to FNMA and FHLMC in return for shares of a new class of senior preferred stock in FNMA and FHLMC issued under certain preferred stock purchase agreements ("SPAs"). The U.S. Treasury is obligated to provide such financial contributions under the SPAs through 2012. The SPAs impose significant restrictions on the activities of FNMA and FHLMC.

The value of securities guaranteed by FNMA and FHLMC may be impacted by (among other things), actions taken by the FHFA in its role as conservator and the U.S. Treasury as a purchaser of senior preferred securities, as well as by future legislation or regulatory actions.

U.S. Territories, Commonwealths and Possessions Obligations

The Funds may invest in municipal securities issued by certain territories, commonwealths and possessions of the United States that pay interest that is exempt from federal income tax and the Fund's state personal income tax. As a result, the Fund's investment could be affected by local political and economic conditions and developments within those territories, commonwealths or possessions.

Zero-Coupon, Step-Up Coupon, and Pay-in-Kind Securities

These securities are debt securities that do not make regular cash interest payments. Zero-coupon securities are securities that make no periodic interest payments, but are instead sold at discounts from face value. Step-up coupon bonds are debt securities that may not pay interest for a specified period of time and then, after the initial period, may pay interest at a series of different rates. Pay-in-kind securities pay bondholders in more bonds instead of cash interest. If these securities do not pay current cash income, the market prices of these securities would generally be more volatile and likely to respond to a greater degree to changes in interest rates than the market prices of securities that pay cash interest periodically having similar maturities and credit qualities.

OTHER INVESTMENTS AND TECHNIQUES

Borrowing

Money may be borrowed for temporary or emergency purposes, including the meeting of redemption requests. Borrowing involves special risk considerations. Interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds (or on the assets that were retained rather than sold to meet the needs for which funds were borrowed). Under adverse market conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when investment considerations would not favor such sales. Reverse repurchase agreements, dollar roll transactions and other similar investments that involve a form of leverage have characteristics similar to borrowings, but are not considered borrowings if the Fund maintains a segregated account.

Diversification

The California Limited-Term Tax-Free Fund, California Tax-Free Fund, Colorado Tax-Free Fund, Minnesota Tax-Free Fund, North Carolina Tax-Free Fund and Pennsylvania Tax-Free Fund are non-diversified, which means that they have greater latitude than a diversified fund with respect to the investment of their assets in the securities of relatively few municipal issuers. As non-diversified portfolios, these Funds may present a greater risk than a diversified fund. However, the Funds intend to comply with applicable diversification requirements of the Internal Revenue Code of 1986, as amended (the "Code"), as discussed further below under "Federal Income Taxes."

Forward Commitments, When-Issued and Delayed-Delivery Transactions

Securities may be purchased or sold on a when-issued or delayed-delivery basis and contracts to purchase or sell securities for a fixed price at a future date beyond customary settlement time may also be made. Delivery and payment on such transactions normally take place within 120 days after the date of the commitment to purchase. Securities purchased or sold on a when-issued, delayed-delivery or forward commitment basis involve a risk of loss if the value of the security to be purchased declines, or the value of the security to be sold increases, before the settlement date.

The Funds have a segregated account in which they may maintain cash, U.S. Government obligations or other high-quality debt instruments in an amount at least equal in value to each Fund's commitments to purchase when-issued securities. If the value of these assets declines, a Fund will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is at least equal to the amount of such commitments.

Geographic Concentration

The California Limited-Term Tax-Free, California Tax-Free, Colorado Tax-Free, Minnesota Tax-Free, North Carolina Tax-Free Fund, Pennsylvania Tax-Free Fund and Wisconsin Tax-Free Fund invest substantially all of their assets in municipal securities issued by issuers within a particular state and the state's political subdivisions. These Funds are more susceptible to factors adversely affecting issuers of those municipal securities than would be a more geographically diverse municipal securities portfolio. These risks arise from the financial condition of the state and its political subdivisions. To the extent state or local governmental entities are unable to meet their financial obligations, the income derived by a Fund, its ability to preserve or realize appreciation of its portfolio assets or its liquidity could be impaired.

To the extent a Fund's investments are primarily concentrated in issuers located in a particular state, the value of the Fund's shares may be especially affected by factors pertaining to that state's economy and other factors specifically affecting the ability of issuers of that state to meet their obligations. As a result, the value of the Fund's assets may fluctuate more widely than the value of shares of a portfolio investing in securities relating to a number of different states. The ability of state, county or local governments and quasi-government agencies to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. The amounts of tax and other revenues available to governmental issuers may be affected from time to time by economic, political and demographic conditions within their state. In addition, constitutional or statutory restrictions may limit a government's power to raise revenues or increase taxes. The availability of federal, state and local aid to governmental issuers may also affect their ability to meet obligations. Payments of principal and interest on private activity securities will depend on the economic condition of the facility specific revenue source from whose revenues the payments will be made, which in turn, could be affected by economic, political or demographic conditions in the state.

Illiquid Securities

Securities not registered under the 1933 Act, and other securities subject to legal or other restrictions on resale may be less liquid than other investments and may be difficult to sell promptly at an acceptable price. Delay or difficulty in selling securities may result in a loss or be costly to a Fund. No Fund may invest or hold more than 15% of its net assets in illiquid securities.

Loans of Portfolio Securities

Portfolio securities of a Fund may be loaned pursuant to guidelines approved by the Board to brokers, dealers and financial institutions, provided: (i) the loan is secured continuously by collateral consisting of cash, securities of the U.S. Government, its agencies or instrumentalities, or an irrevocable letter of credit issued by a bank organized under the laws of the United States, organized under the laws of a state, or a foreign bank that has filed an agreement with the Federal Reserve Board to comply with the same rules and regulations applicable to U.S. banks in securities credit transactions, initially in an amount at least equal to 100% of the value of the loaned securities (which includes any accrued interest or dividends), with the borrower being obligated, under certain circumstances, to post additional collateral on a daily marked-to-market basis, all as described in further detail in the following paragraph; although the loans may not be fully supported at all times if, for example, the instruments in which cash collateral is invested decline in value or the borrower fails to provide additional collateral when required in a timely manner or at all; (ii) the Fund may at any time terminate the loan and request the return of the loaned securities upon sufficient prior notification; (iii) the Fund will receive any interest or distributions paid on the loaned securities; and (iv) the aggregate market value of loaned securities will not at any time exceed the limits established under the 1940 Act.

The following provides additional detail on the requirement described in (i) above. The market value of the collateral delivered in connection with a securities loan must be equal to at least 102% of the market value of any domestic securities loaned or 105% of the market value of any foreign securities loaned. The loaned securities are marked to market on a daily basis, and additional collateral is required to be paid to maintain coverage equal to at least 102% of the market value of domestic securities loaned, and at least 105% of the market value of foreign securities loaned, without taking into account any increase or decrease in the value of instruments in which cash collateral is invested. For loans of U.S. Government Securities, the initial collateral required is 102% of the market value of the loaned securities, but additional collateral is required only if the market value of the loaned securities increases such that the collateral coverage (without taking into account any increase or decrease in the value of instruments in which the cash collateral is invested) falls below 100% of the market value of the loaned securities.

For lending its securities, a Fund will earn either a fee payable by the borrower (on loans that are collateralized by U.S. Government securities or a letter of credit) or the income on instruments purchased with cash collateral (after payment of a rebate fee to the borrower and a portion of the investment revenue to the securities lending agent). Cash collateral is invested on behalf of the Funds by the Funds' adviser in U.S. dollar-denominated short-term money market instruments that are permissible investments for the Fund and that, at the time of investment, are considered high-quality. Currently, cash collateral generated from securities lending is invested in shares of Wells Fargo Securities Lending Cash Investments, LLC (the "Cash Collateral Fund"). The Cash Collateral Fund is a Delaware limited liability company that is exempt from registration under the 1940 Act. The Cash Collateral Fund is managed by Funds Management and is sub-advised by Wells Capital Management Incorporated. The Cash Collateral Fund is required to comply with the credit quality, maturity and other limitations set forth in Rule 2a-7 under the 1940 Act. The Cash Collateral Fund seeks to provide preservation of principal and daily liquidity by investing in high-quality, U.S. dollar-denominated short-term money market instruments. The Cash Collateral Fund may invest in securities with fixed, variable, or floating rates of interest. The Cash Collateral Fund seeks to maintain a stable price per share of $1.00, although there is no guarantee that this will be achieved. Income on shares of the Cash Collateral Fund is reinvested in shares of the Cash Collateral Fund. The investments of the Cash Collateral Fund are valued at amortized cost. The net asset value of a Fund will be affected by an increase or decrease in the value of the securities loaned by it, and by an increase or decrease in the value of instruments purchased with cash collateral received by it. Thus, the current net asset value of each Fund reflects the current valuations assigned to shares of the Cash Collateral Fund held on behalf of such Fund.

Loans of securities involve a risk that the borrower may fail to return the securities when due or when recalled by a Fund or may fail to provide additional collateral when required. In either case, a Fund could experience delays in recovering securities or could lose all or part of the value of the loaned securities. Although voting rights, or rights to consent, attendant to securities on loan pass to the borrower, loans may be recalled at any time and generally will be recalled if a material event affecting the investment is expected to be presented to a shareholder vote, so that the securities may be voted by the Fund.

Each lending Fund pays a portion of the income (net of rebate fees) or fees earned by it from securities lending to a securities lending agent. Goldman Sachs Bank USA, an unaffiliated third party doing business as Goldman Sachs Agency Lending, currently acts as securities lending agent for the Funds, subject to the overall supervision of the Funds' adviser.

Other Investment Companies

A Fund may invest in shares of other open-end and closed-end management investment companies up to the limits prescribed in Section 12(d) under the 1940 Act, subject to the fund's non-fundamental investment policies. Currently, under the 1940 Act, a fund that invests directly in a portfolio of securities is limited to, subject to certain exceptions: (i) 3% of the total voting stock of any one investment company; (ii) 5% of such fund's total assets with respect to any one investment company; and (iii) 10% of such fund's total assets.

Other investment companies in which the Fund invests can be expected to charge fees for operating expenses, such as investment advisory and administration fees, that would be in addition to those charged by the Fund. Other investment companies may include exchange-traded funds ("ETFs"), which are shares of publicly traded unit investment trusts, open-end funds or depositary receipts that seek to track the performance of specific indexes or companies in related industries. ETFs generally are subject to the same risks as the underlying securities the ETFs are designed to track and to the risks of the specific sector or industry tracked by the ETF. ETFs also are subject to the risk that their prices may not totally correlate to the prices of the underlying securities the ETFs are designed to track and the risk of possible trading halts due to market conditions or for other reasons. Although ETFs that track broad market indexes are typically large and their shares are fairly liquid, ETFs that track more specific indexes tend to be newer and smaller, and all ETFs have limited redemption features. Pursuant to certain exemptive relief granted by the SEC, the Fund's investments in certain ETFs may exceed certain of the limits described above.

