File No. 2-84105
811-3757
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 24 [ X ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 24 [ X ]
(Check appropriate box or boxes.)
DREYFUS CALIFORNIA TAX EXEMPT BOND FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o The Dreyfus Corporation
200 Park Avenue, New York, New York 10166
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 922-6000
Mark N. Jacobs, Esq.
200 Park Avenue
New York, New York 10166
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box)
immediately upon filing pursuant to paragraph (b)
----
on (date) pursuant to paragraph (b)
----
60 days after filing pursuant to paragraph (a)(i)
----
X on October 1, 1999 pursuant to paragraph (a)(i)
----
75 days after filing pursuant to paragraph (a)(ii)
----
on (date) pursuant to paragraph (a)(ii) of Rule 485
----
If appropriate, check the following box:
this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
----
Dreyfus California Tax Exempt Bond Fund, Inc.
Investing for income exempt from
federal and California state income taxes
Prospectus October 1, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus.
Any representation to the contrary is a criminal offense.
Contents
The Fund
2 Goal/Approach
3 Main Risks
4 Past Performance
5 Expenses
6 Management
7 Financial Highlights
Your Investment
8 Account Policies
11 Distributions and Taxes
12 Services for Fund Investors
14 Instructions for Regular Accounts
For More Information
Back Cover
What every investor should know about the fund
Information for managing your fund account
Where to learn more about this and other Dreyfus funds
[Page]
The Fund Dreyfus California Tax Exempt Bond Fund, Inc.
Ticker Symbol: DRCAX
Goal/Approach
The fund seeks as high a level of current income, exempt from federal and
California state income taxes, as is consistent with the preservation of
capital. To pursue this goal, the fund normally invests substantially all of
its assets in municipal bonds that provide income exempt from federal and
California income taxes.
The fund will invest at least 80% of its assets in investment grade municipal
bonds or the unrated equivalent as determined by Dreyfus. The fund may invest
up to 20% of its assets in municipal bonds rated below investment grade
("high yield" or "junk" bonds) or the unrated equivalent as determined by
Dreyfus. The dollar-weighted average maturity of the fund normally exceeds
ten years, but the fund is not subject to any maturity restrictions.
Municipal bonds are typically divided into two types:
* general obligation bonds, which are secured by the full faith and credit of
the issuer and its taxing power
* revenue bonds, which are payable from the revenues derived from a
specific revenue source, such as charges for water and sewer service or
highway tolls
The fund is non-diversified, which means that a relatively high percentage of
the fund's assets may be invested in a limited number of issuers. Therefore,
its performance may be more vulnerable to changes in the market value of a
single issuer or a group of issuers.
Information on the fund's recent strategies and holdings can be found in the
current annual/semiannual report (see back cover).
Concepts to understand
Average maturity: an average of the stated maturities of the bonds held in
the fund, based on their dollar-weighted proportions in the fund.
Investment grade bonds:
independent rating organizations analyze and evaluate a bond issuer's credit
history and ability to repay debts. Based on their assessment, they assign
letter grades that reflect the issuer's creditworthiness. AAA or Aaa
represents the highest credit rating, AA/Aa the second highest, and so on
down to D, for defaulted debt. Bonds rated BBB or Baa and above are considered
investment grade.
[Page 2]
Main Risks
Prices of bonds tend to move inversely with changes in interest rates. While
a rise in rates may allow the fund to invest for higher yields, the most
immediate effect is usually a drop in bond prices and, therefore, in the
fund's share price as well. As a result, the value of your investment in the
fund could go up and down, which means that you could lose money.
Other risk factors could have an effect on the fund's performance:
* if an issuer fails to make timely interest or principal payments or there
is a decline in the credit quality of a bond or perception of a decline, the
bond's value could fall, potentially lowering the fund's share price
* California's economy and revenues underlying its municipal bonds may decline
* investing primarily in a single state may make the fund's portfolio
securities more sensitive to risks specific to the state
* lower-rated, higher-yielding municipal bonds are subject to greater credit
risk, including the risk of default, than investment grade obligations;
lower-rated bonds tend to be more volatile and less liquid
Although the fund's objective is to generate income exempt from federal and
California personal income taxes, interest from some of its holdings may be
subject to the federal alternative minimum tax. In addition, the fund
occasionally may invest in taxable bonds and municipal bonds that are only
exempt from federal income tax.
Other potential risks
The fund, at times, may invest in certain derivatives, such as futures,
options and inverse floaters. Derivatives can be highly sensitive to changes
in their underlying security, interest rate or index and as a result can be
highly volatile. A small investment in certain derivatives could have a
potentially large impact on the fund's performance. The fund may use
derivatives to:
* increase yield
* hedge against a decline in principal value
* invest with greater efficiency and lower cost than is possible through
direct investment
* adjust the fund's duration
* provide daily liquidity
The Fund
[Page 3]
Past Performance
The two tables below show some of the risks of investing in the fund. The
first table shows the changes in the fund's performance from year to year. The
second table compares the fund's performance over time to that of the Lehman
Brothers Municipal Bond Index, an unmanaged total-return performance benchmark.
Both tables assume reinvestment of dividends. Of course, past performance is no
guarantee of future results.
Year-by-year total return as of 12/31 each year (%)
8.56 6.72 10.35 6.65 11.90 -7.11 14.07 3.44 8.26 5.84
89 90 91 92 93 94 95 96 97 98
Best Quarter: Q1 '95 +6.12%
Worst Quarter: Q1 '94 -4.96%
The fund's year-to-date total return as of 6/30/99 was -1.64%.
Average annual total return as of 12/31/98
1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------
Fund 5.84% 4.66% 6.72%
Lehman Brothers
Municipal
Bond Index 6.48% 6.22% 8.22%
Unlike the fund, the Lehman Index is not composed of bonds of a single state.
What this fund is - and isn't
This fund is a mutual fund:
a pooled investment that is professionally managed and gives you the
opportunity to participate in financial markets. It strives to reach its
stated goal, although as with all mutual funds, it cannot offer guaranteed
results.
An investment in this fund is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency. It is not a complete
investment program. You could lose money in this fund, but you also have the
potential to make money.
[Page 4]
Expenses
As an investor, you pay certain fees and expenses in connection with the
fund, which are described in the table below. Shareholder transaction fees
are paid from your account. Annual fund operating expenses
are paid out of fund assets, so their effect is included in the share price.
The fund has no sales charge (load) or Rule 12b-1 distribution fees.
Fee table
Shareholder transaction fees
% of transaction amount
Maximum redemption fee 0.10%
charged only when selling shares you
have owned for less than 15 days
Annual fund operating expenses
% of average daily net assets
Management fees 0.60%
Shareholder services fee x.xx%
Other expenses x.xx%
Total 0.72%
Expense example
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------
$73 $230 $400 $894
This example shows what you
could pay in expenses over time. It uses the same
hypothetical conditions other funds use in their
prospectuses: $10,000 initial investment, 5% total
return each year and no changes in expenses. The
figures shown would be the same whether you sold your
shares at the end of a period or kept them. Because
actual return and expenses will be different, the
example is for comparison only.
Concepts to understand
Management fee: the fee paid to the investment adviser for managing the
fund's portfolio and assisting in all aspects of the fund's operations.
Shareholder services fee:
a fee of up to 0.25% used to reimburse Dreyfus Service Corporation for
shareholder account service and maintenance.
Other expenses: fees paid by the fund for miscellaneous items such as transfer
agency, custody, professional and registration fees.
The Fund
[Page 5]
Management
The investment adviser for the fund is The Dreyfus Corporation,
200 Park Avenue, New York, New York 10166. Founded in 1947, Dreyfus manages
more than $120 billion in over 160 mutual fund portfolios. For the past
fiscal year, the fund paid Dreyfus a management fee at the annual rate of
0.60% of the fund's average daily net assets. Dreyfus is the primary mutual
fund business of Mellon Bank Corporation, a broad-based financial services
company with a bank at its core. With more than $389 billion of assets under
management, and $1.9 trillion of assets under administration and custody,
Mellon provides a full range of banking, investment, and trust products and
services to individuals, businesses and institutions. Mellon is headquartered
in Pittsburgh, Pennsylvania.
Joseph P. Darcy has managed the fund since January 1996 and has been employed
by Dreyfus since May 1994.
Dreyfus has a personal securities trading policy (the "Policy") which
restricts the personal securities transactions of its employees. Its primary
purpose is to ensure that personal trading by Dreyfus employees does not
disadvantage any Dreyfus-managed fund. Dreyfus portfolio managers and other
investment personnel who comply with the Policy's preclearance and disclosure
procedures may be permitted to purchase, sell or hold certain types of
securities which also may be or are held in the fund(s) they advise.
Concepts to understand
Year 2000 issues: the fund could be adversely affected if the computer
systems used by Dreyfus and the fund's other service providers do not
properly process and calculate date-related information from and after
January 1, 2000.
Dreyfus is working to avoid year 2000-related problems
in its systems and to obtain assurances from other service providers that
they are taking similar steps. In addition, issuers of securities in which
the fund invests may be adversely affected by year 2000-related problems.
This could have an impact on the value of the fund's investments and its
share price.
[Page 6]
Financial Highlights
This table describes the fund's performance for the fiscal periods indicated.
"Total return" shows how much your investment in the fund would have
increased (or decreased) during each period, assuming you had reinvested all
dividends and distributions. These figures have been independently audited by
Ernst & Young LLP, whose report, along with the fund's financial statements,
is included in the annual report.
<TABLE>
<CAPTION>
Year Ended May 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per-Share Data ($)
Net asset value, beginning of period 14.88 14.32 14.00 14.54 14.59
Investment operations:
Investment income - net .68 .70 .73 .77 .82
Net realized and unrealized
gain (loss) on investments (.12) .56 .32 (.54) -
Total from investment operations .56 1.26 1.05 .23 .82
Distributions:
Dividends from investment
income - net (.68) (.70) (.73) (.77) (.82)
Dividends from net realized gain
on investments (.04) - - - (.05)
Total distributions (.72) (.70) (.73) (.77) (.87)
Net asset value, end of period 14.72 14.88 14.32 14.00 14.54
Total return (%) 3.81 8.89 7.61 1.58 5.93
Ratios/Supplemental Data
Ratio of expenses
to average net assets (%) .72 .71 .73 .69 .71
Ratio of net investment income
to average net assets (%) 4.56 4.77 5.11 5.37 5.77
Portfolio turnover rate (%) 58.49 64.67 60.56 56.12 39.85
Net assets, end of period ($ x 1,000) 1,234,856 1,310,139 1,369,058 1,371,274 1,557,754
</TABLE>
The Fund
[Page 7]
Your Investment
Account Policies
Buying shares
You pay no sales charges to invest in this fund. Your price for fund shares
is the fund's net asset value per share (NAV), which is generally calculated
as of the close of trading on the New York Stock Exchange (usually 4:00 p.m.
Eastern time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund's transfer agent or other authorized entity. Because the
fund seeks tax-exempt income, it is not recommended for purchase in IRAs or
other qualified retirement plans.
Minimum investments
Initial Additional
- -----------------------------------------------------------
Regular accounts $2,500 $100
$500 for
TeleTransfer investments
Dreyfus automatic $100 $100
investment plans
All investments must be in U.S.
dollars. Third-party checks cannot be accepted. You may
be charged a fee for any check that does not
clear. Maximum TeleTransfer purchase is $150,000 per day.
Concepts to understand
Net asset value (NAV): a mutual fund's share price on a given day. A fund's
NAV is calculated by dividing the value of its net assets by the number of
existing shares. When calculating its NAV, the fund's investments are priced at
fair value by an independent pricing service approved by the fund's board. The
pricing service's procedures are reviewed under the general supervision of the
board.
[Page 8]
Selling shares
You may sell (redeem) shares at any time. Your shares will be sold at the
next NAV calculated after your order is accepted by the fund's transfer agent
or other authorized entity. Any certificates representing fund shares being
sold must be returned with your redemption request. Your order will be
processed promptly and you will generally receive the proceeds within a week.
Before selling recently purchased shares, please note that:
* if the fund has not yet collected payment for the shares you are selling,
it may delay sending the proceeds for up to eight business days or until it
has collected payment
* if you are selling or exchanging shares you have owned for less than 15 days,
the fund may deduct a 1% redemption fee (not charged on shares sold through
the Automatic Withdrawal Plan or Dreyfus Auto-Exchange Privilege, or on shares
acquired through dividend reinvestment)
Limitations on selling shares by phone
Proceeds
sent by Minimum Maximum
- -----------------------------------------------------------------------------
Check no minimum $150,000 per day
Wire $1,000 $250,000 for joint accounts
every 30 days
TeleTransfer $500 $250,000 for joint accounts
every 30 days
Written sell orders
Some circumstances require written sell orders along with signature
guarantees. These include:
* amounts of $1,000 or more on accounts whose address has been changed within
the last 30 days
* requests to send the proceeds to a different payee or address
Written sell orders of $100,000 or more must also be signature guaranteed.
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public. For joint
accounts, each signature must be guaranteed. Please call us to ensure that
your signature guarantee will be processed correctly.
Your Investment
[Page 9]
Account Policies (continued)
General policies
Unless you decline telephone privileges on your application, you may be
responsible for any fraudulent telephone order as long as Dreyfus takes
reasonable measures to verify the order.