Under the 1940 Act and rules and regulations thereunder, a Fund may purchase shares of other affiliated Funds, including the money market Funds, subject to certain conditions. Investing in affiliated Funds may present certain actual or potential conflicts of interest.

iShares. iShares Trust and iShares, Inc. ("iShares") are registered investment companies that consist of numerous separate series (each, an "iShares Fund"), each of which seeks investment results similar to the performance of a single stock market or of a group of stock markets in a single geographic location. iShares combine characteristics of stocks with those of index funds. Like stocks, iShares are liquid and can be traded in any number of shares; like index funds, they provide diversification and market tracking. iShares trade on the American Stock Exchange, the Chicago Board of Options Exchange and the New York Stock Exchange in the same way as shares of a publicly held company.

Private Placement and Other Restricted Securities

Private placement securities are not registered under the 1933 Act. Private placements often may offer attractive opportunities for investment not otherwise available on the open market. However, private placement and other "restricted" securities typically cannot be resold without registration under the 1933 Act or the availability of an exemption from registration (such as Rules 144 or 144A (a "Rule 144A Security")), and may not be readily marketable.

Private placement and other restricted securities typically may be resold only to qualified institutional buyers, or in a privately negotiated transaction, or to a limited number of purchasers, or in limited quantities after they have been held for a specified period of time and other conditions are met for an exemption from registration. Investing in private placement and other restricted securities is subject to certain additional risks. They may be considered illiquid securities as they typically are subject to restrictions on resale as a matter of contract or under federal securities laws. Because there may be relatively few potential purchasers for such securities, especially under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, a Fund could find it more difficult to sell such securities when it may be advisable to do so or it may be able to sell such securities only at prices lower than if such securities were more widely held and traded. At times, it also may be more difficult to determine the fair value of such securities for purposes of computing a Fund's net asset value due to the absence of an active trading market. Delay or difficulty in selling such securities may result in a loss to a Fund. Restricted securities, including Rule 144A Securities, that are "illiquid" are subject to a Fund's policy of not investing or holding more than 15% of its net assets in illiquid securities. The adviser will evaluate the liquidity characteristics of each Rule 144A Security proposed for purchase by a Fund on a case-by-case basis and will consider the following factors, among others, in its evaluation: (i) the frequency of trades and quotes for the Rule 144A Security; (ii) the number of dealers willing to purchase or sell the Rule 144A Security and the number of other potential purchasers; (iii) dealer undertakings to make a market in the Rule 144A Security; and (iv) the nature of the Rule 144A Security and the nature of the marketplace trades (e.g., the time needed to dispose of the Rule 144A Security, the method of soliciting offers and the mechanics of transfer). The adviser will apply a similar process to evaluating the liquidity characteristics of other restricted securities. There can be no assurance that a restricted security that is deemed to be liquid when purchased will continue to be liquid for as long as it is held by a Fund.

Repurchase Agreements

Repurchase agreements are agreements wherein the seller of a security to a Fund agrees to repurchase that security from a Fund at a mutually agreed upon time and price. All repurchase agreements will be fully "collateralized," as defined under the 1940 Act. A Fund may enter into repurchase agreements only with respect to securities that could otherwise be purchased by such Fund. The maturities of the underlying securities in a repurchase agreement transaction may be greater than twelve months, although the maximum term of a repurchase agreement will always be less than twelve months. Repurchase agreements generally are subject to counterparty risk. If the seller defaults and the value of the underlying securities has declined, a Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, a Fund's disposition of the underlying securities may be delayed or limited.

A Fund may not enter into a repurchase agreement with a maturity of more than seven days, if, as a result, more than 15% of the market value of such Fund's net assets would be invested in repurchase agreements with maturities of more than seven days, and other illiquid securities. A Fund will only enter into repurchase agreements with broker-dealers and commercial banks that meet guidelines established by the Board and that are not affiliated with the Fund's adviser. The Funds may participate in pooled repurchase agreement transactions with other funds advised by the adviser.

Reverse Repurchase Agreements

A reverse repurchase agreement is an agreement under which a Fund sells a portfolio security and agrees to repurchase it at an agreed-upon date and price. At the time a Fund enters into a reverse repurchase agreement, it will place in a segregated custodial account liquid assets such as U.S. Government securities or other liquid high-grade debt securities having a value equal to or greater than the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that such value is maintained. Reverse repurchase agreements involve the risk that the market value of the securities sold by a Fund may decline below the price at which a Fund is obligated to repurchase the securities. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, a Fund's use of proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce a Fund's obligation to repurchase the securities. Reverse repurchase agreements may be viewed as a form of borrowing.

Short Sales

A short sale is a transaction in which a Fund sells a security it does not own in anticipation of a decline in market price. When a Fund makes a short sale, the proceeds it receives are retained by the broker until a Fund replaces the borrowed security. In order to deliver the security to the buyer, a Fund must arrange through a broker to borrow the security and, in so doing, a Fund becomes obligated to replace the security borrowed at its market price at the time of replacement, whatever that price may be. Short sales "against the box" means that a Fund owns the securities, which are placed in a segregated account until the transaction is closed out, or has the right to obtain securities equivalent in kind and amount to the securities sold short. A Fund's ability to enter into short sales transactions is limited by the requirements of the 1940 Act.

Short sales by a Fund that are not made "against the box" are limited to transactions in futures and options. Such transactions create opportunities to increase a Fund's return but, at the same time, involve special risk considerations and may be considered a speculative technique. Since a Fund in effect profits from a decline in the price of the futures or options sold short without the need to invest the full purchase price of the futures or options on the date of the short sale, a Fund's NAV per share will tend to increase more when the futures or options it has sold short decrease in value, and to decrease more when the futures or options it has sold short increase in value, than would otherwise be the case if it had not engaged in such short sales. Short sales theoretically involve unlimited loss potential, as the market price of futures or options sold short may continuously increase, although a Fund may mitigate such losses by replacing the futures or options sold short before the market price has increased significantly. Under adverse market conditions, a Fund might have difficulty purchasing futures or options to meet its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.

If a Fund makes a short sale "against the box," a Fund would not immediately deliver the securities sold and would not receive the proceeds from the sale. The seller is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. A Fund's decision to make a short sale "against the box" may be a technique to hedge against market risks when the investment manager believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund or a security convertible into or exchangeable for such security. In such case, any future losses in the Fund's long position would be reduced by a gain in the short position. Short sale transactions may have adverse tax consequences to the Fund and its shareholders.

In the view of the SEC, a short sale involves the creation of a "senior security" as such term is defined under the 1940 Act, unless the sale is "against the box" and the securities sold are placed in a segregated account (not with the broker), or unless the Fund's obligation to deliver the securities sold short is "covered" by segregating (not with the broker) cash, U.S. Government securities or other liquid debt or equity securities in an amount equal to the difference between the market value of the securities sold short at the time of the short sale and any cash or securities required to be deposited as collateral with a broker in connection with the sale (not including the proceeds from the short sale), which difference is adjusted daily for changes in the value of the securities sold short. The total value of the cash and securities deposited with the broker and otherwise segregated may not at any time be less than the market value of the securities sold short at the time of the short sale.

To avoid limitations under the 1940 Act on borrowing by investment companies, all short sales by a Fund will be "against the box," or the Fund's obligation to deliver the futures or options sold short not "against the box" will be "covered" by segregating cash, U.S. Government securities or other liquid debt or equity securities in an amount equal to the market value of its delivery obligation. A Fund will not make short sales of futures or options not "against the box" or maintain a short position if doing so could create liabilities or require collateral deposits and segregation of assets aggregating more than 25% of the value of the Fund's total assets.

Unrated Investments

A Fund may purchase instruments that are not rated if, in the opinion of the adviser, such obligations are of investment quality comparable to other rated investments that are permitted to be purchased by such Fund. After purchase by a Fund, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by such Funds. Neither event will require a sale of such security by the Fund. To the extent the ratings given by Moody's, Fitch, or S&P may change as a result of changes in such organizations or their rating systems, a Fund will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in its Prospectus and in this SAI. The ratings of Moody's, Fitch, and S&P are more fully described in the Appendix to this SAI.

Warrants

Warrants are instruments, typically issued with preferred stock or bonds, that give the holder the right to purchase a given number of shares of common stock at a specified price, usually during a specified period of time. The price usually represents a premium over the applicable market value of the common stock at the time of the warrant's issuance. Warrants have no voting rights with respect to the common stock, receive no dividends and have no rights with respect to the assets of the issuer. Warrants do not pay a fixed dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for the resale of the warrants, potential price fluctuations as a result of speculation or other factors and failure of the price of the common stock to rise. A warrant becomes worthless if it is not exercised within the specified time period.

SPECIAL CONSIDERATIONS REGARDING STATE-SPECIFIC MUNICIPAL OBLIGATIONS 

State Tax-Exempt Funds

The state tax-exempt Funds invest primarily in municipal securities issued by a single state and by political sub-divisions of that state. As a result, each state tax-exempt Fund is particularly susceptible to political, fiscal and economic conditions and developments in the state in which it invests. This exposure to factors affecting one state's municipal securities is significantly greater than that of more geographically diversified funds, and may result in greater losses and volatility. Because of the relatively small number of issuers of municipal securities in a given state, each Fund may invest a higher percentage of its assets in securities of a single issuer, which similarly results in greater exposure to risk of loss and volatility than a fund that is more geographically diversified. Further, at times, a state tax-exempt Fund and other funds or accounts managed by Funds Management may own all or most of the securities of a particular issuer. This concentration of ownership may make it more difficult to sell, or to determine the value of, these investments.

A Fund also may focus on a particular sector of the municipal debt market, such as revenue bonds for health care facilities, housing or airports. Certain events may adversely affect investments across a particular sector in a state. Examples include litigation, legislation or court decisions, concerns about pending or threatened litigation, legislation or court decisions, or lower demand for the services or products provided by a sector. Thus, such sector-focused investing may expose a Fund to a greater risk of loss and volatility than a fund that invests more broadly.

Geographically concentrated funds are particularly sensitive to local conditions and developments, including political, fiscal and economic conditions, adverse developments affecting an industry significant to the area, and other developments within a particular locality or region. Because many municipal debt securities may be revenue or general obligations of local governments or authorities, their credit quality may differ from that of the general obligation bonds of the same state.

The types of state-specific risks to which each Fund is exposed include, among others: 

the actual or perceived inability of a government authority to collect sufficient tax or other revenues to meet its payment obligations;

natural disasters or environmental concerns or developments; 

the introduction of constitutional or statutory limits on a municipal issuer's ability to raise revenues or increase taxes; 

the inability of an issuer to pay interest on or to repay principal of securities in which the Funds invest due to fiscal or economic conditions; and

economic or demographic factors that may cause a decrease in tax or other revenues for a government authority or for private operators of publicly financed facilities.