The fund reserves the right to:
* refuse any purchase or exchange request that could adversely affect the fund
or its operations, including those from any individual or group who, in the
fund's view, is likely to engage in excessive trading (usually defined as more
than four exchanges out of the fund within a calendar year) refuse any
purchase or exchange request in excess of 1% of the fund's total assets
* change or discontinue its exchange privilege, or temporarily suspend
this privilege during unusual market conditions
* change its minimum investment amounts
* delay sending out redemption proceeds for up to seven days (generally applies
only in cases of very large redemptions, excessive trading or during unusual
market conditions) The fund also reserves the right to make a "redemption in
kind" - payment in portfolio securities rather than cash - if the amount you
are redeeming is large enough to affect fund operations (for example, if it
represents more than 1% of the fund's assets).
Small account policies
To offset the relatively higher costs of servicing smaller accounts, the fund
charges regular accounts with balances below $2,000 an annual fee of $12. The
fee will be imposed during the fourth quarter of each calendar year.
The fee will be waived for:
any investor whose aggregate Dreyfus mutual fund investments total at least
$25,000; IRA accounts; accounts participating in automatic investment
programs; and accounts opened through a financial institution.
If your account falls below $500, the fund may ask you to increase your
balance. If it is still below $500 after 45 days, the fund may close your
account and send you
the proceeds.
[Page 10]
Distributions and Taxes
The fund usually pays its shareholders dividends from its net investment
income once a month, and distributes any net capital gains it has realized
once a year. Your distributions will be reinvested in the fund unless you
instruct the fund otherwise. There are no fees or sales charges on
reinvestments.
The fund anticipates that virtually all of its income dividends will be
exempt from federal and California state income taxes. However, any dividends
paid from interest on taxable investments or short-term capital gains will be
taxable as ordinary income. Any distributions of long-term capital gains will
be taxable as such The tax status of any distribution is the same regardless
of how long you have been in the fund and whether you reinvest your
distributions or take them in cash. In general, distributions are federally
taxable as follows:
Taxability of distributions
Type of Tax rate for Tax rate for
distribution 15% bracket 28% bracket or above
- ----------------------------------------------------------------------
Income Generally Generally
dividends tax exempt tax exempt
Short-term Ordinary Ordinary
capital gains income rate income rate
Long-term
capital gains 10% 20%
The tax status of your dividends and distributions will be detailed in your
annual tax statement from the fund.
Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences.
Taxes on transactions
Any sale or exchange of fund shares, including through the checkwriting
privilege, may generate a tax liability.
The table at right also can provide a guide for your potential tax liability
when selling or exchanging fund shares. "Short-term capital gains" applies to
fund shares sold or exchanged up to 12 months after buying them. "Long-term
capital gains" applies to shares sold or exchanged after 12 months.
Your Investment
[Page 11]
Services for fund Investors
Automatic services
Buying or selling shares automatically is easy with the services described
below. With each service, you select a schedule and amount, subject to
certain restrictions. You can set up most of these services with your
application or by calling 1-800-645-6561.
For investing
Dreyfus Automatic For making automatic investments
Asset Builder((reg.tm) from a designated bank account.
Dreyfus Payroll For making automatic investments
Savings Plan through a payroll deduction.
Dreyfus Government For making automatic investments
Direct Deposit from your federal employment,
Privilege Social Security or other regular
federal government check.
Dreyfus Dividend For automatically reinvesting the
Sweep dividends and distributions from
one Dreyfus fund into another
(not available for IRAs).
For exchanging shares
Dreyfus Auto- For making regular exchanges
Exchange Privilege from one Dreyfus fund into
another.
For selling shares
Dreyfus Automatic For making regular withdrawals
Withdrawal Plan from most Dreyfus funds.
Dreyfus Financial Centers
Through a nationwide network of Dreyfus Financial Centers, Dreyfus offers a
full array of investment services and products. This includes information on
mutual funds, brokerage services, tax-advantaged products and retirement
planning.
Experienced financial consultants can help you make informed choices and
provide you with personalized attention in handling account transactions. The
Financial Centers also offer informative seminars and events. To find the
Financial Center nearest you, call 1-800-499-3327.
[Page 12]
Checkwriting privilege
You may write redemption checks against your account in amounts of $500 or
more. These checks are free; however, a fee will be charged if you request a
stop payment or if the transfer agent cannot honor a redemption check due to
insufficient funds or another valid reason. Please do not postdate your
checks or use them to close your account.
Exchange privilege
You can exchange $500 or more from one Dreyfus fund into another. You can
request your exchange in writing or by phone. Be sure to read the current
prospectus for any fund into which you are exchanging. Any new account
established through an exchange will have the same privileges as your
original account (as long as they are available). There is currently no fee
for exchanges, although you may be charged a sales load when exchanging into
any fund that has one.
Dreyfus TeleTransfer privilege
To move money between your bank account and your Dreyfus fund account with a
phone call, use the Dreyfus TeleTransfer privilege. You can set up
TeleTransfer on your account by providing bank account information and
following the instructions on your application.
24-hour automated account access
You can easily manage your Dreyfus accounts, check your account balances,
transfer money between your Dreyfus funds, get price and yield information
and much more - when it's convenient for you.
Third-party investments
If you invest through a third party (rather than directly with Dreyfus), the
policies and fees may be different than those described here. Banks, brokers,
financial advisers and financial supermarkets may charge transaction fees and
may set different minimum investments or limitations on buying or selling
shares. Consult a representative of your plan or financial institution if in
doubt.
Your Investment
[Page 13]
Instructions for regular accounts
TO OPEN AN ACCOUNT
In Writing
Complete the application.
Mail your application and a check to:
The Dreyfus Family of Funds
P.O. Box 9387, Providence, RI 02940-9387
TO ADD TO AN ACCOUNT
Fill out an investment slip, and write your account number on your check.
Mail the slip and the check to:
The Dreyfus Family of Funds
P.O. Box 105, Newark, NJ 07101-0105
By Telephone
Wire Have your bank send your investment to The Bank of New York, with these
instructions:
* ABA# 021000018
* DDA# 8900052384
* the fund name
* your Social Security or tax ID number
* name(s) of investor(s)
Call us to obtain an account number. Return your application.
Wire Have your bank send your investment to The Bank of New York, with these
instructions:
* ABA# 021000018
* DDA# 8900052384
* the fund name
* your account number
* name(s) of investor(s)
Electronic check Same as wire, but insert "1111" before your account number.
TeleTransfer Request TeleTransfer on your application. Call us to request
your transaction.
Automatically
With an initial investment Indicate on your application which automatic
service(s) you want. Return your application with your investment.
Without any initial investment Check the Dreyfus Step Program option on
your application. Return your application, then complete the additional
materials when they are sent to you.
All services Call us to request a form to add any automatic investing
service (see "Services for Fund Investors"). Complete and return the forms
along with any other required materials.
Via the Internet
Computer Visit the Dreyfus Web site http://www.dreyfus.com and follow the
instructions to download an account application.
[Page 14]
TO SELL SHARES
Write a redemption check or write a letter of instruction that includes:
* your name(s) and signature(s)
* your account number
* the fund name
* the dollar amount you want to sell
* how and where to send the proceeds
Obtain a signature guarantee or other documentation, if required (see
"Account Policies - Selling Shares").
Mail your request to:
The Dreyfus Family of Funds
P.O. Box 9671, Providence, RI 02940-9671
Wire Be sure the fund has your bank account information on file. Call us to
request your transaction. Proceeds will be wired to your bank.
TeleTransfer Be sure the fund has your bank account information on file.
Call us to request your transaction. Proceeds will be sent to your
bank by electronic check.
Check Call us to request your transaction.
A check will be sent to the address of record.
Dreyfus Automatic Withdrawal Plan Call us to request a form to add the plan.
Complete the form, specifying the amount and frequency of withdrawals you
would like. Be sure to maintain an account balance of $5,000 or more.
To reach Dreyfus, call toll free in the U.S.
1-800-645-6561
Outside the U.S. 516-794-5452
Make checks payable to:
The Dreyfus Family of Funds
You also can deliver requests to any Dreyfus Financial Center. Because
processing time may vary, please ask the representative when your account will
be credited or debited.
Concepts to understand
Wire transfer: for transferring money from one financial institution to
another. Wiring is the fastest way to move money, although your bank
may charge a fee to send or receive wire transfers. Wire redemptions from the
fund are subject to a $1,000 minimum.
Electronic check: for transferring money out of a bank account. Your
transaction is entered electronically, but may take up to eight business days
to clear. Electronic checks usually are available without a fee at all
Automated Clearing House (ACH) banks.
Your Investment
[Page 15]
NOTES
[Page]
[Page]
For More Information
Dreyfus California
Tax Exempt Bond Fund, Inc.
SEC file number: 811-3757
More information on this fund is
available free upon request, including the following:
Annual/Semiannual Report
Describes the fund's performance,
lists portfolio holdings and contains a letter from the
fund's manager discussing recent market conditions,
economic trends and fund strategies that significantly
affected the fund's performance during the last fiscal
year.
Statement of Additional Information (SAI)
Provides more details about the
fund and its policies. A current SAI is on file with
the Securities and Exchange Commission (SEC) and is
incorporated by reference (is legally considered part
of this prospectus).
To obtain information:
By telephone
Call 1-800-645-6561
By mail Write to:
The Dreyfus Family of Funds
144 Glenn Curtiss Boulevard
Uniondale, NY 11556-0144
By E-mail Send your request to [email protected]
On the Internet Text-only versions of fund documents can be viewed online or
downloaded from:
SEC
http://www.sec.gov
Dreyfus
http://www.dreyfus.com
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC (phone 1-800-SEC-0330) or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, DC
20549-6009.
Copy Rights 1999 Dreyfus Service Corporation 928P1099
[Page]
______________________________________________________________________________
DREYFUS CALIFORNIA TAX EXEMPT BOND FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
______________________________________________________________________________
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
Dreyfus California Tax Exempt Bond Fund, Inc. (the "Fund"), dated October 1,
1999, as it may be revised from time to time. To obtain a copy of the Fund's
Prospectus, please write to the Fund at 144 Glenn Curtiss Boulevard,
Uniondale, New York 11556-0144, or call one of the following numbers:
Call Toll Free 1-800-645-6561
In New York City -- Call 1-718-895-1206
Outside the U.S -- Call 516-794-5452
The Fund's most recent Annual Report and Semi-Annual Report to
Shareholders are separate documents supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing in the Annual Report are
incorporated by reference into this Statement of Additional Information.
TABLE OF CONTENTS
Page
Description of the Fund B-2
Management of the Fund B-15
Management Arrangements B-20
How to Buy Shares B-23
Shareholder Services Plan B-24
How To Redeem Shares B-25
Shareholder Services B-27
Determination of Net Asset Value B-30
Dividends, Distributions and Taxes B-31
Portfolio Transactions B-34
Performance Information B-35
Information About the Fund B-36
Counsel and Independent Auditors B-37
Appendix A B-38
Appendix B B-60
DESCRIPTION OF THE FUND
The Fund is a Maryland corporation incorporated on May 3, 1983. The
Fund is an open-end management investment company, known as a municipal bond
fund.
The Dreyfus Corporation (the "Manager") serves as the Fund's investment
adviser.
Premier Mutual Fund Services, Inc. (the "Distributor") is the
distributor of the Fund's shares.
Certain Portfolio Securities
The following information supplements and should be read in conjunction
with the Fund's Prospectus.
Municipal Obligations. The Fund invests primarily in the debt
securities of the State of California, its political subdivisions,
authorities and corporations, the interest from which, in the opinion of
bond counsel to the issuer, is exempt from Federal and State of California
personal income taxes (collectively, "California Municipal Obligations").
To the extent acceptable California Municipal Obligations are at any time
unavailable for investment by the Fund, the Fund will invest temporarily in
other debt securities the interest from which is, in the opinion of bond
counsel to the issuer, exempt from Federal, but not State of California,
income tax. The Fund will invest at least 80% of the value of its net
assets (except when maintaining a temporary defensive position) in Municipal
Obligations. Municipal Obligations are debt obligations issued by states,
territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities,
or multistate agencies or authorities, the interest from which, in the
opinion of bond counsel to the issuer, is exempt from Federal income tax.
Municipal Obligations generally include debt obligations issued to obtain
funds for various public purposes as well as certain industrial development
bonds issued by or on behalf of public authorities. Municipal Obligations
are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. Revenue
bonds are payable from the revenue derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise
or other specific revenue source, but not from the general taxing power.
Tax exempt industrial development bonds, in most cases, are revenue bonds
that do not carry the pledge of the credit of the issuing municipality, but
generally are guaranteed by the corporate entity on whose behalf they are
issued. Notes are short-term instruments which are obligations of the
issuing municipalities or agencies and are sold in anticipation of a bond
sale, collection of taxes or receipt of other revenues. Municipal
Obligations include municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment issued by
municipalities. Municipal Obligations bear fixed, floating or variable
rates of interest, which are determined in some instances by formulas under
which the Municipal Obligation's interest rate will change directly or
inversely to changes in interest rates or an index, or multiples thereof, in
many cases subject to a maximum and minimum. Certain Municipal Obligations
are subject to redemption at a date earlier than their stated maturity
pursuant to call options, which may be separated from the related Municipal
Obligation and purchased and sold separately.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a
particular offering, maturity of the obligation and rating of the issue.
Certain Tax Exempt Obligations. The Fund may purchase floating and
variable rate demand notes and bonds, which are tax exempt obligations
ordinarily having stated maturities in excess of one year, but which permit
the holder to demand payment of principal at any time or at specified
intervals. Variable rate demand notes include master demand notes which are
obligations that permit the Fund to invest fluctuating amounts, at varying
rates of interest, pursuant to direct arrangements between the Fund, as
lender, and the borrower. These obligations permit daily changes in the
amount borrowed. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Each obligation purchased by the Fund
will meet the quality criteria established for the purchase of Municipal
Obligations.
Tax Exempt Participation Interests. The Fund may purchase from
financial institutions participation interests in Municipal Obligations
(such as industrial development bonds and municipal lease/purchase
agreements). A participation interest gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation.
These instruments may have fixed, floating or variable rates of interest.
If the participation interest is unrated, it will be backed by an
irrevocable letter of credit or guarantee of a bank that the Fund's Board
has determined meets prescribed quality standards for banks, or the payment
obligation otherwise will be collateralized by U.S. Government securities.
For certain participation interests, the Fund will have the right to demand
payment, on not more than seven days' notice, for all or any part of the
Fund's participation interest in the Municipal Obligation, plus accrued
interest. As to these instruments, the Fund intends to exercise its right
to demand payment only upon a default under the terms of the Municipal
Obligation, as needed to provide liquidity to meet redemptions, or to
maintain or improve the quality of its investment portfolio.
Municipal lease obligations or installment purchase contract
obligations (collectively, "lease obligations") have special risks not
ordinarily associated with Municipal Obligations. Although lease
obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation
ordinarily is backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such
purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult. The staff of the Securities and
Exchange Commission currently considers certain lease obligations to be
illiquid. Determination as to the liquidity of such securities is made in
accordance with guidelines established by the Fund's Board. Pursuant to
such guidelines, the Board has directed the Manager to monitor carefully the
Fund's investment in such securities with particular regard to: (1) the
frequency of trades and quotes for the lease obligation; (2) the number of
dealers willing to purchase or sell the lease obligation and the number of
other potential buyers; (3) the willingness of dealers to undertake to make
a market in the lease obligation; (4) the nature of the marketplace trades,
including the time needed to dispose of the lease obligation, the method of
soliciting offers and the mechanics of transfer; and (5) such other factors
concerning the trading market for the lease obligation as the Manager may
deem relevant. In addition, in evaluating the liquidity and credit quality
of a lease obligation that is unrated, the Fund's Board has directed the
Manager to consider: (a) whether the lease can be canceled; (b) what
assurance there is that the assets represented by the lease can be sold; (c)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of nonappropriation"); (e)
the legal recourse in the event of failure to appropriate; and (f) such
other factors concerning credit quality as the Manager may deem relevant.
The Fund will not invest more than 15% of the value of its net assets in
lease obligations that are illiquid and in other illiquid securities. See
"Investment Restriction No. 13" below.
Tender Option Bonds. The Fund may purchase tender option bonds. A
tender option bond is a Municipal Obligation (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing
interest at a fixed rate substantially higher than prevailing short-term tax
exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to
which such institution grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the
face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between
the Municipal Obligation's fixed coupon rate and the rate, as determined by
a remarketing or similar agent at or near the commencement of such period,
that would cause the securities, coupled with the tender option, to trade at
par on the date of such determination. Thus, after payment of this fee, the
security holder effectively holds a demand obligation that bears interest at
the prevailing short-term tax exempt rate. The Manager, on behalf of the
Fund, will consider on an ongoing basis the creditworthiness of the issuer
of the underlying Municipal Obligation, of any custodian and of the third
party provider of the tender option. In certain instances and for certain
tender option bonds, the option may be terminable in the event of a default
in payment of principal or interest on the underlying Municipal Obligation
and for other reasons.
The Fund will purchase tender option bonds only when it is satisfied
that the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax exempt status of the
underlying Municipal Obligations and that payment of any tender fees will
not have the effect of creating taxable income for the Fund. Based on the
tender option bond agreement, the Fund expects to be able to value the
tender option bond at par; however, the value of the instrument will be
monitored to assure that it is valued at fair value.
Custodial Receipts. The Fund may purchase custodial receipts
representing the right to receive certain future principal and interest
payments on Municipal Obligations which underlie the custodial receipts. A
number of different arrangements are possible. In a typical custodial
receipt arrangement, an issuer or a third party owner of Municipal
Obligations deposits such obligations with a custodian in exchange for two
classes of custodial receipts. The two classes have different
characteristics, but, in each case, payments on the two classes are based on
payments received on the underlying Municipal Obligations. One class has
the characteristics of a typical auction rate security, where at specified
intervals its interest rate is adjusted, and ownership changes, based on an
auction mechanism. This class's interest rate generally is expected to be
below the coupon rate of the underlying Municipal Obligations and generally
is at a level comparable to that of a Municipal Obligation of similar
quality and having a maturity equal to the period between interest rate
adjustments. The second class bears interest at a rate that exceeds the
interest rate typically borne by a security of comparable quality and
maturity; this rate also is adjusted, but in this case inversely to changes
in the rate of interest of the first class. In no event will the aggregate
interest paid with respect to the two classes exceed the interest paid by
the underlying Municipal Obligations. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Obligation of comparable quality and maturity and their purchase
by the Fund should increase the volatility of its net asset value and, thus,
its price per share. These custodial receipts are sold in private
placements. The Fund also may purchase directly from issuers, and not in a
private placement, Municipal Obligations having characteristics similar to
custodial receipts. These securities may be issued as part of a multi-class
offering and the interest rate on certain classes may be subject to a cap or
floor.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, the Fund obligates a broker, dealer or bank to repurchase, at
the Fund's option, specified securities at a specified price and, in this
respect, stand-by commitments are comparable to put options. The exercise
of a stand-by commitment, therefore, is subject to the ability of the seller
to make payment on demand. The Fund will acquire stand-by commitments
solely to facilitate its portfolio liquidity and does not intend to exercise
its rights thereunder for trading purposes. The Fund may pay for stand-by
commitments if such action is deemed necessary, thus increasing to a degree
the cost of the underlying Municipal Obligation and similarly decreasing
such security's yield to investors. Gains realized in connection with stand-
by commitments will be taxable. The Fund also may acquire call options on
specific Municipal Obligations. The Fund generally would purchase these
call options to protect the Fund from the issuer of the related Municipal
Obligation redeeming, or other holder of the call option from calling away,
the Municipal Obligation before maturity. The sale by the Fund of a call
option that it owns on a specific Municipal Obligation could result in the
receipt of taxable income by the Fund.
Ratings of Municipal Obligations. The Fund will invest at least 80% of
the value of its net assets in Municipal Obligations which, in the case of
bonds, are rated no lower than Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P") or Fitch IBCA,
Inc. ("Fitch" and, together with Moody's and S&P, the "Rating Agencies").
The Fund may invest up to 20% of the value of its net assets in Municipal
Obligations which, in the case of bonds, are rated lower than Baa by Moody's
and BBB by S&P and Fitch and as low as the lowest rating assigned by the
Rating Agencies, but it currently is the intention of the Fund that this
portion of the Fund's portfolio be invested primarily in Municipal
Obligations rated no lower than Baa by Moody's or BBB by S&P or Fitch. The
Fund may invest in short-term Municipal Obligations which are rated in the
two highest rating categories by a Rating Agency. The Fund also may invest
in securities which, while not rated, are determined by the Manager to be of
comparable quality to the rated securities in which the Fund may invest; for
purposes of the 80% requirement described in this paragraph, such unrated
securities will be considered to have the rating so determined.
Percentage
Fitch or Moody's or S&P of Value
_____ _______ ___ __________
AAA Aaa AAA 65.9%
AA Aa AA 15.4%
A A A 10.2%
BBB Baa BBB 2.6%
F-1 VMIG SP-1/A-1
1/MIG 1/P-1 4.6%(1)
Not Rated Not Rated Not Rated
1.3%(2)
100.0%
=========
_______________________________
1 Included in these categories are tax exempt notes rated within the two
highest grades by a Rating Agency. These securities, together with
Municipal Obligations rated Baa or better by Moody's or BBB or better
by S&P or Fitch, are taken into account at the time of a purchase for
purposes of determining that the Fund's portfolio meets the 80% minimum
quality standard discussed above.
2 Included in the Not Rated category are securities comprising 1.3% of
the Fund's market value which, while not rated, have been determined by
the Manager to be of comparable quality to securities rated Baa/BBB.
Subsequent to its purchase by the Fund, an issue of rated Municipal
Obligations may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. Neither event will require the
sale of such Municipal Obligations by the Fund, but the Manager will
consider such event in determining whether the Fund should continue to hold
the Municipal Obligations. To the extent that the ratings given by the
Rating Agencies for Municipal Obligations may change as a result of changes
in such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for its investments in accordance with the
investment policies contained in the Prospectus and this Statement of
Additional Information. The ratings of the Rating Agencies represent their
opinions as to the quality of the Municipal Obligations which they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these
ratings may be an initial criterion for selection of portfolio investments,
the Manager also will evaluate these securities and the creditworthiness of
the issuers of such securities.
Zero Coupon Securities. The Fund may invest in zero coupon securities
which are debt securities issued or sold at a discount from their face value
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount
of the discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, liquidity of the security and
perceived credit quality of the issuer. Zero coupon securities also may
take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to a greater degree to changes in interest rates than non-zero
coupon securities having similar maturities and credit qualities.
Illiquid Securities. The Fund may invest up to 15% of the value of its
net assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with the Fund's investment
objective. These securities may include securities that are not readily
marketable, such as securities that are subject to legal or contractual
restrictions on resale, and repurchase agreements providing for settlement
in more than seven days after notice. As to these securities, the Fund is
subject to a risk that should the Fund desire to sell them when a ready
buyer is not available at a price the Fund deems representative of their
value, the value of the Fund's net assets could be adversely affected.
Taxable Investments. From time to time, on a temporary basis other
than for temporary defensive purposes (but not to exceed 20% of the value of
the Fund's net assets) or for temporary defensive purposes, the Fund may
invest in taxable short-term investments ("Taxable Investments") consisting
of: notes of issuers having, at the time of purchase, a quality rating
within the two highest grades of a Rating Agency; obligations of the U.S.
Government, its agencies or instrumentalities; commercial paper rated not
lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch; certificates of
deposit of U.S. domestic banks, including foreign branches of domestic
banks, with assets of $1 billion or more; time deposits; bankers'
acceptances and other short-term bank obligations; and repurchase agreements
in respect of any of the foregoing. Dividends paid by the Fund that are
attributable to income earned by the Fund from Taxable Investments will be
taxable to investors. Except for temporary defensive purposes, at no time
will more than 20% of the value of the Fund's net assets be invested in
Taxable Investments and Municipal Obligations the interest from which gives
rise to a preference item for the purpose of the alternate minimum tax.
When the Fund has adopted a temporary defensive position, including when
acceptable California Municipal Obligations are unavailable for investment
by the Fund, in excess of 35% of the Fund's assets may be invested in
securities that are not exempt from California personal income taxes. Under
normal market conditions, the Fund anticipates that not more than 5% of the
value of its total assets will be invested in any one category of Taxable
Investments.
Investment Techniques
The following information supplements and should be read in conjunction
with the Fund's Prospectus. The Fund's use of certain of the investment
techniques described below may give rise to taxable income.
Borrowing Money. The Fund is permitted to borrow to the extent
permitted under the Investment Company Act of 1940, as amended (the "1940
Act"), which permits an investment company to borrow in an amount up to 33-
1/3% of the value of its total assets. The Fund currently intends to borrow
money only for temporary or emergency (not leveraging) purposes, in an
amount up to 15% of the value of its total assets (including the amount
borrowed) valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) at the time the borrowing is made. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
Lending Portfolio Securities. The Fund may lend securities from its
portfolio to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. The Fund continues to
be entitled to payments in amounts equal to the interest or other
distributions payable on the loaned securities which affords the Fund an
opportunity to earn interest on the amount of the loan and on the loaned
securities' collateral. Loans of portfolio securities may not exceed 33-
1/3% of the value of the Fund's total assets, and the Fund will receive
collateral consisting of cash, U.S. Government securities or irrevocable
letters of credit which will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. Such
loans are terminable by the Fund at any time upon specified notice. The
Fund might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with the
Fund. In connection with its securities lending transactions, the Fund may
return to the borrower or a third party which is unaffiliated with the Fund,
and which is acting as a "placing broker," a part of the interest earned
from the investment of collateral received for securities loaned.
Derivatives. The Fund may invest in, or enter into, derivatives, such
as options and futures, for a variety of reasons, including to hedge certain
market risks, to provide a substitute for purchasing or selling particular
securities or to increase potential income gain. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest
than "traditional" securities would.
Derivatives can be volatile and involve various types and degrees of
risk, depending upon the characteristics of the particular derivative and
the portfolio as a whole. Derivatives permit the Fund to increase or
decrease the level of risk, or change the character of the risk, to which
its portfolio is exposed in much the same way as the Fund can increase or
decrease the level of risk, or change the character of the risk, of its
portfolio by making investments in specific securities. However,
derivatives may entail investment exposures that are greater than their cost
would suggest, meaning that a small investment in derivatives could have a
large potential impact on the Fund's performance.