State Specific Information

The following descriptions of certain economic, financial and legal matters pertaining to the states referenced below, and their political subdivisions, is drawn from the referenced documents and does not purport to be a complete description or listing of all relevant factors. More information about state-specific risks and factors that could affect investments may be available from other official state resources. The following descriptions will not be updated during the year. The Funds have not independently verified any of the information contained in the referenced documents and are not expressing any opinion regarding the completeness or materiality of such information or the descriptions derived therefrom. The information is subject to change at any time. Any such change may adversely affect the financial condition of the applicable state and its municipal issuers.

Any estimates and projections contained in the following summaries should not be construed as statements of fact and are based on assumptions that may be affected by numerous factors. There can be no assurance that any such estimates or projections will be realized or achieved. Descriptions of the financial condition of a particular state may not be relevant to municipal obligations of political subdivisions of that state. Moreover, the general economic conditions discussed may or may not affect issuers in these states.

California Municipal Obligations

Unless otherwise noted, the following information is based on information drawn from official statements, government web sites and other resources publicly available as of August 16, 2012.

Economic and General Information

California's economy, the largest among the 50 states and one of the largest and most diverse in the world, has major components in high technology, trade, entertainment, agriculture, manufacturing, government, tourism, construction and services. The relative proportion of the various components of the California economy closely resembles the make-up of the national economy.

California followed the nation's path through the recession and into the recovery. California labor markets deteriorated dramatically during the latter half of 2008 and the first nine months of 2009, suffering their worst losses on record. From July 2007 through September 2009, the state lost nearly 1.4 million nonfarm jobs. These losses moderated as the year progressed and switched to very modest gains during 2010 and 2011. California has gained 425,000 jobs from September 2009 through May 2012.

Statistics coming from the California economy are painting a picture of a gradual recovery. Strong growth in the high-technology sector, international trade, and tourism are offsetting weak residential construction and real estate and fiscally strapped state and local governments. The California economy is expected to continue making steady progress. Industry employment is forecast to expand 1.4 percent and 1.9 percent in 2012 and 2013, respectively, and 2.5 percent growth is projected for 2014. Personal income is projected to grow 4.9 percent in 2012, 3.4 percent in 2013 and 5.4 percent in 2014. Personal income increased for the tenth consecutive quarter in the first quarter of 2012. Taxable sales increased for the eleventh consecutive quarter in the first quarter of 2012.

The prospect of a European financial crisis and impending contractionary federal fiscal policy changes are the most significant known risks at this point. Economic growth in Europe is slowing, which is adversely affecting U.S. exports. However, California's exposure to this risk is less than the nation's as a whole. Pacific Rim economies, Japan and China in particular, are much more important to the California economy than are European economies. Another risk is the impact of a number of impending federal fiscal policy developments that could slow economic growth at the beginning of 2013. These developments include the expiration of the Bush and temporary payroll tax cuts, the end of emergency unemployment insurance benefits and the imposition of automatic federal spending cuts. If the Bush tax cuts are extended through 2013 or longer, the state could expect to see a reduction in the amount of capital gains and dividend income shifted from 2013 to 2012. However, because of the advent of the 3.8 percent federal Medicare tax and because any decision to extend the Bush tax cuts will not likely be made until late in 2012, it is not likely that there would be a significant reduction in the amount of capital gains and dividend income shifted from 2013 to 2012.

In 2011 California's population reached 37.5 million residents comprising 12 percent of the total United States population. California is by far the most populous state in the nation, with the next largest state, Texas, having 12 million fewer residents. In the last decade California experienced more modest growth in comparison to historical growth patterns, especially toward the end of the decade. This recent modest growth is the result of lower total migration figures for the state as well as fewer births statewide since 2007. While California has been known as a destination state for both international and domestic migration, for the last several years the largest growth component for population in California has been natural increase. Short-term population growth through 2015 is expected to show the largest increases for the 65 and older population. The proportion of the population under age 25 is projected to decline due to decreasing fertility rates and smaller cohort sizes, while the working age population is expected to show a slight increase.

California's 2011 unemployment rate was 11.7 percent compared with 8.9 percent for the nation. Its per capital personal income in 2011 was $44,481 compared with $41,663 nationally. The value of residential construction permits in 2011 is $14.4 billion, down from the peak of $47.1 billion in 2005 but up from 2010's level of $13.7 billion, and the 2011 value of non-residential construction permits is $13.0 billion, down from the peak of $22.5 billion in 2007 but up from 2010's level of $11.2 billion.

California's economy has continued to improve during the first half of fiscal year 2011-12. Since hitting bottom at the end of the first fiscal quarter of fiscal year 2010-11, the state has added back 351,100 of the non-farm jobs lost during the downturn. Personal income in California, which stood at $1.67 trillion in the third quarter of 2011, has already surpassed its pre-recession peak after almost two years of consecutive growth on a quarterly basis. In addition to growing consumer demand from domestic sources, international trade also has been playing a large role in speeding up California's recovery. California's exports, including industrial machinery, vehicles and parts, aircrafts, pharmaceuticals, and plastics, are booming. While home prices have yet to rebound across the state, the housing market has stabilized and is beginning to move in the right direction. New single-family building permits were still declining through the first six months of fiscal year 2011-12, but multi-family building permits have been trending upward since mid-2010 and nonresidential permit values have steadily increased through 2011.

State Finances

During the recent recession, which officially ended in 2009, the state experienced the most significant economic downturn since the Great Depression of the 1930s. As a result of continuing weakness in the state economy, state tax revenues declined precipitously, resulting in large budget gaps and occasional cash shortfalls. There can be no assurances that the state will not continue to face fiscal stress and cash pressures and that such circumstances will not become more difficult, or that other impacts of the current economic situation will not further materially adversely affect the financial condition of the state.

The state receives revenues from taxes, fees and other sources, the most significant of which are the personal income tax, sales and use tax, and corporation tax, which collectively constitute over 90 percent of tota1 General Fund revenues and transfers. The state expends money on a variety of programs and services. Significant elements of state expenditures include education (both kindergarten through twelfth grade and higher education), health and human services, and correctional programs.

The 2012 Budget Act closed a projected budget gap of $15.7 billion over the two fiscal years 2011-12 and 2012-13, and projects a $948 million reserve by June 30, 2013, by enacting a total of $16.6 billion in solutions (including $8.1 billion in expenditure reductions and $6.0 billion in additional General Fund revenues, which is net of a $2.9 billion increase in Proposition 98 funding, assuming passage of the Governor's Initiative, and $2.5 billion in other solutions).

The Governor's Initiative is The Schools and Local Public Safety Protection Act of 2012, an initiative measure which will appear on the November 2012 statewide general election ballot as Proposition 30. The Governor's Initiative is projected to raise total revenues by an estimated $8.5 billion, but only provide $5.6 billion of additional General Fund resources since Proposition 98 would require additional funding to K-14 schools and colleges. Proposition 30 would, among other things, temporarily raise personal income tax rates on high-income taxpayers for seven years and raise the statewide sales tax by one-quarter percent for four years. Proposition 30 is one of ten initiative measures which will appear on the November 2012 ballot. Proposition 38 will also appear: it would raise personal income tax rates for most taxpayers through 2024, with funding largely dedicated to K-12 education and early childhood programs. Each of Proposition 30 and Proposition 38 contain language to the effect that, if both are approved, the tax-raising provisions only of the measure with the greater number of votes would become operative law. The Governor's Initiative, Proposition 30, includes a 0.25 percent additional sales tax rate from January 1, 2013 through December 31, 2016. Proposition 38 does not include any changes to the sales tax. The Governor's Initiative also includes a provision constitutionally guaranteeing that the 1.0625 percent of the sales tax rate is dedicated to the Local Revenue Fund 2011 and explicitly states that this sales tax revenue does not constitute a General Fund revenue for purposes of the Proposition 98 guarantee. The 1.0625 percent of the sales tax rate is expected to generate $5.153 billion in fiscal year 2011-12 and $5.435 billion in fiscal year 2012-13. If both initiatives pass and the Governor's Initiative has more votes, both the 0.25 percent additional sales tax rate and the constitutional guarantee of the 1.0625 percent of the sales tax rate would take effect. If Proposition 38, instead, has more votes, the 0.25 additional sales tax rate would not take effect. It is unclear what would happen to the constitutional guarantee of the 1.0625 percent of the sales tax rate should both initiatives pass and Proposition 38 has more votes; however, this 1.0625 percent sales tax dedicated to local government would continue under existing statutes. The 2012 Budget Act assumes the 0.25 percent additional rate will take effect January 1, 2013.

The 2012 Budget Act recognized the potential risk to the state's General Fund condition if the Governor's Initiative does not pass in the November 2012 elections or does not become operative, by including a "2012-13 Trigger Mechanism" to provide certain automatic expenditure reductions. The trigger reductions, totaling $6 billion, would go into effect on January 1, 2013, but would only offset approximately 70 percent of the $8.5 billion of total gross new revenues projected to be generated if the new tax rates in the Governor's Initiative had become effective. The trigger reductions would be made from the expenditure level currently appropriated in the 2012-13 budget, and the balance of the shortfall would have to be addressed in the fiscal year 2013-14 budget. The 2012-13 Trigger Mechanism would take effect even if the higher tax rates in Proposition 38 take effect in place of the Governor's Initiative.

Over a number of years, the state has adopted budget solutions for one fiscal year by deferring certain required payments (including Proposition 98 payments to schools, Medi-Cal reimbursements, state payrolls and payments to the state pension fund) from one fiscal year into the next year; these deferrals end up having to be repeated year after year. In addition, the General Fund is obligated for repayment of deficit bonds, certain legislatively-approved interfund borrowings, reimbursement of borrowings from state and local governments, reimbursements to local governments and school districts for the costs of state mandates placed on those entities under state laws, settle-up payments for Proposition 98, obligations to employees for compensated absences, costs for self-insurance, and future payment of interest owed on borrowings from the federal government for unemployment insurance payments. In some cases, the Legislature has the ability to modify, further extend the timing of or even cancel the repayment of some of these obligations.

By the end of fiscal year 2011-12 the total amount of budgetary borrowing and deferrals is estimated to be $34.2 billion. The Administration projects that if the fiscal year 2012-13 budget package is fully implemented and its policies remain in effect, and if revenues continue to increase as projected, most of this outstanding budgetary borrowing and deferrals would be repaid by the end of the 2015-16 fiscal year.

As of the 2012 Budget Act the General Fund is also obligated to repay school and community college districts for past underfunding which is permitted under Proposition 98 ("maintenance factor"). The Department of Finance estimates that the total outstanding balance at the end of the 2011-12 fiscal year for the Proposition 98 maintenance factor is $10.6 billion. The outstanding balance projected at the end of the 2012-13 fiscal year will be $8.1 billion, assuming enactment of the Governor's Initiative. The Proposition 98 maintenance factor payments will be repaid pursuant to the constitutional repayment formula in future years when state revenue increases.