If the Fund invests in derivatives at inopportune times or judges
market conditions incorrectly, such investments may lower the Fund's return
or result in a loss. The Fund also could experience losses if its
derivatives were poorly correlated with its other investments, or if the
Fund were unable to liquidate its position because of an illiquid secondary
market. The market for many derivatives is, or suddenly can become,
illiquid. Changes in liquidity may result in significant, rapid and
unpredictable changes in the prices for derivatives.
Although the Fund will not be a commodity pool, certain derivatives
subject the Fund to the rules of the Commodity Futures Trading Commission
which limit the extent to which the Fund can invest in such derivatives.
The Fund may invest in futures contracts and options with respect thereto
for hedging purposes without limit. However, the Fund may not invest in
such contracts and options for other purposes if the sum of the amount of
initial margin deposits and premiums paid for unexpired options with respect
to such contracts, other than for bona fide hedging purposes, exceeds 5% of
the liquidation value of the Fund's assets, after taking into account
unrealized profits and unrealized losses on such contracts and options;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
Derivatives may be purchased on established exchanges or through
privately negotiated transactions referred to as over-the-counter
derivatives. Exchange-traded derivatives generally are guaranteed by the
clearing agency which is the issuer or counterparty to such derivatives.
This guarantee usually is supported by a daily variation margin system
operated by the clearing agency in order to reduce overall credit risk. As
a result, unless the clearing agency defaults, there is relatively little
counterparty credit risk associated with derivatives purchased on an
exchange. By contrast, no clearing agency guarantees over-the-counter
derivatives. Therefore, each party to an over-the-counter derivative bears
the risk that the counterparty will default. Accordingly, the Manager will
consider the creditworthiness of counterparties to over-the-counter
derivatives in the same manner as it would review the credit quality of a
security to be purchased by the Fund. Over-the-counter derivatives are less
liquid than exchange-traded derivatives since the other party to the
transaction may be the only investor with sufficient understanding of the
derivative to be interested in bidding for it.
Futures Transactions--In General. The Fund may enter into futures contracts
in U.S. domestic markets, such as the Chicago Board of Trade. Engaging in
these transactions involves risk of loss to the Fund which could adversely
affect the value of the Fund's net assets. Although the Fund intends to
purchase or sell futures contracts only if there is an active market for
such contracts, no assurance can be given that a liquid market will exist
for any particular contract at any particular time. Many futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during
the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and potentially
subjecting the Fund to substantial losses.
Successful use of futures by the Fund also is subject to the Manager's
ability to predict correctly movements in the direction of the relevant
market, and, to the extent the transaction is entered into for hedging
purposes, to ascertain the appropriate correlation between the securities
being hedged and the price movements of the futures contract. For example,
if the Fund uses futures to hedge against the possibility of a decline in
the market value of securities held in its portfolio and the prices of such
securities instead increase, the Fund will lose part or all of the benefit
of the increased value of securities which it has hedged because it will
have offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities
and Exchange Commission, the Fund may be required to segregate permissible
liquid assets to cover its obligations relating to its transactions in
derivatives. To maintain this required cover, the Fund may have to sell
portfolio securities at disadvantageous prices or times since it may not be
possible to liquidate a derivative position at a reasonable price. In
addition, the segregation of such assets will have the effect of limiting
the Fund's ability otherwise to invest those assets.
Specific Futures Transactions. The Fund may purchase and sell interest rate
futures contracts. An interest rate future obligates the Fund to purchase
or sell an amount of a specific debt security at a future date at a specific
price.
Options--In General. The Fund may invest up to 5% of its assets,
represented by the premium paid, in the purchase of call and put options
with respect to specific securities or futures contracts. The Fund may
write (i.e., sell) covered call and put option contracts to the extent of
20% of the value of its net assets at the time such option contracts are
written. A call option gives the purchaser of the option the right to buy,
and obligates the writer to sell, the underlying security or securities at
the exercise price at any time during the option period, or at a specific
date. Conversely, a put option gives the purchaser of the option the right
to sell, and obligates the writer to buy, the underlying security or
securities at the exercise price at any time during the option period, or at
a specific date.
A covered call option written by the Fund is a call option with respect
to which the Fund owns the underlying security or otherwise covers the
transaction by segregating permissible liquid assets. A put option written
by the Fund is covered when, among other things, the Fund segregates
permissible liquid assets having a value equal to or greater than the
exercise price of the option to fulfill the obligation undertaken. The
principal reason for writing covered call and put options is to realize,
through the receipt of premiums, a greater return than would be realized on
the underlying securities alone. The Fund receives a premium from writing
covered call or put options which it retains whether or not the option is
exercised.
There is no assurance that sufficient trading interest to create a
liquid secondary market on a securities exchange will exist for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may
cease to exist for a variety of reasons. In the past, for example, higher
than anticipated trading activity or order flow, or other unforeseen events,
at times have rendered certain of the clearing facilities inadequate and
resulted in the institution of special procedures, such as trading
rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible
to effect closing transactions in particular options. If, as a covered call
option writer, the Fund is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Successful use by the Fund of options will be subject to the Manager's
ability to predict correctly movements in interest rates. To the extent the
Manager's predictions are incorrect, the Fund may incur losses.
Future Developments. The Fund may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts
and any other derivatives which are not presently contemplated for use by
the Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Fund's investment
objective and legally permissible for the Fund. Before entering into such
transactions or making any such investment, the Fund will provide
appropriate disclosure in its Prospectus or Statement of Additional
Information.
Forward Commitments. The Fund may purchase Municipal Obligations and
other securities on a forward commitment or when-issued basis, which means
that delivery and payment take place a number of days after the date of the
commitment to purchase. The payment obligation and the interest rate
receivable on a forward commitment or when-issued security are fixed when
the Fund enters into the commitment, but the Fund does not make payment
until it receives delivery from the counterparty. The Fund will commit to
purchase such securities only with the intention of actually acquiring the
securities, but the Fund may sell these securities before the settlement
date if it is deemed advisable. The Fund will segregate permissible liquid
assets at least equal at all times to the amount of the Fund's purchase
commitments.
Municipal Obligations and other securities purchased on a forward
commitment or when-issued basis are subject to changes in value (generally
changing in the same way, i.e. appreciating when interest rates decline and
depreciating when interest rates rise) based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Securities purchased on a forward commitment or
when-issued basis may expose the Fund to risks because they may experience
such fluctuations prior to their actual delivery. Purchasing securities on
a forward commitment or when-issued basis can involve the additional risk
that the yield available in the market when the delivery takes place
actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the
Fund is fully or almost fully invested may result in greater potential
fluctuation in the value of the Fund's net assets and its net asset value
per share.
Investment Considerations and Risks
Investing in Municipal Obligations. The Fund may invest more than 25%
of the value of its total assets in Municipal Obligations which are related
in such a way that an economic, business or political development or change
affecting one such security also would affect the other securities; for
example, securities the interest upon which is paid from revenues of similar
types of projects. As a result, the Fund may be subject to greater risk as
compared to a fund that does not follow this practice.
Certain municipal lease/purchase obligations in which the Fund may
invest may contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease/purchase obligations are secured by the leased
property, disposition of the leased property in the event of foreclosure
might prove difficult. In evaluating the credit quality of a municipal
lease/purchase obligation that is unrated, the Manager will consider, on an
ongoing basis, a number of factors including the likelihood that the issuing
municipality will discontinue appropriating funding for the leased property.
Certain provisions in the Internal Revenue Code of 1986, as amended
(the "Code"), relating to the issuance of Municipal Obligations may reduce
the volume of Municipal Obligations qualifying for Federal tax exemption.
One effect of these provisions could be to increase the cost of the
Municipal Obligations available for purchase by the Fund and thus reduce
available yield. Shareholders should consult their tax advisers concerning
the effect of these provisions on an investment in the Fund. Proposals that
may restrict or eliminate the income tax exemption for interest on Municipal
Obligations may be introduced in the future. If any such proposal were
enacted that would reduce the availability of Municipal Obligations for
investment by the Fund so as to adversely affect Fund shareholders, the Fund
would reevaluate its investment objective and policies and submit possible
changes in the Fund's structure to shareholders for their consideration. If
legislation were enacted that would treat a type of Municipal Obligation as
taxable, the Fund would treat such security as a permissible Taxable
Investment within the applicable limits set forth herein.
Investing in California Municipal Obligations. You should review the
information in "Appendix A," which provides a brief summary of special
investment considerations and risk factors relating to investing in
California Municipal Obligations.
Lower Rated Bonds. The Fund may invest up to 20% of the value of its
net assets in higher yielding (and, therefore, higher risk) debt securities
such as those rated below investment grade by the Rating Agencies (commonly
known as junk bonds). They may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated Municipal Obligations. See "Appendix B" for a
general description of the Rating Agencies' ratings of Municipal
Obligations. Although ratings may be useful in evaluating the safety of
interest and principal payments, they do not evaluate the market value risk
of these bonds. The Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of an issuer.
You should be aware that the market values of many of these bonds tend
to be more sensitive to economic conditions than are higher rated securities
and will fluctuate over time. These bonds generally are considered by the
Rating Agencies to be, on balance, predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of
the obligation and generally will involve more credit risk than securities
in the higher rating categories.
Because there is no established retail secondary market for many of
these securities, the Fund anticipates that such securities could be sold
only to a limited number of dealers or institutional investors. To the
extent a secondary trading market for these bonds does exist, it generally
is not as liquid as the secondary market for higher rated securities. The
lack of a liquid secondary market may have an adverse impact on market price
and yield and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the
issuer. The lack of a liquid secondary market for certain securities also
may make it more difficult for the Fund to obtain accurate market quotations
for purposes of valuing the Fund's portfolio and calculating its net asset
value. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of these
securities. In such cases, judgment may play a greater role in valuation
because less reliable objective data may be available.
These bonds may be particularly susceptible to economic downturns. It
is likely that any economic recession would disrupt severely the market for
such securities and may have an adverse impact on the value of such
securities and could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon which would increase
the incidence of default for such securities.
The Fund may acquire these bonds during an initial offering. Such
securities may involve special risks because they are new issues. The Fund
has no arrangement with any person concerning the acquisition of such
securities, and the Manager will review carefully the credit and other
characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply
to lower rated zero coupon bonds and pay-in-kind bonds, in which the Fund
may invest up to 5% of its total assets. Zero coupon bonds and pay-in-kind
bonds carry an additional risk in that, unlike bonds which pay interest
throughout the period to maturity, the Fund will realize no cash until the
cash payment date unless a portion of such securities are sold and, if the
issuer defaults, the Fund may obtain no return at all on its investment.
See "Dividends, Distributions and Taxes."
Zero Coupon Securities. The Fund may invest in zero coupon securities
and pay-in-kind bonds (bonds which pay interest through the issuance of
additional bonds). Federal income tax law requires the holder of a zero
coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid
liability for Federal income taxes, the Fund may be required to distribute
such income accrued with respect to these securities and may have to dispose
of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
Simultaneous Investments. Investment decisions for the Fund are made
independently from those of other investment companies advised by the
Manager. If, however, such other investment companies desire to invest in,
or dispose of, the same securities as the Fund, available investments or
opportunities for sales will be allocated equitably to each investment
company. In some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by the Fund or the price paid or
received by the Fund.
Investment Restrictions
The Fund's investment objective is a fundamental policy, which cannot
be changed without approval by the holders of a majority (as defined in the
1940 Act) of the Fund's outstanding voting shares. In addition, the Fund
has adopted investment restrictions numbered 1 through 7 as fundamental
policies. Investment restrictions numbered 8 through 12 are not fundamental
policies and may be changed by a vote of a majority of the Fund's Board
members at any time. The Fund may not:
1. Invest more than 25% of its assets in the securities of issuers in
any single industry; provided that there shall be no limitation on the
purchase of Municipal Obligations and, for temporary defensive purposes,
securities issued by banks and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. Borrow money, except to the extent permitted under the 1940 Act
(which currently limits borrowings to no more than 33-1/3% of the Fund's
total assets). For purposes of this investment restriction, the entry into
options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indices shall not constitute
borrowing.
3. Purchase or sell real estate, commodities or commodity contracts,
or oil and gas interests, but this shall not prevent the Fund from investing
in Municipal Obligations secured by real estate or interests therein, or
prevent the Fund from purchasing and selling options, forward contracts,
futures contracts, including those relating to indices, and options on
futures contracts or indices.
4. Underwrite the securities of other issuers, except that the Fund
may bid separately or as part of a group for the purchase of Municipal
Obligations directly from an issuer for its own portfolio to take advantage
of the lower purchase price available, and except to the extent the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, by
virtue of disposing of portfolio securities.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements; however, the Fund may
lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange
Commission and the Fund's Board.
6. Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act), except to the extent that the activities permitted
in Investment Restrictions numbered 2, 3 and 10 may be deemed to give rise
to a senior security.
7. Sell securities short or purchase securities on margin, but the
Fund may make margin deposits in connection with transactions in options,
forward contracts, futures contracts, including those relating to indices,
and options on futures contracts or indices.
8. Purchase securities other than Municipal Obligations and Taxable
Investments and those arising out of transactions in futures and options or
as otherwise provided in the Fund's Prospectus.
9. Invest in securities of other investment companies, except to the
extent permitted under the 1940 Act.
10. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to the extent necessary to secure borrowings for temporary or
emergency purposes and to the extent related to the deposit of assets in
escrow in connection with the purchase of securities on a when-issued or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to options, futures contracts, including those
related to indices, and options on futures contracts or indices.
11. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid
(which securities could include participation interests (including municipal
lease/purchase agreements) that are not subject to the demand feature
described in the Fund's Prospectus, floating and variable rate demand
obligations as to which the Fund cannot exercise the demand feature
described in the Fund's Prospectus on less than seven days' notice and as to
which there is no secondary market) if, in the aggregate, more than 15% of
its net assets would be so invested.
12. Invest in companies for the purpose of exercising control.
For purposes of Investment Restriction No. 1, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together
as an "industry."
If a percentage restriction is adhered to at the time of investment, a
later increase in percentage resulting from a change in values or assets
will not constitute a violation of such restriction.
MANAGEMENT OF THE FUND
The Fund's Board is responsible for the management and supervision of
the Fund. The Board approves all significant agreements between the Fund
and those companies that furnish services to the Fund. These companies are
as follows:
The Dreyfus Corporation Investment Adviser
Premier Mutual Fund Services, Inc. Distributor
Dreyfus Transfer, Inc. Transfer Agent
The Bank of New York Custodian
Board members and officers of the Fund, together with information as to
their principal business occupations during at least the last five years,
are shown below.
Board Members of the Fund
JOSEPH S. DiMARTINO, Chairman of the Board. Since January 1995, Chairman of
the Board of various funds in the Dreyfus Family of Funds. He also is
a director of The Noel Group, Inc., a venture capital company (for
which, from February 1995 until November 1997, he was Chairman of the
Board), The Muscular Dystrophy Association, HealthPlan Services
Corporation, a provider of marketing, administrative and risk
management services to health and other benefit programs, Carlyle
Industries, Inc. (formerly, Belding Heminway Company, Inc.), a button
packager and distributor, Career Blazers, Inc. (formerly, Staffing
Resources, Inc.), a temporary placement agency, and Century Business
Services, Inc. (formerly, International Alliance Services, Inc.), a
provider of various outsourcing functions for small and medium sized
companies. For more than five years prior to January 1995, he was
President, a director and, until August 1994, Chief Operating Officer
of the Manager and Executive Vice President and a director of Dreyfus
Service Corporation, a wholly-owned subsidiary of the Manager and,
until August 24, 1994, the Fund's distributor. From August 1994 until
December 31, 1994, he was a director of Mellon Bank Corporation. He is
55 years old and his address is 200 Park Avenue, New York, New York
10166.
DAVID W. BURKE, Board Member. Board member of various funds in the Dreyfus
Family of Funds. Chairman of the Broadcasting Board of Governors, an
independent board within the United States Information Agency, from
August 1994 to November 1998. From August 1994 to December 1994, Mr.
Burke was a Consultant to the Manager, and from October 1990 to August
1994, he was Vice President and Chief Administrative Officer of the
Manager. From 1977 to 1990, Mr. Burke was involved in the management
of national television news, as Vice President and Executive Vice
President of ABC News, and subsequently as President of CBS News. He
is 62 years old and his address is Box 654, Eastham, Massachusetts
02642.
SAMUEL CHASE, Board Member. Retired. From 1982 to 1996, Mr. Chase was
President of Samuel Chase & Company, Ltd., an economic consulting firm.
He is 67 years old and his address is 10380 Springhill Road, Belgrade,
Montana 59714.
GORDON J. DAVIS, Board Member. Since October 1994, a senior partner with
the law firm of LeBoeuf, Lamb, Greene & MacRae. From 1983 to September
1994, Mr. Davis was a senior partner with the law firm of Lord Day &
Lord, Barrett Smith. From 1978 to 1983, he was Commissioner of Parks
and Recreation for the City of New York. He is also a director of
Consolidated Edison, a utility company, and Phoenix Home Life Insurance
Company and a member of various other corporate and not-for-profit
boards. He is 57 years old and his address is 241 Central Park West,
New York, New York 10023.
JONI EVANS, Board Member. Senior Vice President of the William Morris
Agency since September 1993. From September 1987 to May 1993,
Executive Vice President of Random House Inc. and, from January 1991 to
May 1993, President and Publisher of Turtle Bay Books; from January
1987 to December 1990, Publisher of Random House-Adult Trade Division;
from September 1985 to September 1987, President of Simon and
Schuster-Trade Division. She is 56 years old and her address is 1325
Avenue of the Americas, New York, New York 10019.
ARNOLD S. HIATT, Board Member. Chairman of The Stride Rite Foundation.
From 1969 to June 1992, Chairman of the Board, President or Chief
Executive Officer of The Stride Rite Corporation, a multi-divisional
footwear manufacturing and retailing company. Mr. Hiatt is also a
director of The Cabot Corporation. He is 71 years old and his address
is 400 Atlantic Avenue, Boston, Massachusetts 02110.
BURTON N. WALLACK, Board Member. President and co-owner of Wallack
Management Company, a real estate management company managing real
estate in the New York City area. He is 48 years old and his address
is 18 East 64th Street, New York, New York 10021.
For so long as the Fund's plan described in the section "Shareholder
Services Plan" remains in effect, the Board members of the Fund who are not
"interested persons" of the Fund, as defined in the 1940 Act, will be
selected and nominated by the Board members who are not "interested persons"
of the Fund.
The Fund typically pays its Board members an annual retainer and a per
meeting fee and reimburses them for their expenses. The Chairman of the
Board receives an additional 25% of such compensation. Emeritus Board
members are entitled to receive an annual retainer and a per meeting fee of
one-half the amount paid to them as Board members. The aggregate amount of
compensation paid by the Fund to each Board member for the fiscal year ended
May 31, 1999, and by all funds in the Dreyfus Family of Funds for which such
person was a Board member (the number of which is set forth in parenthesis
next to each Board member's total compensation)* for the year ended December
31, 1998, was as follows:
Aggregate Total Compensation From
Name of Board Compensation Fund and Fund Complex
Member From Fund** Paid to Board Member
_____________ _____________ _______________________
Joseph S. DiMartino $8,750 $619,660(187)
David W. Burke $7,000 $233,500(62)
Samuel Chase $6,500 $45,000(12)
Gordon J. Davis $7,000 $83,500(29)
Joni Evans $6,500 $45,000(12)
Arnold S. Hiatt $6,000 $37,500(12)
Burton N. Wallack $7,000 $45,000(12)
_____________________
* Represents the number of separate portfolios comprising the investment
companies in the Fund Complex, including the Fund, for which the Board
member serves.
** Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $2,740 for all Board members as a group.
Officers of the Fund
MARIE E. CONNOLLY, President and Treasurer. President, Chief Executive
Officer, Chief Compliance Officer and a director of the Distributor and
Funds Distributor, Inc., the ultimate parent of which is Boston
Institutional Group, Inc., and an officer of other investment companies
advised or administered by the Manager. She is 41 years old.
MARGARET W. CHAMBERS, Vice President and Secretary. Senior Vice President
and General Counsel of Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From
August 1996 to March 1998, she was Vice President and Assistant General
Counsel for Loomis, Sayles & Company, L.P. From January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray. She is
38 years old.
FREDERICK C. DEY, Vice President and Assistant Treasurer and Assistant
Secretary. Vice President, New Business Development of Funds
Distributor, Inc., since September 1994, and an officer of other
investment companies advised or administered by the Manager. He is 37
years old.
STEPHANIE D. PIERCE, Vice President, Assistant Secretary and Assistant
Treasurer. Vice President of the Distributor and Funds Distributor,
Inc., and an officer of other investment companies advised or
administered by the Manager. From April 1997 to March 1998, she was
employed as a Relationship Manager with Citibank, N.A. From August
1995 to April 1997, she was an Assistant Vice President with Hudson
Valley Bank, and from September 1990 to August 1995, she was Second
Vice President with Chase Manhattan Bank. She is 30 years old.
JOHN P. COVINO, Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of
Funds Distributor, Inc., since December 1998. From December 1995 to
November 1998, he was employed by Fidelity Investments where he held
multiple positions in their Institutional Brokerage Group. Prior to
joining Fidelity, he was employed by SunGard Brokerage systems where he
was responsible for the technology and development of the accounting
product group. He is 35 years old.
MARY A. NELSON, Vice President and Assistant Treasurer. Vice President of
the Distributor and Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. She is 34
years old.
GEORGE A. RIO, Vice President and Assistant Treasurer. Executive Vice
President and Client Service Director of Funds Distributor, Inc., and
an officer of other investment companies advised or administered by the
Manager. From June 1995 to March 1998, he was Senior Vice President
and Senior Key Account Manager for Putnam Mutual Funds. From May 1994
to June 1995, he was Director of Business Development for First Data
Corporation. He is 43 years old.
JOSEPH F. TOWER, III, Vice President and Assistant Treasurer. Senior Vice
President, Treasurer, Chief Financial Officer and a director of the
Distributor and Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. He is 36
years old.
DOUGLAS C. CONROY, Vice President and Assistant Secretary. Assistant Vice
President of Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From
April 1993 to January 1995, he was a Senior Fund Accountant for
Investors Bank & Trust Company. He is 29 years old.
KAREN JACOPPO-WOOD, Vice President and Assistant Secretary. Vice President and
Senior Counsel of Funds Distributor, Inc., since February 1997, and
an officer of other investment companies advised or administered by the
Manager. From June 1994 to January 1996, she was Manager of SEC
Registration at Scudder, Stevens & Clark, Inc. She is 32 years old.
CHRISTOPHER J. KELLEY, Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of Funds Distributor,
Inc., and an officer of other investment companies advised or
administered by the Manager. From April 1994 to July 1996, he was
Assistant Counsel at Forum Financial Group. He is 33 years old.
KATHLEEN K. MORRISEY, Vice President and Assistant Secretary. Manager of
Treasury Services Administration of Funds Distributor, Inc., and an
officer of other investment companies advised or administered by the
Manager. From July 1994 to November 1995, she was a Fund Accountant
for Investors Bank & Trust Company. She is 26 years old.
ELBA VASQUEZ, Vice President and Assistant Secretary. Assistant Vice
President of Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From
March 1990 to May 1996, she was employed by U.S. Trust Company of New
York where she held various sales and marketing positions. She is 37
years old.
The address of each officer of the Fund is 200 Park Avenue, New York,
New York 10166, except those officers indicated by an (*), whose address is
60 State Street, Boston, Massachusetts 02109.
The Fund's Board members and officers, as a group, owned less than 1%
of the Fund's voting securities outstanding on July 20, 1999.
MANAGEMENT ARRANGEMENTS
Investment Adviser. The Manager is a wholly-owned subsidiary of Mellon
Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation
("Mellon"). Mellon is a publicly owned multibank holding company
incorporated under Pennsylvania law in 1971 and registered under the Federal
Bank Holding Company Act of 1956, as amended. Mellon provides a
comprehensive range of financial products and services in domestic and
selected international markets. Mellon is among the twenty-five largest
bank holding companies in the United States based on total assets.
The Manager provides management services pursuant to the Management
Agreement (the "Agreement") dated August 24, 1994 with the Fund, which is
subject to annual approval by (i) the Fund's Board or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities
of the Fund, provided that in either event the continuance also is approved
by a majority of the Board members who are not "interested persons" (as
defined in the 1940 Act) of the Fund or the Manager, by vote cast in person
at a meeting called for the purpose of voting on such approval. The
Agreement was approved by shareholders on August 2, 1994, and was last
approved by the Fund's Board, including a majority of the Board members who
are not "interested persons" of any party to the Agreement, at a meeting
held on April 21, 1999. The Agreement is terminable without penalty, on not
more than 60 days' notice, by the Fund's Board or by vote of the holders of
a majority of the Fund's outstanding voting shares, or, upon not less than
90 days' notice, by the Manager. The Agreement will terminate automatically
in the event of its assignment (as defined in the 1940 Act).
The following persons are officers and/or directors of the Manager:
Christopher M. Condron, Chairman of the Board and Chief Executive Officer;
Stephen E. Canter, President, Chief Operating Officer, Chief Investment
Officer and a director; Lawrence S. Kash, Vice Chairman and a director; J.
David Officer, Vice Chairman and a director; Thomas F. Eggers, Vice Chairman-
- -Institutional and a director; Ronald P. O'Hanley III, Vice Chairman;
William T. Sandalls, Jr., Executive Vice President; Mark N. Jacobs, Vice
President, General Counsel and Secretary; Diane P. Durnin, Vice President--
Product Development; Patrice M. Kozlowski, Vice President--Corporate
Communications; Mary Beth Leibig, Vice President--Human Resources; Andrew S.
Wasser, Vice President--Information Systems; Theodore A. Schachar, Vice
President; Wendy Strutt, Vice President; Richard Terres, Vice President;
William H. Maresca, Controller; James Bitetto, Assistant Secretary; Steven
F. Newman, Assistant Secretary; and Mandell L. Berman, Burton C. Borgelt,
Steven G. Elliot, Martin C. McGuinn, Richard W. Sabo and Richard F. Syron,
directors.
The Manager manages the Fund's portfolio of investments in accordance
with the stated policies of the Fund, subject to the approval of the Fund's
Board. The Manager is responsible for investment decisions and provides the
Fund with portfolio managers who are authorized by the Fund's Board to
execute purchases and sales of securities. The Fund's portfolio managers
are: Richard J. Moynihan, W. Michael Petty, Joseph P. Darcy, A. Paul
Disdier, Douglas J. Gaylor, Stephen C. Kris, Jill C. Shaffro, Samuel J.