The 2012 Budget Act projects continued steady growth of the state's major tax revenue sources. Even though the state continues to face budget risks and pressures, the Administration believes that the fiscal year 2012-13 budget puts California on its most stable financial footing in years. Under current projections and assuming implementation of the Governor's Initiative, the Administration projects that the state General Fund budget would be balanced on an ongoing basis for the first time in over a decade.

Constraints on the Budget Process . Over the years, a number of laws and constitutional amendments have been enacted, often through voter initiatives, which have increased the difficulty of raising state taxes, restricted the use of the state's General Fund or special fund revenues, or otherwise limited the Legislature and the Governor's discretion in enacting budgets, and similar laws and amendments are currently under consideration.

Historic examples of provisions that make it more difficult to raise taxes include Proposition 13, passed in 1978, which, among other things, required that any change in state taxes enacted for the purpose of increasing revenues collected pursuant thereto, whether by increased rates or changes in computation, be approved by a two-thirds vote in each house of the Legislature. Examples of provisions restricting the use of General Fund revenues are Proposition 98, passed in 1988, which mandates that a minimum amount of General Fund revenues be spent on local education, and Proposition 10, passed in 1998, which raised taxes on tobacco products and mandated how the additional revenues would be expended.

Constitutional amendments approved by the voters have also affected the budget process. These include Proposition 58, approved in 2004, which requires the adoption of a balanced budget and restricts future borrowing to cover budget deficits; Proposition 49, approved in 2002, which requires the expansion of funding for before and after school programs; Proposition 63, approved in 2004, which imposes a surcharge on taxable income of more than $1 million and earmarks this funding for expanded mental health services; Proposition 1A, approved in 2004, which limits the Legislature's power over local revenue sources, and Proposition 1A approved in 2006, which limits the Legislature's ability to use sales taxes on motor vehicle fuels for any purpose other than transportation. Most recently, Propositions 22 and 26, approved on November 2, 2010, further limit the state's fiscal flexibility. Finally, Proposition 25, also passed by the voters in November 2010, changed the legislative vote requirement to pass a budget and budget related legislation from two-thirds to a simple majority. It retained the two-thirds vote requirement for taxes.

Pensions and Other Post-Employment Benefits

The principal retirement systems in which the state participates or contributes funds to are the California Public Employees' Retirement System ("CalPERS") and the California State Teachers' Retirement System ("CalSTRS"). The obligation of the state to make payments to CalPERS and CalSTRS to fund retirement benefits constitutes a significant financial obligation. CalPERS and CalSTRS each currently have unfunded liabilities in the tens of billions of dollars. Retirement-related costs payable from the General Fund are expected to increase significantly in the foreseeable future. The actual amount of such increases will depend on a variety of factors, including but not limited to investment returns, actuarial assumptions, experience, retirement benefit adjustments and, in the case of CalSTRS, statutory changes in contributions. The most recent actuarial valuation of CalPERS, based on data through June 30, 2010, showed an accrued unfunded liability allocable to state employees (excluding judges and elected officials) of $24.1 billion on an actuarial value of assets basis ("AVA") and $45.2 billion on a market value of assets basis ("MVA").

CalSTRS reported the unfunded accrued liability of its defined benefit plan at June 30, 2011 at $64.5 billion on an AVA basis (an increase of $8.5 billion from the June 30, 2010 valuation), and $68.4 billion on an MVA basis (a decrease of $10.8 billion from the June 30, 2010 valuation).

In addition, CalPERS and CalSTRS have sustained substantial investment losses in recent years and face large unfunded future liabilities. General Fund contributions to CalPERS and CalSTRS are estimated to be approximately $2.2 billion and $1.3 billion, respectively, for fiscal year 2012-13. The combined contributions, which include contributions for California State University ("CSU"), represent about 3.9 percent of all General Fund expenditures in fiscal year 2012-13. There can be no assurances that the state's annual required contributions to CalPERS and CalSTRS will not significantly increase in the future. The actual amount of any increases will depend on a variety of factors, including but not limited to investment returns, actuarial assumptions, experience, retirement benefit adjustments, and, in the case of CalSTRS, statutory changes in contributions. Recent action by the Board of CalPERS to lower the assumed rate of return on investments has caused an increase in state contributions.

The University of California ("UC") maintains a separate retirement system. From fiscal years 1990-91 through 2011-12, the state's General Fund did not directly contribute to UC's system. In 2012 the state's general fund provided $89.1 million for UC's employer retirement contributions for fiscal year 2012-13, with provisional language stating that this funding does not constitute a state obligation to provide funding after fiscal year 2012-13 for additional UC's employer retirement costs.

In addition to a pension the state also provides postemployment health care and dental benefits (OPEB) to its employees and their spouses and dependents, when applicable, and recognizes these costs on a "pay-as-you-go" basis. As of June 30, 2011 approximately 154,500 retirees were enrolled to receive health benefits and 128,100 to receive dental benefits The long-term costs for OPEB benefits may negatively affect the state's financial reports and impact its credit rating if the state does not adequately manage such costs.

The state also has an Actuarial Accrued Liability ("AAL") relating to retirees' postemployment healthcare benefits which was estimated at $62.14 billion at June 30, 2011. The estimated unfunded obligation as of June 30, 2011 grew $2.2 billion from the $59.9 billion obligation identified as of June 30, 2010. The estimated accrued liability grew less than expected due to favorable healthcare claim experiences linked to a combination of fewer claims, less expensive claims, less utilization of services, and the implementation of new CalPERS health programs designed to reduce costs.

Pension Reform Proposal . In February 2012, the Governor submitted to the Legislature a draft constitutional amendment and accompanying statutory language needed to implement his 12-point pension reform plan affecting all California public employees in state government, local government, public universities and colleges, and school districts, which the Governor had first outlined in the fall of 2011. The major provisions of the Governor's proposals included (but were not limited to): requiring increased employee contributions to annual pension costs, establishment of a "hybrid" pension system for new employees integrated with federal Social Security, raising the retirement age, making the rules for computation of final compensation used to calculate pension benefits more restrictive, changing the composition of the CalPERS board and extending the number of years of service before newly hired state employees will become eligible to receive health benefits in retirement. The Governor's proposal has been considered by a joint Assembly-Senate Conference Committee on Public Employee Pensions which was formed in 2011 to review various pension reform options. The Committee has held several hearings. Pension reform discussions are continuing between the Administration and the Legislature.

Litigation

At any given time, including the present, there are numerous civil actions pending against the State, which could, if determined adversely to the state, affect the state's expenditures and, in some cases, its revenues and cash flow. The state identifies a variety of legal proceedings which have a potentially significant fiscal impact on the state's revenue and expenditures. In broad categories of such litigation, the state has noted the following: budget-related litigation, which includes actions challenging school financing; actions challenging statutes which reformed California redevelopment law; actions challenging required contribution by redevelopment agencies; actions challenging allocation of vehicle licensing fees; and actions regarding furlough of state employees. The state also notes a number of tax cases, cases on environmental matters, cases on escheated property claims, actions seeking damages for alleged violations of privacy rights, actions regarding Medi-Cal reimbursements and fees, local government mandate claims and actions, actions relating to tribal gaming compacts, prison healthcare reform and reduction of prison population, and actions regarding proposed sale of state-owned properties.

As noted in the state's comprehensive annual financial report for the fiscal year ended June 30, 2011, the following are the more significant lawsuits pending against the primary government:

The primary government is a defendant in two cases, Bakersfield Mall, LLC v. Franchise Tax Board, and CA-Centerside II, LLC v. Franchise Tax Board , both regarding the constitutionality of a fee imposed on limited liability companies (LLC). In Bakersfield Mall, LLC v. Franchise Tax Board the plaintiff contends that not all of its income is derived within the State and therefore not all income should be subject to the LLC fee. The second case, CA-Centerside II, LLC v. Franchise Tax Board , alleges that the LLC fee is unconstitutional regarding any activities, whether in-state or out-of-state.

In a previously settled case, Northwest Energetic Services, LLC v. Franchise Tax Board , the Court of Appeal found the fee unconstitutional only as applied to the plaintiff. The primary government has already begun to pay refunds to LLCs with the same facts as Northwest who have no income earned inside California. In another recently settled case, Ventas Finance I, LLC v. Franchise Tax Board , the Court of Appeal also ruled that the fee is unconstitutional as applied to the plaintiff, but it awarded only a partial refund because Ventas received income from both inside and outside of California. Bakersfield Mall, LLC v. Franchise Tax Board , raised the same constitutional issues as Northwest and Ventas , but initially pertained to LLCs that conduct business solely within California. Bakersfield Mall, LLC later amended its complaint to reflect the fact that not all of its income is derived within the State, making it similar to the Ventas case. This plaintiff also intended to bring a class action suit for refund on behalf of all similarly situated LLCs and to declare the LLC fee unconstitutional. However, the Court of Appeal ruled that Bakersfield Mall, LLC did not follow mandatory class action claim procedures. CA-Centerside II, LLC v. Franchise Tax Board raised the same constitutional issues as Northwest and Ventas , and alleges that the LLC fee is unconstitutional regarding any activities, whether in-state or out-of-state. Actual and expected future claims for refunds from LLCs are estimated to be as high as $1.2 billion. In addition, plaintiffs will in all likelihood seek a very large award of attorneys' fees in these cases should they prevail.

The primary government is the defendant in both California Redevelopment Association et al. v. Michael C. Genest et al. and County of Los Angeles, et al. v. Genest, et al . These two cases challenge the constitutionality of Assembly Bill X4-26 that requires that redevelopment agencies remit a total of $1.7 billion in 2009-10 fiscal year and $350 million in 2010-11 fiscal year to a county Supplemental Education Revenue Augmentation Fund to be used by local schools. The State successfully defeated the claims in the superior court and is currently defending against the claims in the Court of Appeal. If the Court of Appeal grants judgment for the plaintiff, the State would need to pay the challenged amount to the schools from the General Fund.

The primary government is the defendant in numerous cases regarding the Governor's executive orders directing the furlough, without pay, of state employees. The first executive order, issued on December 19, 2008, directed furloughs of two days per month, effective February 1, 2009, through June 30, 2010. The second order, issued on July 1, 2009, required a third furlough day per month, effective through June 30, 2010. On July 28, 2010 the Governor issued a new executive order requiring furloughs for three days per month beginning August 1, 2010, until a new 2010-11 fiscal year budget was adopted and the Director of Finance determined that the State had sufficient cash flow to pay for essential services. Furloughs officially ended for all Service Employees International Union-represented State employees in November 2010 and for all remaining bargaining units in April 2011.

Most cases related to the furloughs have been settled or dismissed with only five cases still pending. Neither the outcome nor the estimated potential loss for any of the cases can be determined at this time.