Weinstock and Monica S. Wieboldt. The Manager also maintains a research
department with a professional staff of portfolio managers and securities
analysts who provide research services for the Fund and for other funds
advised by the Manager.
The Manager has a personal securities trading policy (the "Policy")
which restricts the personal securities transactions of its employees. Its
primary purpose is to ensure that personal trading by the Manager's
employees does not disadvantage any fund managed by the Manager. Under the
Policy, the Manager's employees must preclear personal transactions in
securities not exempt under the Policy. In addition, the Manager's
employees must report their personal securities transactions and holdings,
which are reviewed for compliance with the Policy. In that regard, the
Manager's portfolio managers and other investment personnel also are subject
to the oversight of Mellon's Investment Ethics Committee. Portfolio
managers and other investment personnel of the Manager who comply with the
Policy's preclearance and disclosure procedures and the requirements of the
Committee may be permitted to purchase, sell or hold securities which also
may be or are held in fund(s) they manage or for which they otherwise
provide investment advice.
All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by the Manager. The
expenses borne by the Fund include: taxes, interest, loan commitment fees,
interest and distributions paid on securities sold short, brokerage fees and
commissions, if any, fees of Board members who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of
the Manager, Securities and Exchange Commission fees, state Blue Sky
qualification fees, advisory fees, charges of custodians, transfer and
dividend disbursing agents' fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of independent
pricing services, costs of maintaining corporate existence, costs
attributable to investor services (including, without limitation, telephone
and personnel expenses), costs of shareholders' reports and corporate
meetings, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to
existing shareholders and any extraordinary expenses.
The Manager maintains office facilities on behalf of the Fund, and
furnishes statistical and research data, clerical help, accounting, data
processing, bookkeeping and internal auditing and certain other required
services to the Fund. The Manager may pay the Distributor for shareholder
services from the Manager's own assets, including past profits but not
including the management fee paid by the Fund. The Distributor may use part
or all of such payments to pay certain financial institutions (which may
include banks) securities dealers and other industry professionals in
respect of these services. The Manager also may make such advertising and
promotional expenditures, using its own resources, as it from time to time
deems appropriate.
As compensation for the Manager's services, the Fund has agreed to pay
the Manager a monthly management fee at the annual rate of .60% of the value
of the Fund's average daily net assets. All fees and expenses are accrued
daily and deducted before declaration of dividends to investors. The
management fees paid to the Manager for the fiscal years ended May 31, 1997,
1998 and 1999 amounted to $8,259,304, $7,979,665 and $7,728,575,
respectively.
The Manager has agreed that if, in any fiscal year, the aggregate
expenses of the Fund, exclusive of taxes, brokerage fees, interest on
borrowings and (with the prior written consent of the necessary state
securities commissions) extraordinary expenses, but including the management
fee, exceed 1-1/2% of the value of the Fund's average net assets for the
fiscal year, the Fund may deduct from the payment to be made to the Manager
under the Agreement, or the Manager will bear, such excess expense. Such
deduction or payment, if any, will be estimated daily, and reconciled and
effected or paid, as the case may be, on a monthly basis.
The aggregate of the fees payable to the Manager is not subject to
reduction as the value of the Fund's net assets increases.
Distributor. The Distributor, located at 60 State Street, Boston,
Massachusetts 02109, serves as the Fund's distributor on a best efforts
basis pursuant to an agreement which is renewable annually.
Transfer and Dividend Disbursing Agent and Custodian. Dreyfus
Transfer, Inc. (the "Transfer Agent"), a wholly-owned subsidiary of the
Manager, P.O. Box 9671, Providence, Rhode Island 02940-9671, is the Fund's
transfer and dividend disbursing agent. Under a transfer agency agreement
with the Fund, the Transfer Agent arranges for the maintenance of
shareholder account records for the Fund, the handling of certain
communications between shareholders and the Fund and the payment of
dividends and distributions payable by the Fund. For these services, the
Transfer Agent receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Fund during the month, and is
reimbursed for certain out-of-pocket expenses.
The Bank of New York (the "Custodian"), 90 Washington Street, New York,
New York 10286, is the Fund's custodian. The Custodian has no part in
determining the investment policies of the Fund or which securities are to
be purchased or sold by the Fund. Under a custody agreement with the Fund,
the Custodian holds the Fund's securities and keeps all necessary accounts
and records. For its custody services, the Custodian receives a monthly fee
based on the market value of the Fund's assets held in custody and receives
certain securities transactions charges.
HOW TO BUY SHARES
General. Fund shares are sold without a sales charge. You may be
charged a fee if you effect transactions in Fund shares through a securities
dealer, bank or other financial institution. Stock certificates are issued
only upon your written request. No certificates are issued for fractional
shares. It is not recommended that the Fund be used as a vehicle for Keogh,
IRA or other qualified plans. The Fund reserves the right to reject any
purchase order.
The minimum initial investment is $2,500, or $1,000 if you are a client
of a securities dealer, bank or other financial institution which maintains
an omnibus account in the Fund and has made an aggregate minimum initial
purchase for its customers of $2,500. Subsequent investments must be at
least $100. The initial investment must be accompanied by the Account
Application. For full-time or part-time employees of the Manager or any of
its affiliates or subsidiaries, directors of the Manager, Board members of a
fund advised by the Manager, including members of the Fund's Board, or the
spouse or minor child of any of the foregoing, the minimum initial
investment is $1,000. For full-time or part-time employees of the Manager
or any of its affiliates or subsidiaries who elect to have a portion of
their pay directly deposited into their Fund accounts, the minimum initial
investment is $50. The Fund reserves the right to vary further the initial
and subsequent investment minimum requirements at any time.
Fund shares also are offered without regard to the minimum initial
investment requirements through Dreyfus-Automatic Asset Builderr, Dreyfus
Government Direct Deposit Privilege or Dreyfus Payroll Savings Plan pursuant
to the Dreyfus Step Program described under "Shareholder Services." These
services enable you to make regularly scheduled investments and may provide
you with a convenient way to invest for long-term financial goals. You
should be aware, however, that periodic investment plans do not guarantee a
profit and will not protect you against loss in a declining market.
Shares are sold on a continuous basis at the net asset value per share
next determined after an order in proper form is received by the Transfer
Agent or other entity authorized to receive orders on behalf of the Fund.
Net asset value per share is determined as of the close of trading on the
floor of the New York Stock Exchange (currently 4:00 p.m., New York time),
on each day the New York Stock Exchange is open for business. For purposes
of determining net asset value per share, options and futures contracts will
be valued 15 minutes after the close of trading on the floor of the New York
Stock Exchange. Net asset value per share is computed by dividing the value
of the Fund's net assets (i.e., the value of its assets less liabilities) by
the total number of shares outstanding. The Fund's investments are valued
by an independent pricing service approved by the Fund's Board and are
valued at fair value as determined by the pricing service. The pricing
service's procedures are reviewed under the general supervision of the
Board. For further information regarding the methods employed in valuing
Fund investments, see "Determination of Net Asset Value."
Dreyfus TeleTransfer Privilege. You may purchase shares by telephone
if you have checked the appropriate box and supplied the necessary
information on the Account Application or have filed a Shareholder Services
Form with the Transfer Agent. The proceeds will be transferred between the
bank account designated in one of these documents and your fund account.
Only a bank account maintained in a domestic financial institution which is
an Automated Clearing House ("ACH") member may be so designated.
Dreyfus TeleTransfer purchase orders may be made at any time. Purchase
orders received by 4:00 p.m., New York time, on any day the Transfer Agent
and the New York Stock Exchange are open for business will be credited to
the shareholder's Fund account on the next bank business day following such
purchase order. Purchase orders made after 4:00 p.m., New York time, on any
day the Transfer Agent and the New York Stock Exchange are open for
business, or orders made on Saturday, Sunday or any Fund holiday (e.g., when
the New York Stock Exchange is not open for business), will be credited to
the shareholder's Fund account on the second bank business day following
such purchase order. To qualify to use the Dreyfus TeleTransfer Privilege,
the initial payment for purchase of shares must be drawn on, and redemption
proceeds paid to, the same bank and account as are designated on the Account
Application or Shareholder Services Form on file. If the proceeds of a
particular redemption are to be wired to an account at any other bank, the
request must be in writing and signature-guaranteed. See "How to Redeem
Shares--Dreyfus TeleTransfer Privilege."
Reopening an Account. You may reopen an account with a minimum
investment of $100 without filing a new Account Application during the
calendar year the account is closed or during the following calendar year,
provided the information on the old Account Application is still applicable.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Plan") pursuant
to which the Fund reimburses Dreyfus Service Corporation an amount not to
exceed an annual rate of .25% of the value of the Fund's average daily net
assets for certain allocated expenses of providing personal services and/or
maintaining shareholder accounts. The services provided may include
personal services relating to shareholder accounts, such as answering
shareholder inquiries regarding the Fund and providing reports and other
information, and services related to the maintenance of shareholder
accounts.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the
Fund's Board for its review. In addition, the Plan provides that material
amendments of the Plan must be approved by the Fund's Board, and by the
Board members who are not "interested persons" (as defined in the 1940 Act)
of the Fund and have no direct or indirect financial interest in the
operation of the Plan, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Plan is subject to annual
approval by such vote of the Board members cast in person at a meeting
called for the purpose of voting on the Plan. The Plan was last so approved
on July 14, 1999. The Plan is terminable at any time by vote of a majority
of the Board members who are not "interested persons" and have no direct or
indirect financial interest in the operation of the Plan.
For the fiscal year ended May 31, 1999, $647,766 was chargeable to the
Fund under the Plan.
HOW TO REDEEM SHARES
Redemption Fee. The Fund will deduct a redemption fee equal to .10% of
the net asset value of Fund shares redeemed (including redemptions through
the use of the Fund Exchanges service) less than 15 days following the
issuance of such shares. The redemption fee will be deducted from the
redemption proceeds and retained by the Fund. For the fiscal year ended
May 31, 1999, the Fund retained $12,091 in redemption fees.
No redemption fee will be charged on the redemption or exchange of
shares (1) through the Fund's Check Redemption Privilege, Automatic
Withdrawal Plan, or Dreyfus Auto-Exchange Privilege, (2) through accounts
that are reflected on the records of the Transfer Agent as omnibus accounts
approved by Dreyfus Service Corporation, (3) through accounts established by
securities dealers, banks or other financial institutions approved by
Dreyfus Service Corporation that utilize the National Securities Clearing
Corporation's networking system, or (4) acquired through the reinvestment of
dividends or capital gains distributions. The redemption fee may be waived,
modified or terminated at any time, or from time to time.
Check Redemption Privilege. The Fund provides Redemption Checks
("Checks") automatically upon opening an account, unless you specifically
refuse the Check Redemption Privilege by checking the applicable "No" box on
the Account Application. The Check Redemption Privilege may be established
for an existing account by a separate signed Shareholder Services Form.
Checks will be sent only to the registered owner(s) of the account and only
to the address of record. The Account Application or Shareholder Services
Form must be manually signed by the registered owner(s). Checks may be made
payable to the order of any person in an amount of $500 or more. When a
Check is presented to the Transfer Agent for payment, the Transfer Agent, as
your agent, will cause the Fund to redeem a sufficient number of shares in
your account to cover the amount of the Check. Dividends are earned until
the Check clears. After clearance, a copy of the Check will be returned to
you. You generally will be subject to the same rules and regulations that
apply to checking accounts, although the election of this Privilege creates
only a shareholder-transfer agent relationship with the Transfer Agent.
You should date your Checks with the current date when you write them.
Please do not postdate your Checks. If you do, the Transfer Agent will
honor, upon presentment, even if presented before the date of the Check, all
postdated Checks which are dated within six months of presentment for
payment, if they are otherwise in good order.
Checks are free, but the Transfer Agent will impose a fee for stopping
payment of a Check upon your request or if the Transfer Agent cannot honor a
Check due to insufficient funds or other valid reason. If the amount of the
Check is greater than the value of the shares in your account, the Check
will be returned marked insufficient funds. Checks should not be used to
close an account.
This Privilege will be terminated immediately, without notice, with
respect to any account which is, or becomes, subject to backup withholding
on redemptions. Any Check written on an account which has become subject to
backup withholding on redemptions will not be honored by the Transfer Agent.
Wire Redemption Privilege. By using this Privilege, you authorize the
Transfer Agent to act on wire, telephone or letter redemption instructions
from any person representing himself or herself to be you and reasonably
believed by the Transfer Agent to be genuine. Ordinarily, the Fund will
initiate payment for shares redeemed pursuant to this Privilege on the next
business day after receipt by the Transfer Agent of a redemption request in
proper form. Redemption proceeds ($1,000 minimum) will be transferred by
Federal Reserve wire only to the commercial bank account specified by you on
the Account Application or Shareholder Services Form, or to a correspondent
bank if your bank is not a member of the Federal Reserve System. Fees
ordinarily are imposed by such bank and borne by the investor. Immediate
notification by the correspondent bank to your bank is necessary to avoid a
delay in crediting the funds to your bank account.
If you have access to telegraphic equipment, you may wire redemption
requests to the Transfer Agent by employing the following transmittal code
which may be used for domestic or overseas transmissions:
Transfer Agent's
Transmittal Code Answer Back Sign
144295 144295 TSSG PREP
If you do not have direct access to telegraphic equipment, you may have
the wire transmitted by contacting a TRT Cables operator at 1-800-654-7171,
toll free. You should advise the operator that the above transmittal code
must be used and should also inform the operator of the Transfer Agent's
answer back sign.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Transfer Agent.
This request must be signed by each shareholder, with each signature
guaranteed as described below under "Stock Certificates; Signatures."
Dreyfus TeleTransfer Privilege. You may request by telephone that
redemption proceeds be transferred between your Fund account and your bank
account. Only a bank account maintained in a domestic financial institution
which is an ACH member may be designated. Holders of jointly registered
Fund or bank accounts may redeem through the Dreyfus TeleTransfer Privilege
for transfer to their bank account not more than $250,000 within any 30-day
period. You should be aware that if you have selected the Dreyfus
TeleTransfer Privilege, any request for a wire redemption will be effected
as a Dreyfus TeleTransfer transaction through the ACH system unless more
prompt transmittal specifically is requested. Redemption proceeds will be
on deposit in the your account at an ACH member bank ordinarily two business
days after receipt of the redemption request. See "How to Buy Shares--
Dreyfus TeleTransfer Privilege."
Stock Certificates; Signatures. Any certificates representing Fund
shares to be redeemed must be submitted with the redemption request.
Written redemption requests must be signed by each shareholder, including
each holder of a joint account, and each signature must be guaranteed.
Signatures on endorsed certificates submitted for redemption also must be
guaranteed. The Transfer Agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be
accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations, as well as from participants in the New York Stock
Exchange Medallion Signature Program, the Securities Transfer Agents
Medallion Program ("STAMP") and the Stock Exchanges Medallion Program.
Guarantees must be signed by an authorized signatory of the guarantor, and
"Signature-Guaranteed" must appear with the signature. The Transfer Agent
may request additional documentation from corporations, executors,
administrators, trustees or guardians, and may accept other suitable
verification arrangements from foreign investors, such as consular
verification. For more information with respect to signature-guarantees,
please call one of the telephone numbers listed on the cover.
Redemption Commitment. The Fund has committed itself to pay in cash
all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Fund's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission and is a fundamental policy of the Fund which may not be changed
without shareholder approval. In the case of requests for redemption in
excess of such amount, the Board reserves the right to make payments in
whole or in part in securities or other assets of the Fund in case of an
emergency or any time a cash distribution would impair the liquidity of the
Fund to the detriment of the existing shareholders. In such event, the
securities would be valued in the same manner as the Fund's portfolio is
valued. If the recipient sells such securities, brokerage charges might be
incurred.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b)
when trading in the markets the Fund ordinarily utilizes is restricted, or
when an emergency exists as determined by the Securities and Exchange
Commission so that disposal of the Fund's investments or determination of
its net asset value is not reasonably practicable, or (c) for such other
periods as the Securities and Exchange Commission by order may permit to
protect the Fund's shareholders.
SHAREHOLDER SERVICES
Fund Exchanges. You may purchase, in exchange for shares of the Fund,
shares of certain other funds managed or administered by the Manager, to the
extent such shares are offered for sale in your state of residence. The
Fund will deduct a redemption fee equal to .10% of the net asset value of
Fund shares exchanged out of the Fund where the exchange is made less than
15 days after the issuance of such shares. Shares of other funds purchased
by exchange will be purchased on the basis of relative net asset value per
share as follows:
A. Exchanges for shares of funds offered without a sales load will be
made without a sales load.
B. Shares of funds purchased without a sales load may be exchanged
for shares of other funds sold with a sales load, and the
applicable sales load will be deducted.
C. Shares of funds purchased with a sales load may be exchanged
without a sales load for shares of other funds sold without a sales
load.
D. Shares of funds purchased with a sales load, shares of funds
acquired by a previous exchange from shares purchased with a sales
load, and additional shares acquired through reinvestment of
dividends or distributions of any such funds (collectively
referred to herein as "Purchased Shares") may be exchanged for
shares of other funds sold with a sales load (referred to herein
as "Offered Shares"), but if the sales load applicable to the
Offered Shares exceeds the maximum sales load that could have been
imposed in connection with the Purchased Shares (at the time the
Purchased Shares were acquired), without giving effect to any
reduced loads, the difference will be deducted.
To accomplish an exchange under item D above, you must notify the
Transfer Agent of your prior ownership of fund shares and your account
number.
To request an exchange, you must give exchange instructions to the
Transfer Agent in writing or by telephone. The ability to issue exchange
instructions by telephone is given to all Fund shareholders automatically,
unless you check the applicable "No" box on the Account Application,
indicating that you specifically refuse this Privilege. By using the
Telephone Exchange Privilege, you authorize the Transfer Agent to act on
telephonic instructions (including over The Dreyfus Touch automated
telephone system) from any person representing himself or herself to be you
and reasonably believed by the Transfer Agent to be genuine. Telephone
exchanges may be subject to limitations as to the amount involved or the
number of telephone exchanges permitted. Shares issued in certificate form
are not eligible for telephone exchange. No fees currently are charged
shareholders directly in connection with exchanges, although the Fund
reserves the right, upon not less than 60 days' written notice, to charge
shareholders a nominal administrative fee in accordance with rules
promulgated by the Securities and Exchange Commission.
To establish a personal retirement plan by exchange, shares of the fund
being exchanged must have a value of at least the minimum initial investment
required for the fund into which the exchange is being made.
Dreyfus Auto-Exchange Privilege. Dreyfus Auto-Exchange Privilege
permits you to purchase, in exchange for shares of the Fund, shares of
another fund in the Dreyfus Family of Funds of which you are a shareholder.
This Privilege is available only for existing accounts. Shares will be
exchanged on the basis of relative net asset value as described above under
"Fund Exchanges." Enrollment in or modification or cancellation of this
Privilege is effective three business days following notification by the
investor. You will be notified if your account falls below the amount
designated to be exchanged under this Privilege. In this case, your account
will fall to zero unless additional investments are made in excess of the
designated amount prior to the next Auto-Exchange transaction. Shares held
under IRA and other retirement plans are eligible for this Privilege.
Exchanges of IRA shares may be made between IRA accounts and from regular
accounts to IRA accounts, but not from IRA accounts to regular accounts.
With respect to all other retirement accounts, exchanges may be made only
among those accounts.
Shareholder Services Forms and prospectuses of the other funds may be
obtained by calling 1-800-645-6561. The Fund reserves the right to reject
any exchange request in whole or in part. Shares may be exchanged only
between accounts having identical names and other identifying designations.
The Fund Exchanges service or Dreyfus Auto-Exchange Privilege may be
modified or terminated at any time upon notice to shareholders.
Dreyfus-Automatic Asset Builderr. Dreyfus-Automatic Asset Builder
permits you to purchase Fund shares (minimum of $100 and maximum of $150,000
per transaction) at regular intervals selected by you. Fund shares are
purchased by transferring funds from the bank account designated by you.
Dreyfus Government Direct Deposit Privilege. Dreyfus Government Direct
Deposit Privilege enables you to purchase Fund shares (minimum of $100 and
maximum of $50,000 per transaction) by having Federal salary, Social
Security, or certain veterans', military or other payments from the U.S.
Government automatically deposited into your fund account. You may deposit
as much of such payments as you elect.
Dreyfus Payroll Savings Plan. Dreyfus Payroll Savings Plan permits you
to purchase Fund shares (minimum of $100 per transaction) automatically on a
regular basis. Depending upon your employer's direct deposit program, you
may have part or all of your paycheck transferred to your existing Dreyfus
account electronically through the ACH system at each pay period. To
establish a Dreyfus Payroll Savings Plan account, you must file an
authorization form with your employer's payroll department. It is the sole
responsibility of your employer to arrange for transactions under the
Dreyfus Payroll Savings Plan.
Dreyfus Step Program. The Dreyfus Step Program enables you to purchase
Fund shares without regard to the Fund's minimum initial investment
requirements through Dreyfus-Automatic Asset Builderr, Dreyfus Government
Direct Deposit Privilege or Dreyfus Payroll Savings Plan. To establish a
Dreyfus Step Program account, you must supply the necessary information on
the Account Application and file the required authorization form(s) with the
Transfer Agent. For more information concerning this Program, or to request
the necessary authorization form(s), please call toll free 1-800-782-6620.
You may terminate your participation in this Program at any time by
discontinuing your participation in Dreyfus-Automatic Asset Builder, Dreyfus
Government Direct Deposit Privilege or Dreyfus Payroll Savings Plan, as the
case may be, as provided under the terms of such Privilege(s). The Fund may
modify or terminate this Program at any time.
Dreyfus Dividend Options. Dreyfus Dividend Sweep allows you to invest
automatically your dividends or dividends and capital gain distributions, if
any, from the Fund in shares of another fund in the Dreyfus Family of Funds
of which you are a shareholder. Shares of other funds purchased pursuant to
this privilege will be purchased on the basis of relative net asset value
per share as follows:
A. Dividends and distributions paid by a fund may be invested
without imposition of a sales load in shares of
other funds offered without a sales load.
B. Dividends and distributions paid by a fund which
does not charge a sales load may be invested in shares of
other funds sold with a sales load, and the applicable sales
load will be deducted.
C. Dividends and distributions paid by a fund that charges a sales
load may be invested in shares of other funds sold with a sales
load (referred to herein as "Offered
Shares"), but if the sales load applicable to the Offered
Shares exceeds the maximum sales load charged by the fund
from which dividends or distributions are being swept
(without giving effect to any reduced loads), the difference
will be deducted.
D. Dividends and distributions paid by a fund may be invested in
shares of other funds that impose a contingent deferred sales
charge ("CDSC") and the applicable CDSC, if
any, will be imposed upon redemption of such shares.
Dreyfus Dividend ACH permits you to transfer electronically dividends
or dividends and capital gain distributions, if any, from the Fund to a
designated bank account. Only an account maintained at a domestic financial
institution which is an ACH member may be so designated. Banks may charge a
fee for this service.
Automatic Withdrawal Plan. The Automatic Withdrawal Plan permits you
to request withdrawal of a specified dollar amount (minimum of $50) on
either a monthly or quarterly basis if you have a $5,000 minimum account.
Withdrawal payments are the proceeds from sales of Fund shares, not the
yield on the shares. If withdrawal payments exceed reinvested dividends and
distributions, your shares will be reduced and eventually may be depleted.
Automatic Withdrawal may be terminated at any time by you, the Fund or the
Transfer Agent. Shares for which certificates have been issued may not be
redeemed through the Automatic Withdrawal Plan.
DETERMINATION OF NET ASSET VALUE
Valuation of Portfolio Securities. The Fund's investments are valued
each business day by an independent pricing service (the "Service") approved
by the Fund's Board. When, in the judgment of the Service, quoted bid
prices for investments are readily available and are representative of the
bid side of the market, these investments are valued at the mean between the
quoted bid prices (as obtained by the Service from dealers in such
securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Other investments (which
constitute a majority of the portfolio securities) are carried at fair value
as determined by the Service, based on methods which include consideration
of: yields or prices of municipal bonds of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. The Service's procedures
are reviewed by the Fund's officers under the general supervision of the
Fund's Board. Expenses and fees, including the management fee (reduced by
the expense limitation, if any), are accrued daily and are taken into
account for the purpose of determining the net asset value of Fund shares.
New York Stock Exchange Closings. The holidays (as observed) on which
the New York Stock Exchange is closed currently are: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Management believes that the Fund has qualified as a "regulated
investment company" under the Code for the fiscal year ended May 31, 1999
and the Fund intends to continue to so qualify, if such qualification is in
the best interests of its shareholders. To qualify as a regulated
investment company, the Fund must distribute at least 90% of its net income
(consisting of net investment income from tax exempt obligations and net
short-term capital gains) to its shareholders, and must meet certain asset
diversification and other requirements. Accordingly, the Fund may be
restricted in the selling of securities held for less than three months. If
the Fund did not qualify as a regulated investment company, it would be
treated for tax purposes as an ordinary corporation subject to Federal
income tax. The term "regulated investment company" does not imply the
supervision of management or investment practices or policies by any
government agency.
The Fund ordinarily declares dividends from its net investment income
on each day the New York Stock Exchange is open for business. Fund shares
begin earning dividends on the day following the date of purchase. The
Fund's earnings for Saturdays, Sundays and holidays are declared as
dividends on the next business day. Dividends usually are paid on the last
business day of each month and are automatically reinvested in additional
Fund shares at net asset value or, at your option, paid in cash. If you
redeem all shares in your account at any time during the month, all
dividends to which you are entitled will be paid to you along with the
proceeds of the redemption. If you are an omnibus accountholder and
indicate in a partial redemption request that a portion of any accrued
dividends to which such account is entitled belongs to an underlying
accountholder who has redeemed all shares in his or her account, such
portion of the accrued dividends will be paid to you along with the proceeds
of the redemption. Distributions from net realized securities gains, if
any, generally are declared and paid once a year, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the 1940 Act.