The California School Boards Association has filed a case against the primary government. California School Boards Association, et al. v. State of California et al . is challenging the amount of funds appropriated for education in the 2011-12 fiscal year, arguing that the amount violates the minimum funding guarantee in the California constitution (Proposition 98). Plaintiffs argue that certain funds directed to local governments should have been included in the Proposition 98 calculation and that by not including these funds in the calculation the state underfunded education by approximately $2.8 billion in the 2011-12 fiscal year. The State has denied the material allegations and has filed an answer to the complaint. Currently it is anticipated that the State will ultimately add the $2.8 billion back to the minimum Proposition 98 calculation over the next five years; however, an unfavorable outcome of this case would require the State to add back the amount entirely in the 2012-13 fiscal year.

Until recently the primary government was a defendant in five cases related to Medi-Cal reimbursement rate reductions. As a result of intervening events including sunsetting of specific legislation, resolution of these matters will no longer have a future fiscal impact.

The University of California, the State Compensation Insurance Fund (SCIF), the California Housing Finance Agency (CalHFA), the Public Employees' Benefits Fund, and certain nonmajor discretely presented component units are contingently liable in connection with claims and contracts, including those currently in litigation, arising in the normal course of their activities. Although there are inherent uncertainties in any litigation, the management and the general counsel of the University of California, SCIF, CalHFA, the Public Employees' Benefit Fund, and certain nonmajor discretely presented component units are of the opinion that the outcome of such matters either will not have a material effect on the financial statements or cannot be estimated at this time.

Ratings

As of July 2012 Moody's Investors Service has assigned the State of California general obligation bond obligations a rating of A1.

As of September 2012 Standard & Poor's Ratings Services has assigned the State of California's general obligation bond obligations a rating of A-.

As of September 2012 Fitch Ratings has assigned the State of California's general obligation bond obligations a rating of A-.

Colorado Municipal Obligations

Unless otherwise noted, the following information based on information drawn from official statements, government web sites and other resources publicly available as of July 10, 2012.

Economic and General Information

The economies of Colorado and the nation are experiencing mixed conditions. There continue to be positives, such as improvements in the long-struggling housing market, continued growth in jobs and exports, increased energy production and reduced household debt loads. Most notably, the foundation of Colorado's economy has grown stronger; it continues to outperform the nation overall and many other states. At the national level, continued low expectations about future economic growth, combined with increasing uncertainty stemming from the European crisis and looming major federal fiscal issues, are expected to slow growth over the coming year. Colorado is not immune from these issues.

Colorado is the most populous state in the Rocky Mountain region. The State's major economic sectors include agriculture, professional and business services, manufacturing, technology, tourism, energy production and mining. Considerable economic activity is generated in support of these sectors by government, wholesale and retail trade, transportation, communications, public utilities, finance, insurance, real estate and other services. Approximately 55% of the State's population and 60% of its jobs are located in the Denver/Boulder metropolitan area, which is the State's hub for transportation, communication, financial activities and professional and business services. The aerospace, bioscience and energy industries are also key contributors to economic growth in the Denver/Boulder metropolitan area and the State as a whole. The State's economic performance depends heavily on economic performance at the national level.

Colorado has an estimated 2011 population of 5.12 million, up from 5.05 million in 2012 and 4.34 million in 2000. It reports a 2011 per capital income of $44,088 (up from $42,295 in 2010) compared with $39,420 for the Rocky Mountain Region consisting of Colorado, Idaho, Montana, Utah, and Wyoming, and $41,663 for the nation as a whole. It reports a 2011 unemployment rate of 8.3%, down from 8.9% in 2010 compared with 8.9% and 9.3%, respectively for the United States.

State Finances

The State Constitution requires that expenditures for any fiscal year not exceed revenues for such fiscal year. The General Fund is the principal operating fund of the State. All revenues and moneys not required by the State Constitution or statutes to be credited and paid into a special fund are required to be credited and paid into the General Fund. The major revenue sources to the General Fund are individual and corporate income taxes and sales and use taxes. The State also imposes excise taxes on the sale of cigarettes, tobacco products and liquor, and receives revenues from a diverse group of other sources such as estate taxes, insurance taxes, pari-mutuel taxes, interest income, court receipts and gaming taxes.

Fiscal Year 2010-11. General Fund revenues increased by 9.7% in fiscal year 2010-11 compared to a decline of 4.2% in fiscal year 2009-10. In fiscal year 2010-11, sales and use tax revenues increased by 12.8% compared to a decrease of 6.0% in fiscal year 2009-10. Other excise tax revenues decreased 3.1% compared to an increase of 0.9% in fiscal year 2009-10. Corporate and individual income tax collections increased 9.7% compared to a decrease of 3.7% in fiscal year 2009-10. Other revenues declined 5.6% in fiscal year 2010-11 compared to an increase of 0.1% in fiscal year 2009-10. Total funds available for expenditure in fiscal year 2010-11 (which excludes the amount deposited into the State Education Fund and includes beginning General Fund Surplus and amounts transferred into the General Fund) were $7,373.2 million and total obligations were $6,927.7 million. In accordance with State law, $591.9 million was diverted to the State Education Fund. The Unappropriated Reserve was $156.7 million. The Unappropriated Reserve was 2.3% of fiscal year appropriations.

The Governor's Office of State Planning and Budgeting (OSPB) projects that the State will end fiscal years 2011-12 and 2012-13 with reserves equal to $442.7 million and $342.5 million, respectively, above the 4.0% Unappropriated Reserve requirement. Per statute, $59.0 million of the fiscal year 2011-12 excess reserves are to be transferred to the State Education Fund and the balance is to be carried forward and become part of the beginning Fiscal Year 2012-13 fund balance, and all of the fiscal year 2012-13 excess reserves are required to be transferred to the State Education Fund.

Colorado Ballot Initiative

The State Constitution provides that the people of the State reserve to themselves the power to propose laws and amendments to the State Constitution ("Initiatives") and to enact or reject such Initiatives by a vote of the people by Statewide ballot.

TABOR. The Constitutional provision entitled the Taxpayer's Bill of Rights, commonly known as "TABOR", was passed in 1992 and imposes various fiscal limits and requirements on the State and its local governments. Overall, TABOR is a limitation on the amount of revenue that may be kept by the State in any particular year, regardless of whether that revenue is spent during the year. Any revenue received during a Fiscal Year in excess of the limitations provided for in TABOR must be refunded to the taxpayers during the next Fiscal Year. TABOR implements these revenue limitations through certain restrictions and limitations on spending ("TABOR limit"). State revenues did not exceed the TABOR limit in either fiscal year 2008-09 or fiscal year 2009-10, but exceeded it by $770.6 million in fiscal year 2010-11. The OSPB projects that fiscal year 2011-12 spending will exceed the TABOR limit by $1,312.4 million.

Pensions and Other Post-Employment Benefits

The State provides post-employment benefits to its employees based on their work tenure and earnings history through a defined benefit pension plan (the Plan), a defined contribution plan and a limited healthcare plan. Each plan is administered by the Public Employees' Retirement Association (PERA). Most State employees participate in the Plan. The State does not participate in Social Security.

The Plan is funded with payments made by the State and by each participating State employee, the amounts of which are determined and established by statute. Although the State has made all statutorily required contributions (SRC) to the Plan, as of December 31, 2011, the actuarial value of the Plan assets and the actuarial accrued liability (AAL) of the Plan were $12.0 billion and $20.8 billion, respectively, resulting in an unfunded actuarial accrued liability (UAAL) of $8.8 billion and a funded ratio of 57.7%. The UAAL at December 31, 2011, would amortize over a 56-year period based on contribution rates as of the date of calculation (i.e., contributions equal to the SRC). The actuarial value of assets for the Plan uses an asset valuation method of smoothing the difference between the market value of assets and the actuarial value of assets to prevent extreme fluctuations that may result from short-term or cyclical economic and market conditions. Accordingly, the full effect of recent fluctuations in Plan assets as a result of economic and market conditions is not reflected in the funded ratio of 57.7%. The funded ratio of the Plan at December 31, 2011, based on the market value of assets, was 57.6%, representing an unfunded accrued liability of $8.8 billion.

The State also currently offers other post-employment health and life insurance benefits to its employees. At December 31, 2011, the Health Care Trust Fund had an unfunded actuarial accrued liability of $1.4 billion, a funded ratio of 16.5%, and a 49-year amortization period.

Litigation

There is an assortment of litigation pending against the State, including, but not limited to:

The case of Lobato v State of Colorado challenges the State's school finance system. School districts, students, and parents have filed suit against the State asserting that the current school funding system fails to provide a thorough and uniform system of free public education as required by the State Constitution. The plaintiffs seek to overturn the current funding system and ensure that additional funding of approximately $1.35 billion to $4.15 billion annually for operations funding and $5.7 billion to $17.9 billion for capital facility funding is provided. All claims were dismissed by the District Court and the Colorado Court of Appeals. After the Colorado Court of Appeals decision, both the plaintiffs and the State petitioned the Colorado Supreme Court. The Supreme Court reversed the lower courts' ruling and remanded the case to District Court for trial, which concluded on September 2, 2011. On December 9, 2011, the District Court ruled in favor of the plaintiffs and held the State's school finance system is unconstitutional because it is inadequate and not rationally related to the constitutional mandate of a thorough and uniform system of free public education. The plaintiffs' action for declaratory and injunctive relief was stayed until final action by the Colorado Supreme Court upon appeal of the District Court's decision; provided that if appeal is not perfected to the Colorado Supreme Court, the District Court will review the stay upon application of either party submitted no earlier than the conclusion of the 2012 legislative session. The District Court's decision did not specify an immediate or long-term remedy, and the certainty, timing, and extent of fiscal impact on the State cannot be determined at this time. The State has appealed the ruling to the State Supreme Court. The State Attorney General is not currently opining as to the effect of any final decision rendered in connection with the Lobato case.

Subsequent to the issuance of the State's Fiscal Year 2010-11 Comprehensive Annual Financial Report (CAFR), litigation was filed against the State and the Colorado Bridge Enterprise (the "Bridge Enterprise"), a government-owned business within CDOT, asserting that the Bridge Enterprise does not qualify as an enterprise for purposes of TABOR, that the bridge safety surcharge imposed by the Bridge Enterprise on certain motor vehicles registered in the State to finance highway bridge projects is an unconstitutional tax imposed without prior statewide voter approval as required by TABOR and that bonds issued by the Bridge Enterprise to fund highway projects are also unconstitutional as having been issued without prior statewide voter approval as required by TABOR. Plaintiffs seek, among other things, a refund to Colorado taxpayers of the bridge safety surcharges collected since the inception of the legislation in July 2009.

Ratings

As of June 2012 Moody's Investors Service has assigned the State of Colorado a long-term rating of Aa1.

As of September 2012 Standard & Poor's Ratings Services has assigned the State of Colorado a long-term rating of AA.

Fitch Ratings does not currently assign a long-term rating to the State of Colorado.

Minnesota Municipal Obligations

Unless otherwise noted, the following information is based on information drawn from official statements, government web sites and other resources publicly available as of August 7, 2012.

Economic and General Information

Minnesota has a 2011 estimated population of 5.35 million, up from 4.93 million in 2000. Its 2011 per capita personal income in 2011 is estimated at $44,823 compared with $41,415 for the nation. Minnesota's unemployment rate in May 2012 was 5.6 percent compared with 8.2 percent for the nation. Minnesota's unemployment rate was ranked 12th among states at the end of fiscal year 2011. During fiscal 2011, payroll employment in Minnesota grew by 28,600 or 1.1 percent. Nationally, payroll employment grew by 0.8 percent over that same 12-month period. At the close of fiscal year 2011, Minnesota had regained 28 percent of the 159,000 jobs lost in the state during the Great Recession. On a national level, only 21 percent of the jobs lost in the recession had been regained.

Employment grew by 1.1 percent in both goods and services producing industries. Manufacturing employment in the state grew 1.2 percent and construction employment posted a gain of 0.1 percent during the fiscal year ended June 30, 2011. Mining employment grew by 10.9 percent, but from a very small base. Despite the improvements in fiscal year 2011 employment, both manufacturing and construction remain well below pre-recession levels. In June 2011 Minnesota had 30,000 fewer construction jobs than when the recession began in December 2007 and 43,000 fewer manufacturing jobs.

Service sector employment is 85 percent of payroll employment in Minnesota. Service sector firms added 24,500 jobs during fiscal year 2011. Employment in establishments providing accommodations or food service accounted for more than one-half of the services sector job growth, up 13,700 from levels observed in June 2010. Education and health services (up 8,800) and professional and technical services (up 6,600) also exhibited significant growth during fiscal year 2011. Retail trade, information services, and financial activities all had small percentage declines in employment. Government employment fell by 5,900 or 1.4 percent. The majority of this decline was related to federal workers, reflecting release of temporary workers added to conduct the 2010 Census.

Minnesota personal income grew by 6.7 percent between the end of fiscal year 2010 and the end of the 2011 fiscal year, considerably faster than the 3.4 percent growth observed in fiscal year 2010. Minnesota personal income also grew faster than the national average of 5.4 percent. Total wages paid in the state also grew faster than the U.S. average. At the close of fiscal year 2011, total wages were 5.6 percent above the level observed at the end of fiscal year 2010. On a national level, growth of 4.0 percent was observed.

Minnesota's economy is expected to grow slightly faster in fiscal year 2012 than the U.S. economy. Personal income is forecasted to grow by 3.5 percent over the fiscal year, 0.8 percent faster than is forecast for the nation. Payroll employment is expected to grow by 34,000 jobs (1.2 percent) during fiscal 2012. Nationally, job growth of 0.8 percent is projected. Minnesota's manufacturing employment is expected to be relatively flat during fiscal year 2012, but construction employment is projected to increase by 3,000 jobs (3.5 percent) over the fiscal year. Employment in health care services is forecast to increase by 12,000.

State Finances

Approximately 54 percent of the state's total revenue (governmental and business-type activities) came from taxes, while 33 percent resulted from grants and contributions, including federal aid. Charges for various goods and services provided 12 percent of the total revenues. The remaining 1 percent came from other general revenues. The state's expenses cover a range of services. The largest expenses were for general education, and health and human services. Significant increases in revenues were partially offset by decreases in other revenue sources. The increase in revenue was primarily attributable to the increase in income and sales taxes as a result of the strengthening economy after an economic downturn. Individual income taxes increase results mainly from an increase in wages, capital gains, and other non-wage income, while the corporate income taxes increase is from corporate profits. These increases are partially offset by a decrease in federal program revenues related to the American Recovery and Reinvestment Act (ARRA).

The Governor and Legislature failed to reach agreement on a balanced 2012-2013 biennial budget by the constitutional deadline, triggering a 20- day state government shutdown in July 2011. Effects of the 20-day shutdown included the temporary layoff of 19,000 state employees, additional costs for shutdown preparation and post-shutdown recovery, and minor permanent revenue loss. To end the shutdown, the Governor and Legislature compromised on 2012-2013 biennial budget balanced primarily through spending reductions, payment shifts, reductions to reserves, and proceeds from bonds secured by tobacco settlement receipts. The state's most recent forecast projects that the General Fund will remain balanced on a budgetary basis for the 2012-2013 biennium. A forecast balance of $876 million for the 2012-2013 biennium is allocated by law to restoring the reserves. The increased reserves will provide a cushion against slower economic growth and uncertainty about changes in national fiscal policy.

Pensions and Other Post-Employment Benefits

Pensions. There are three major state-wide retirement systems that cover most of the public employees of the state and its counties, municipalities and school districts. These systems are the Minnesota State Retirement System (MSRS), the Public Employees Retirement Association (PERA) and the State Teachers' Retirement Association (TRA). The state is the primary employer for MSRS, and is only a minor employer in the PERA and TRA plans. The state also makes non-employer contributions to certain plans and makes contributions to certain local governments to assist them with their pension funding obligations.

The estimated funding ratios for the six MSRS retirement funds as of June 30, 2011 are: State Employees Retirement Fund 85.32 percent; Correctional Employees Retirement Fund 70.23 percent; State Patrol Retirement Fund 80.33 percent; Judges Retirement Fund 58.72 percent; the Legislators Retirement Fund and the Elective State Officers Fund are financed on a pay-as-you-go basis.

OPEB. Other postemployment benefits (OPEB) are available to state employees and their dependents through a single-employer defined benefit health care plan and required under the terms of selected employment contracts. All pre-age 65 state retirees with at least five years of allowable pension service who are entitled at the time of retirement to receive an annuity under the state retirement program are eligible to participate in the state's health and dental insurance plan until age 65. As of July 1, 2010, there were approximately 2,450 retirees participating in the state's insurance plan under this provision.

For fiscal year ended June 30, 2011, the state contributed $39,518,000 to the plan.

As of July 1, 2010 the unfunded actuarial accrued liability for benefits was $799 million, and is being amortized over a 30-year amortization period. The state's annual OPEB cost is calculated based on the annual required contribution (ARC) of the employer. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal costs each year and amortize any unfunded actuarial liabilities over a thirty year amortization period using a 4.75 percent discount rate. For year ending June 30, 2011, the state's ARC is $76,132,000. The actuarial value of assets is zero as no assets have been deposited into an irrevocable OPEB trust for future benefits.

Litigation

35W Bridge Collapse. On August 1, 2007, the 35W interstate bridge over the Mississippi River collapsed. Thirteen people were killed, and approximately 145 injured. The bridge, which opened in 1967, was designed by a private contractor under contract with the state of Minnesota and was inspected and maintained by the Minnesota Department of Transportation (MnDOT). The state has received 186 Notices of Tort Claim arising from the collapse of the 35W bridge. The Minnesota Legislature enacted a compensation account and appropriated $36,640,000 for payments to representatives of decedents and claimants who were on the 35W bridge at the time of the collapse. A panel of three attorneys determined the amount of payments. All 179 claimants accepted payments from the compensation account and the emergency relief account in the aggregate amount of about $37 million on the condition that they waived the right to sue the state for additional recovery. However, the majority of those claimants have commenced litigation against the original bridge designer, an engineering firm that inspected the bridge under contract with the state, and a construction company that was performing work on the bridge at the time of the collapse. The state has been third-partied into this litigation. Although the state's position is that its exposure in this litigation is capped at $1 million, the constitutionality of this cap may be challenged. The state has brought third party claims against the other defendants seeking recovery of the $37 million paid to claimants by the statutory compensation account, the emergency relief account and for state's damages associated with the collapse. The state's claim against the construction company performing work on the bridge at the time of the collapse has been settled for $1 million. The state's claim against the company which had performed inspections and analysis of the bridge has been settled for $5 million. The state is pursuing a claim against the company that designed the bridge. The Minnesota Supreme Court affirmed lower court rulings that the state's claim can proceed.

Ratings

As of August 2012 Moody's Investors Service has assigned the State of Minnesota's general obligation bond obligations a rating of Aa1.

As of August 2012 Standard & Poor's Ratings Services has assigned the State of Minnesota's general obligation bond obligations a rating of AA+.

As of August 2012 Fitch Ratings has assigned the State of Minnesota's general obligation bond obligations a rating of AA+. 

North Carolina Municipal Obligations

Unless otherwise noted, the following information is based on information drawn from official statements, government web sites and other resources publicly available as of November 9, 2011.

Economic and General Information

North Carolina has a 2010 Census population of 9.56 million, ranking it 10th largest in the United States. The state's per capita income for 2010 is $35,638 compared with $40,584 for the nation; during the period from 2000 to 2010, per capita income in the State grew from $27,914 to $35,638, an annual increase of approximately 1% when adjusted for inflation. The unemployment rate in August 2011 was 10.4 percent. North Carolina's major industry sectors are services, agriculture, trade, manufacturing, exports and tourism, but the military presence and housing starts are also important factors. During the period from 2000 to 2010, per capita personal income in the State grew from $27,914 to $35,638, an annual increase of approximately 1% when adjusted for inflation. North Carolina, like the rest of the nation, is still dealing with a prolonged period of high unemployment and slow job growth in the wake of the national recession. North Carolina's September 2011 seasonally adjusted unemployment rate was 10.5 percent, up slightly from 10.1 percent in September 2010. At 10.5 percent, North Carolina's unemployment rate is 1.4 percent higher than the nation as a whole (9.1 percent). Between the State's peak in employment in February 2008 and the low of February 2010, North Carolina lost 328,600 jobs-a decrease of 7.9 percent.

Nonfarm total employment accounts for 3,868,100 jobs in the state. Between February 2008 and February 2010, all major industrial sectors experienced job declines with the exception of Education & Health Services (up 7,600) and Government (up 5,600). The largest job losses were in Manufacturing (down 98,400), Trade Transportation & Utilities (down 71,900), Construction (down 71,700) and Professional & Business Services (down 35,600). However, between July 2010 and July 2011, job growth picked up somewhat, with all the major sectors reporting seasonally adjusted job increases: Leisure & Hospitality Services (up 13,200); Professional & Business Services (up 12,900); Trade, Transportation & Utilities (up 10,300); Financial Activities (up 4,800); Manufacturing (up 2,300); and Information (up 300).

The slow economic recovery that persisted throughout fiscal year 2010-2011, was largely due to structural imbalances in the housing and financial sectors. These imbalances have had a profound effect on the state's economy and are taking a long time to correct. Ongoing weaknesses in the global economy have exacerbated the pace of the economic recovery both in the U.S. and the state. A return to a full expansionary economy is not projected until the end of 2012, five years after the onset of the recession. Until then, the housing market is expected begin to gradually improve and steady improvements in household income and consumer spending are anticipated.

State Finances

The General Assembly enacted a $19.7 billion budget for fiscal year 2011-2012, closing the $2.6 billion budget gap through spending reductions (64%) and adjustments to availability (36%) as follows:

Spending Reductions. Spending reductions totaled $2.1 billion in fiscal year 2011-2012 and $2.5 billion in fiscal year 2012-2013. The largest reductions occurred in the education and health and human services categories. Education reductions were $1.2 billion in fiscal year 2011-2012 and $1.4 billion in fiscal year 2012-2013, while health and human services reductions totaled $531 million in fiscal year 2011-2012 and $650 million in fiscal year 2012-2013.

Adjustments to Availability . Adjustments increased availability by $354 million in fiscal year 2011-2012 and $45 million in fiscal year 2012-2013. Major adjustments included transfers from the Highway Fund for state highway patrol (adds $385 million over the biennium), increases in judicial fees (adds $124 million over the biennium), and suspension of the corporate income tax earmark for public school construction (adds $147 million over the biennium).

Revenue Outlook. Even with modest improvement in the North Carolina economy and revenue outlook, the consensus forecast maintained a very cautious revenue outlook for the biennium period 2011-2013. Specifically, the General Assembly budget assumes baseline General Fund revenue to increase 4.6% in fiscal year 2011-2012. The economy is expected to continue to accelerate in fiscal year 2012-2013, resulting in baseline General Fund revenues growth of 5.5%. While stronger than recent performance, this revenue recovery forecast is below historical growth during economic recoveries and remains near long-term average revenue growth.

Pensions and Other Post-Employment Benefits

The state reports a number of defined benefit public employee retirement plans and two defined contribution plans administered by the state. There are other defined contribution plans administered by a third party under the auspices of the state. As of December 31, 2010: (i) the Teachers/ and State Employees' Retirement System was estimated to be have a funded ratio of95.4 percent; (ii) the Consolidated Judicial Retirement System was estimated to have a funded ration of 91.6 percent; and (iii) the Legislative Retirement System was estimated to have a funded ratio of 125.6 percent.
The state also administers two post-employment benefit plans, the Retiree Health Benefit Fund and the Disability Income Plan. As of December 31, 2010, the Retiree Health Benefit Fund had an estimated funded ratio of 2.0 percent, and the Disability Income Plan had an estimated funded ratio of 75.8 percent.

Litigation

There are a number of cases pending in which the State faces the risk of either a loss of revenue or an unanticipated expenditure. Although an adverse result in any of the cases could have negative budgetary consequences, in the opinion of the Department of State Treasurer after consultation with the Attorney General, an adverse decision in any of these cases would not materially adversely affect the State's ability to meet its financial obligations.

Ratings

As of January 2011 Moody's Investors Service has assigned the State of North Carolina's general obligation bond obligations a rating of Aaa.

As of September 2012 Standard & Poor's Ratings Services has assigned the State of North Carolina's general obligation bond obligations a rating of AAA.

As of November 2011 Fitch Ratings has assigned the State of North Carolina's general obligation bond obligations a rating of AAA.

Pennsylvania Municipal Obligations

Unless otherwise noted, the following information is based on information drawn from official statements, government web sites and other resources publicly available as of July 24, 2012.

Economic and General Information

The Commonwealth of Pennsylvania has a 2010 population of 12.7 million and per capita personal income of $40,599 compared with $39,945 nationally. The Commonwealth's economic performance is largely dependent upon job growth. Heavy job losses that occurred during 2009 and 2010 have abated and the Commonwealth economy generated approximately 54,000 net new non-agricultural jobs during the fiscal year ended June 30, 2011. Pennsylvania's unemployment rate has traditionally been equal to or below the national average following the diversification of the Commonwealth economy in the 1980's and 1990's, and during fiscal 2011 the Commonwealth unemployment rate was 7.6 percent while the national unemployment rate was 9.2 percent. The Commonwealth's year-over-year rate of growth in employment averaged 1.1 percent while the broader U.S. economy was just 0.6 percent. Larger sectors adding jobs in Pennsylvania included: health care, wholesale trade and administrative services, manufacturing and mining. Significant job losses were experienced in the governmental sector. Pennsylvania has weathered the bursting of the housing bubble better than most other states. The Commonwealth ranks 29th in the country in loans in foreclosure and 40th in the nation in terms of new loan foreclosures initiated in 2010. Further, while home prices had been failing dramatically throughout the nation, home price appreciation in Pennsylvania has essentially stalled from 2007 to 2010.

Pennsylvania-based energy and mining firms historically led the nation during much of the past two centuries before falling on hard times in the 1980s. Escalating oil and natural gas prices have contributed to increased exploration for new energy reserves. While mining activity has declined significantly within the Commonwealth, the emergence of the Marcellus Shale natural gas reserves under much of Pennsylvania is leading to a resurgence in the industry. The Marcellus Shale natural gas field could be the second largest natural gas field in the world, and producers are spending billions in the Commonwealth to increase production. Over 1,000 drilling permits have been granted in Pennsylvania in 2010, more than double the rate approved in 2008. Estimated job creation tied to the expanded natural gas industry is forecast to add upwards of 200,000 jobs and more than $18 billion in output to the state economy by the end of the decade.

During fiscal year 2010 the continuing effects of the national economic recession again negatively impacted the Commonwealth's economy. While avoiding the contraction in the national economy from the prior fiscal year, the Commonwealth experienced only minimal economic growth in fiscal year 2010.

State Finances

The subdued level of the economic recovery from the most recent national recession continued to affect the Commonwealth's revenue receipts during fiscal year 2012. General Fund revenues of the Commonwealth were below the certified estimate by $162.8 million or 0.6 percent during fiscal year 2012. Final Commonwealth General Fund revenues for the fiscal year totaled $27,678.0 million. Total fiscal year 2012 revenues, net of reserves for tax refunds and including public health and human services assessments, totaled $27,101.3 million. Total expenditures, net of appropriation lapses and including public health and human services assessments and expenditures from additional sources, were $27,534.4 million, resulting in a preliminary operating balance for fiscal year 2012 of negative $433.3 million. However, after accounting for a positive fiscal year 2012 beginning balance of $1,072.8 million, the Commonwealth ended fiscal year 2012 with an unappropriated surplus balance of $659.0 million, which was the second largest (following the $1,072.8 million ending balance from FY 2011) such unappropriated ending balance since prior to the last recession.

General Fund revenues increased $180.8 million or 0.7 percent during fiscal year 2012 when measured on a year-over-year basis as compared to fiscal year 2011. Tax revenue collections grew $687.8 million or 2.6 percent on a year-over-year basis from fiscal year 2011 to fiscal year 2012 while non-tax revenue collections declined $507.2 million or 48.9 percent, primarily from a reduction in balance transfers from fiscal year 2011 to fiscal year 2012.

Fiscal year 2012 appropriations from Commonwealth revenues, including supplemental appropriations and net of appropriation lapses, totaled $27,534.4 million. A total of $349.3 million in appropriations were lapsed in fiscal year 2012, and the fiscal year 2012 budget contained a slightly increased level of public health and human services assessments, $698.3 million, which were utilized to cover a portion of medical assistance and long-term care costs. These assessments replaced $698.3 million of General Fund medical assistance and long-term care costs in fiscal year 2012 compared to $636.6 million in fiscal year 2011, an increase of 9.7 percent. The ending unappropriated balance was $659.2 million for fiscal year 2012. In June 2012, the statutory transfer of 25 percent of the Commonwealth's unappropriated surplus balance was suspended for one year.

On June 30, 2012, the Commonwealth's fiscal year 2013 budget was signed into law by the Governor. The fiscal year 2013 budget includes a projected increase in Commonwealth revenues, prior to reserves for tax refunds, of 3.3 percent over fiscal year 2012 receipts. The rate of growth was based upon a projection that national and state economic growth will continue at a modest rate. The enacted fiscal year 2013 budget limits spending growth to 2.3 percent on a year-over-year basis.

The enacted fiscal year 2013 budget provides appropriations and executive authorizations, net of lapses and other reductions, totaling $28,285.0 million of Commonwealth funds against estimated revenues, net of tax refunds and including public health and human services assessments, of $27,918.6 million.

The fiscal year 2013 revenue estimate is based upon an economic assumption that economic growth will total 2.2 percent annual growth through June 2013. Total revenues of the Commonwealth, prior to reserves for refunds are expected to increase $912.0 million or 3.3 percent from fiscal year 2012 levels. The enacted budget for fiscal year 2013 includes tax reductions totaling $312.9 million, principally from the continued phase-out of the capital stock and franchise tax. Tax revenues of the Commonwealth are estimated to increase 3.4 percent from fiscal year 2012 levels. Fiscal year 2013 receipts from corporate tax receipts are projected to decrease 4.1 percent, after adjusting for a restart of the scheduled reduction in the capital stock and franchise tax rate reduction. Personal income tax receipts in fiscal year 2013 are expected to grow 4.5 percent on a year-over-year basis. Sales and use tax receipts are projected to increase 5.1 percent during fiscal year 2013. Non-tax revenues are projected to decline 3.8 percent.

Commonwealth General Fund appropriations for fiscal year 2013 total $27,656.4 million, an increase of $626.1 million or 2.3 percent from fiscal year 2012 levels.

Pensions and Other Post-Employment Benefits

Pensions. Commonwealth laws established contributory defined benefit pension plans covering substantially all Commonwealth and public school employees. Generally, Commonwealth employees are members of the State Employees' Retirement System (SERS), and public school employees are members of the Public School Employees' Retirement System (PSERS).

On November 23, 2010, the Governor signed Act 120 of 2010 into law (Act 120) to implement changes to the actuarial methodologies of both of the PSERS and the SERS pension plans. Act 120 also implemented employer contribution collars, set a permanent minimum employer contribution rate, changed the retirement benefits for new employees and prohibited the use by the Commonwealth of pension obligation bonds, among other changes.

In March 2011, the PSERS Board decreased the actuarial investment rate of return for a third time from 8.0 percent to 7.5 percent for the June 30, 2011 actuarial valuation. In May 2012, SERS' Board decreased the actuarial rate of return from 8.0 percent to 7.5 percent for the December 31, 2011 valuation. As of December 31, 2011 SERS has an unfunded actuarial accrued liability of $14.66 billion. As of June 30, 2011 PSERS has an unfunded actuarial accrued liability of $26.5 billion.

OPEB. The Commonwealth sponsors two primary plans which provide other post-employment benefits (OPEB). The Commonwealth provides health care plans under the Retired Pennsylvania State Police Program (RPSPP) provides collectively bargained benefits to retired state enlisted members and their dependents and the Retired Employee Health Program (REHP) provides Commonwealth-determined benefits to other retired state employees and their dependents. The General Assembly, based upon the Governor's request, annually appropriates funds to meet the obligation to pay current retiree health care benefits on a "pay-as-you-go" basis. Retiree health care expenditures are currently funded by the Commonwealth's General Fund (approximately 46 percent), and by Federal, Other and Special Funds. Commonwealth costs for such benefits totaled $563 million in fiscal year 2010, $626 million in fiscal year 2011 and an estimated $660 million in fiscal year 2012.

Litigation

As of fiscal year ended June 30, 2011, the Commonwealth is a defendant in numerous legal proceedings pertaining to matters normally incidental to routine operations. Additionally, the Commonwealth is currently involved in certain legal proceedings for which the likelihood of an unfavorable outcome is reasonably possible, for which liabilities have not been recorded as of June 30, 2011. Unfavorable outcomes for such cases, which the Commonwealth is vigorously contesting, could range from approximately $98 million to $1.9 billion for the General Fund; $1 million to $186 million for the Motor License Fund; and $0.1 million to $1.1 billion of possible additional liabilities for the State Employees' Retirement System. The range of potential liability for governmental activities is from $99 million to $2.1 billion.

Among the General Fund cases for which an unfavorable outcome is reasonably possible, the Commonwealth is defendant against plaintiff organizations' claims which seek the repayment of funds paid from the Healthcare Providers Retention Account and the Medical Care Availability and Reduction of Error Fund (amounting to $800 million) to the General Fund through October 2009, in accordance with Act 50 of 2009 (Act 50). Plaintiff organizations allege, among other things, that the sections of Act 50 which mandated that the amounts be paid to the General Fund are unconstitutional. On September 14, 2011, oral arguments were presented to the Pennsylvania Supreme Court. A decision is pending. It is the Commonwealth's best judgment, including that of outside counsel, based on the latest available information to the Commonwealth that it will ultimately prevail in this matter. The Commonwealth cannot, and does not, assure or guarantee that it will ultimately prevail in this matter. On February 29, 2012 the Supreme Court of Pennsylvania unanimously held that the Commonwealth did not violate the rights of the petitioner health care providers when the General Assembly closed the Healthcare Providers Retention Account and transferred its funds to the General Fund. The Commonwealth Supreme Court has not yet decided the Medical Care Availability and Reduction of Error Fund case.

Ratings

As of July 2012 Moody's Investors Service has assigned the Commonwealth of Pennsylvania general obligation bond obligations a rating of Aa2. Moody's downgraded Pennsylvania's rating to Aa2 from Aa1 on July 16, 2012.

As of July 2012 Standard & Poor's Ratings Services has assigned the Commonwealth of Pennsylvania's general obligation bond obligations a rating of AA.

As of July 2012 Fitch Ratings has assigned the Commonwealth of Pennsylvania general obligation bond obligations a rating of AA+.

Wisconsin Municipal Obligations

Unless otherwise noted, the following information is based on information drawn from official statements, government web sites and other resources publicly available as of July 11, 2012.

Economic and General Information

Wisconsin ranks 20th among the states in population and 25th in land area. Wisconsin has a 2010 Census population of 5,687,000, up from 5,364,000 in 2000. Wisconsin's unemployment rate was 7.5 percent as of March 2012 compared with 8.4 percent for the nation. Wisconsin's per capita personal income as of 2010 is $38,432 compared with $40,584 nationally. Its median income for a four-person family is $78,742 compared with $75,764 nationally. Principal industries, based on nonagricultural payrolls, are manufacturing (15.7 percent); government (15.4 percent); educational and health services (15.3 percent); retail trade (10.7 percent); professional and business services (9.8 percent); and leisure and hospitality (9.2 percent). The value of taxable property in the state declined from the year before in each of calendar years 2009 through 2011; such value is reported at $486.86 billion in 2011, somewhat below the 2007 valuation of $497.92 billion. The peak valuation for the decade occurred in 2008 at $514.39 billion. 

Wisconsin's economic performance has largely mirrored the nation's in recent years. However, Wisconsin has coped better than the nation as a whole by several measures:

Wisconsin's unemployment rate remains significantly lower than the national rate.

Wisconsin's growth in gross state product has exceeded the 50-state average since 2007.

Wisconsin's per capita income growth has exceeded the nation's growth.

With 90.6 percent of its population covered, Wisconsin has the third highest insurance coverage rate in the country.

Wisconsin's median household income of $50,522 is the 24th highest in the country and 2.2 percent above the national average.

In fiscal year 2011, Wisconsin's economy began to recover from the nation's worst economic crisis in decades. Total general fund revenues increased by 6.4 percent over fiscal year 2010 tax collections with a broad-based improvement in all of Wisconsin's major general fund tax revenue sources. Individual income tax revenues increased 10.0 percent, sales and use tax revenues increased 4.2 percent and corporate tax revenues increased 2.2 percent. This revenue growth helped to maintain spending priorities by replacing federal funding for states that was included in the American Recovery and Reinvestment Act of 2009 (ARRA). In fiscal year 2010, Wisconsin was able to use the additional federal funding for states to help offset reduced state revenues due to the recession and, as a result, protect high priority programs, including Medical Assistance, School Aids, Shared Revenue and Youth Aids. While additional federal matching funds for Medical Assistance were available in Fiscal Year 2011, the state had completely allocated Wisconsin's share of the state fiscal stabilization funds in Fiscal Year 2010. This allowed Wisconsin to position the state's budget to better fit within available state revenues.

Looking ahead, Wisconsin's gross domestic product is projected to increase 2.5 percent in 2012. Total nonfarm employment in Wisconsin is projected to increase 1.0 percent in 2012. Nationally, nonfarm employment is projected to increase 1.0 percent in 2012. Wisconsin personal income is projected to increase 3.3 percent in 2012. This is similar to the expected personal income growth nationally of 3.6 percent in 2012.

In early 2011, significant legislation was passed strengthening the State's commitment to economic development and job growth. Created under 2011 Wisconsin Act 7, the Wisconsin Economic Development Corporation's sole mission is to assist the private sector in job creation. A public-private partnership, this authority replaces the Wisconsin Department of Commerce, and focuses exclusively on developing and implementing economic programs to assist companies that are investing and creating jobs in Wisconsin and supporting new business start-ups and business expansion and growth in the State.

State Finances

The state raises revenues from diverse sources, including various taxes levied by the state; federal government payments; various kinds of fees, licenses, permits, and service charges paid by users of specific services, privileges, or facilities; investment income; and gifts, donations, and contributions. The state's major tax revenue sources are individual income taxes; general sales and use taxes; motor fuel tax; corporate franchise and income tax; excise taxes; public utility taxes; and other taxes.

For the 2011-12 fiscal year, the estimated General Fund tax collections are $13.388 billion, or an increase of $194 million from the projections included in the February 2012 Legislative Fiscal Bureau (LFB) Memorandum, and an increase of $476 million (or 3.7 percent) from collections in the 2010-11 fiscal year. For the 2012-13 fiscal year, the estimates are $13.675 billion, or an increase of $72 million from projections included in the February 2012 LFB Memorandum.

The February 2012 LFB Memorandum included updated General Fund tax revenue estimates for the 2011-13 biennium. For the 2011-12 fiscal year, these estimates were $13.195 billion, or an increase of $283 million (or 2.2 percent) from collections in the 2010-11 fiscal year but a decrease of $100 million from the projections included in the 2011-13 biennial budget. For the 2012-13 fiscal year, these estimates were $13.604 billion, or a decrease of $173 million from the projections included in the 2011-13 biennial budget.

Based on the projections included in the February 9, 2012 LFB Memorandum, expenditures for the 2012- 13 fiscal year were expected to exceed revenues in that fiscal year by more than one-half of one percent. However, in the May 10, 2012 Department of Administration ("DOA") Memorandum, the Secretary of Administration determined that the potential shortfall previously projected in the February 9, 2012 LFB Memorandum was no longer projected to occur. With updated projections of General Fund Tax collections and reduction of debt service costs resulting from completion of structural refunding authorized by the 2011-13 biennial budget and other refunding transactions, the May 10, 2012 DOA Memorandum projects a positive gross ending balance for the 2011-12 fiscal year of $230 million and a positive net ending balance (including the statutory required reserve) for the 2012-13 fiscal year of $89 million.

State Budget; Potential Effect of Litigation; 2011 Wisconsin Act
Certain budget adjustment legislation for the 2010-11 fiscal year was adopted by the Legislature on March 10, 2011, and signed into law by the Governor on March 11, 2011 (2011 Wisconsin Act 10). A provision of this act modified collective bargaining rights of public employees in the State (except for certain protective occupation employees under the Wisconsin Retirement System or under the City of Milwaukee or Milwaukee County retirement systems).

The 2011 Wisconsin Act 10 included provisions that, among others, increased State employee health and retirement contributions and modified the collective bargaining rights of certain public employees in the State. The 2011 Wisconsin Act 10 has been challenged in state and federal courts. The 2011-13 biennial budget does not currently assume any settlement of this matter or other means to address the impact of any negative decision.

Budget Stabilization Fund
Statutory provisions require, for each fiscal year, the transfer of 50 percent of general purpose revenues received over the original budget estimate to the state's Budget Stabilization Fund, provided that the statutory required balance for that fiscal year is maintained. Pursuant to this requirement, a transfer of approximately $14 million was made at the end of the 2010-11 fiscal year from the General Fund to the Budget Stabilization Fund (which is a "rainy day fund"). As of December 15, 2011, the balance in the Budget Stabilization Fund is approximately $17 million. The transfers to the Budget Stabilization Fund are required to continue until the balance in the Budget Stabilization Fund is at least equal to 5 percent of the estimated expenditures from the General Fund, which would be approximately $700 million based on estimated General Fund expenditures for the 2011-12 fiscal year.

Pensions and Other Post-Employment Benefits

The state is part of the Wisconsin Retirement System (WRS), which is a hybrid pension plan with separate individual accounts maintained for all participants. Although the state provides pension and investment management staff for its own and local government employees, the state has no financial obligation for payment of any local government contribution. The State of Wisconsin, as of December 31, 2010, had no unfunded liability. The total system unfunded liability of $132 million (99.8 percent funded ratio), as of December 31, 2010, is attributable to local governments.

Litigation

The State is a defendant in various legal proceedings pertaining to matters incidental to the performance of routine governmental operations. In the opinion of the Wisconsin Legislative Audit Bureau, the ultimate dispositions and consequences of any single legal proceeding or all legal proceedings collectively should not have a material adverse effect on the State's financial position.

See also the "State Budget; Potential Effect of Litigation; 2011 Wisconsin Act" section above.

Ratings

As of July 2012 Moody's Investors Service has assigned the State of Wisconsin's general obligation bond obligations a rating of Aa2.

As of July 2012 Standard & Poor's Ratings Services has assigned the State of Wisconsin's general obligation bond obligations a rating of AA.

As of July 2012 Fitch Ratings has assigned the State of Wisconsin's general obligation bond obligations a rating of AA.