If you elect to receive dividends and distributions in cash and your
dividend or distribution check is returned to the Fund as undeliverable or
remains uncashed for six months, the Fund reserves the right to reinvest
such dividend or distribution and all future dividends and distributions
payable to you in additional Fund shares at net asset value. No interest
will accrue on amounts represented by uncashed distribution or redemption
checks. All expenses are accrued daily and deducted before declaration of
dividends to investors.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the net asset value of his shares below the
cost of his investment. Such a distribution would be a return on investment
in an economic sense although taxable as stated under "Distributions and
Taxes" in the Prospectus. In addition, the Code provides that if a
shareholder has not held his shares for more than six months (or such
shorter period as the Internal Revenue Service may prescribe by regulation)
and has received an exempt-interest dividend with respect to such shares,
any loss incurred on the sale of such shares will be disallowed to the
extent of the exempt-interest dividend received.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the Fund's total assets consists of Federal tax exempt
obligations, the Fund may designate and pay Federal exempt-interest
dividends from interest earned on all such tax exempt obligations. Such
exempt-interest dividends may be excluded by shareholders of the Fund from
their gross income for Federal income tax purposes. Dividends derived from
taxable investments, together with distributions from any net realized
short-term securities gains, generally are taxable as ordinary income for
Federal income tax purposes whether or not reinvested. Distributions from
net realized long-term securities gains generally are taxable as long-term
capital gains to a shareholder who is a citizen or resident of the United
States, whether or not reinvested and regardless of the length of time the
shareholder has held his shares.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the Fund's total assets consists of obligations which, when
held by an individual, the interest therefrom is exempt from California
personal income tax, and if the Fund qualifies as a management company under
the California Revenue and Taxation Code, then the Fund will be qualified to
pay dividends to its shareholders that are exempt from California personal
income tax (but not from California franchise tax) ("California exempt-
interest dividends"). However, the total amount of California
exempt-interest dividends paid by the Fund to a non-corporate shareholder
with respect to any taxable year cannot exceed such shareholder's pro rata
share of interest received by the Fund during such year that is exempt from
California taxation less any expenses and expenditures deemed to have been
paid from such interest.
For shareholders subject to California personal income tax, exempt-
interest dividends derived from California Municipal Obligations will not be
subject to the California personal income tax. Distributions from net
realized short-term capital gains to California resident shareholders will
be subject to the California personal income tax as ordinary income.
Distributions from net realized long-term capital gains may constitute long-
term capital gains for individual California resident shareholders. Unlike
under Federal tax law, the Fund's shareholders will not be subject to
California personal income tax, or receive a credit for California taxes
paid by the Fund, on undistributed capital gains. In addition, California
tax law does not consider any portion of the exempt-interest dividends paid,
an item of tax preference for the purposes of computing the California
alternative minimum tax.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gain or loss. However, all or a portion of the gain
realized from the disposition of certain market discount bonds will be
treated as ordinary income under Section 1276 of the Code. In addition, all
or a portion of the gain realized from engaging in "conversion transactions"
may be treated as ordinary income under Section 1258 of the Code.
"Conversion transactions" are defined to include certain forward, futures,
option and "straddle" transactions, transactions marketed or sold to produce
capital gains, or transactions described in Treasury regulations to be
issued in the future.
Under Section 1256 of the Code, gain or loss realized by the Fund from
certain financial futures and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss.
Gain or loss will arise upon exercise or lapse of such futures and options
as well as from closing transactions. In addition, any such futures or
options remaining unexercised at the end of the Fund's taxable year will be
treated as sold for their then fair market value, resulting in additional
gain or loss to the Fund characterized as described above.
Offsetting positions held by the Fund involving certain financial
futures contracts or options transactions may be considered, for tax
purposes, to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 and 1258 of the Code,
which, in certain circumstances, override or modify the provisions of
Sections 1256 and 988 of the Code. As such, all or a portion of any short
or long-term capital gain from certain "straddle" and/or conversion
transactions may be recharacterized as ordinary income.
If the Fund were treated as entering into "straddles" by reason of its
engaging in financial futures contracts or options transactions, such
"straddles" would be characterized as "mixed straddles" if the futures or
options comprising a part of such "straddles" were governed by Section 1256
of the Code. The Fund may make one or more elections with respect to "mixed
straddles." Depending on which election is made, if any, the results to the
Fund may differ. If no election is made, to the extent the straddle and
conversion transaction rules apply to positions established by the Fund,
losses realized by the Fund will be deferred to the extent of unrealized
gain in the offsetting position. Moreover, as a result of the straddle and
the conversion transaction rules, short-term capital losses on straddle
positions may be recharacterized as long-term capital losses, and long-term
capital gains on straddle positions may be recharacterized as short-term
capital gains or ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally apply if the fund either (1) holds an appreciated financial
position with respect to stock, certain debt obligations, or partnership
interests ("appreciated financial positions") and then enters into a short
sale, futures, forward, or offsetting notional principal contract
(collectively, a "Contract") respecting the same or substantially identical
property or (2) holds an appreciated financial position that is a Contract
and then acquires property that is the same as, or substantially identical
to, the underlying property. In each instance, with certain exceptions, the
Fund generally will be taxed as if the appreciated financial position were
sold at its fair market value on the date the Fund enters into the financial
position or acquires the property, respectively. Transactions that are
identified as hedging or straddle transactions under other provisions of the
Code can be subject to the constructive sale provisions.
Investment by the Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such
portion in order to maintain its qualification as a regulated investment
company. In such case, the Fund may have to dispose of securities which it
might otherwise have continued to hold in order to generate cash to satisfy
these distribution requirements.
PORTFOLIO TRANSACTIONS
Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly-issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that
the best price or execution will be obtained. Usually no brokerage
commissions, as such, are paid by the Fund for such purchases and sales, al
though the price paid usually includes an undisclosed compensation to the
dealer acting as agent. The prices paid to underwriters of newly-issued
securities usually include a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers
ordinarily are executed at a price between the bid and asked price. No
brokerage commissions have been paid by the Fund to date.
Transactions are allocated to various dealers by the Fund's portfolio
managers in their best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to enable the Manager to supplement its own research and
analysis with the views and information of other securities firms and may be
selected based upon their sales of shares of the Fund or other funds advised
by the Manager or its affiliates.
Research services furnished by brokers through which the Fund effects
securities transactions may be used by the Manager in advising other funds
it advises and, conversely, research services furnished to the Manager by
brokers in connection with other funds the Manager advises may be used by
the Manager in advising the Fund. Although it is not possible to place a
dollar value on these services, it is the opinion of the Manager that the
receipt and study of such services should not reduce the overall expenses of
its research department.
PERFORMANCE INFORMATION
The Fund's current yield for the 30-day period ended May 31, 1999 was
4.08%. Current yield is computed pursuant to a formula which operates as
follows: the amount of the Fund's expenses accrued for the 30-day period is
subtracted from the amount of the dividends and interest earned (computed in
accordance with regulatory requirements) by the Fund during the period.
That result is then divided by the product of: (a) the average daily number
of shares outstanding during the period that were entitled to receive
dividends and distributions, and (b) the net asset value per share on the
last day of the period less any undistributed earned income per share
reasonably expected to be declared as a dividend shortly thereafter. The
quotient is then added to 1, and that sum is raised to the 6th power, after
which 1 is subtracted. The current yield is then arrived at by multiplying
the result by 2.
Based upon a combined 1999 Federal and California personal income tax
rate of 45.22%, the Fund's tax equivalent yield for the 30-day period ended
May 31, 1999 was 7.45%. Tax equivalent yield is computed by dividing that
portion of the current yield (calculated as described above) which is tax
exempt by 1 minus a stated tax rate and adding the quotient to that portion,
if any, of the yield of the Fund that is not tax exempt.
The tax equivalent yield quoted above represents the application of the
highest Federal and State of California marginal personal income tax rates
presently in effect. For Federal personal income tax purposes, the highest
39.6% tax rate has been used. For California personal income tax purposes,
a 11% tax rate has been used. The tax equivalent figure, however, does not
include the potential effect of any local (including, but not limited to,
county, district or city) taxes, including applicable surcharges. In
addition, there may be pending legislation which could affect such stated
tax rates or yield. Each investor should consult its tax adviser, and
consider its own factual circumstances and applicable tax laws, in order to
ascertain the relevant tax equivalent yield.
The Fund's average annual total return for the 1, 5 and 10 year periods
ended May 31, 1999 was 3.81%, 5.53% and 6.26%, respectively. Average annual
total return is calculated by determining the ending redeemable value of an
investment purchased with a hypothetical $1,000 payment made at the
beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period)
and subtracting 1 from the result.
The Fund's aggregate total return for the period July 26, 1983
(commencement of operations) to May 31, 1999 was 214.23%. Total return is
calculated by subtracting the amount of the Fund's net asset value per share
at the beginning of a stated period from the net asset value per share at
the end of the period (after giving effect to the reinvestment of dividends
and distributions during the period), and dividing the result by the net
asset value per share at the beginning of the period.
From time to time, the Fund may use hypothetical tax equivalent yields
or charts in its advertising. These hypothetical yields or charts will be
used for illustrative purposes only and are not representative of the Fund's
past or future performance.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from CDA
Investment Technologies, Inc., Lipper Analytical Services, Inc., Moody's
Bond Survey Bond Index, Lehman Brothers Municipal Bond Index, Morningstar,
Inc. and other industry publications. From time to time, advertising
materials for the Fund may refer to or discuss then-current or past economic
conditions, developments and/or events, actual or proposed tax legislation,
or to statistical or other information concerning trends relating to
investment companies, as compiled by industry associations such as the
Investment Company Institute. From time to time, advertising materials for
the Fund also may refer to Morningstar ratings and related analyses
supporting the ratings.
From time to time, advertising material for the Fund may include
biographical information relating to its portfolio manager and may refer to,
or include commentary by the portfolio manager relating to investment
strategy, asset growth, current or past business, political, economic or
financial conditions and other matters of general interest to investors.
INFORMATION ABOUT THE FUND
Each Fund share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and nonassessable.
Fund shares are of one class and have equal rights as to dividends and in
liquidation. Shares have no preemptive, subscription or conversion rights
and are freely transferable.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a
result, Fund shareholders may not consider each year the election of Board
members or the appointment of auditors. However, the holders of at least 10%
of the shares outstanding and entitled to vote may require the Fund to hold
a special meeting of shareholders for purposes of removing a Board member
from office. Fund shareholders may remove a Board member by the affirmative
vote of a majority of the Fund's outstanding voting shares. In addition,
the Board will call a meeting of shareholders for the purpose of electing
Board members if, at any time, less than a majority of the Board members
then holding office have been elected by shareholders.
The Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
market movements. A pattern of frequent purchases and exchanges can be
disruptive to efficient portfolio management and, consequently, can be
detrimental to the Fund's performance and its shareholders. Accordingly, if
the Fund's management determines that an investor is following a market-
timing strategy or is otherwise engaging in excessive trading, the Fund,
with or without prior notice, may temporarily or permanently terminate the
availability of Fund Exchanges, or reject in whole or part any purchase or
exchange request, with respect to such investor's account. Such investors
also may be barred from purchasing other funds in the Dreyfus Family of
Funds. Generally, an investor who makes more than four exchanges out of the
Fund during any calendar year or who makes exchanges that appear to coincide
with a market-timing strategy may be deemed to be engaged in excessive
trading. Accounts under common ownership or control will be considered as
one account for purposes of determining a pattern of excessive trading. In
addition, the Fund may refuse or restrict purchase or exchange requests by
any person or group if, in the judgment of the Fund's management, the Fund
would be unable to invest the money effectively in accordance with its
investment objective and policies or could otherwise be adversely affected
or if the Fund receives or anticipates receiving simultaneous orders that
may significantly affect the Fund (e.g., amounts equal to 1% or more of the
Fund's total assets). If an exchange request is refused, the Fund will take
no other action with respect to the shares until it receives further
instructions from the investor. The Fund may delay forwarding redemption
proceeds for up to seven days if the investor redeeming shares is engaged in
excessive trading or if the amount of the redemption request otherwise would
be disruptive to efficient portfolio management or would adversely affect
the Fund. The Fund's policy on excessive trading applies to investors who
invest in the Fund directly or through financial intermediaries, but does
not apply to the Dreyfus Auto-Exchange Privilege, to any automatic
investment or withdrawal privilege described herein, or to participants in
employer-sponsored retirement plans.
During times of drastic economic or market conditions, the Fund may
suspend Fund Exchanges temporarily without notice and treat exchange
requests based on their separate components--redemption orders with a
simultaneous request to purchase the other fund's shares. In such a case,
the redemption request would be processed at the Fund's next determined net
asset value but the purchase order would be effective only at the net asset
value next determined after the fund being purchased receives the proceeds
of the redemption, which may result in the purchase being delayed.
To offset the relatively higher costs of servicing smaller accounts,
the Fund charges regular accounts with balances below $2,000 an annual fee
of $12. The valuation of accounts and the deductions are expected to take
place during the last four months of each year. The fee will be waived for
any investor whose aggregate Dreyfus mutual fund investments total at least
$25,000, and will not apply to IRA accounts or to accounts participating in
automatic investment programs or opened through a securities dealer, bank or
other financial institution, or to other fiduciary accounts.
The Fund sends annual and semi-annual financial statements to all its
shareholders.
COUNSEL AND INDEPENDENT AUDITORS
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the
shares being sold pursuant to the Fund's Prospectus.
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
independent auditors, have been selected as independent auditors of the
Fund.
APPENDIX A
INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in California Municipal Securities and is drawn from the
Official Statement issued by the State for its public bond issue on April 1,
1999. The sources of payment for such obligations and the marketability
thereof may be affected by financial or other difficulties experienced by
the State of California and certain of its municipalities and public
authorities. It does not purport to be a complete description and is based
on information from official statements relating to securities offerings of
California issuers.
State Finances
The Budget Process. The State's fiscal year begins on July 1 and ends
on June 30. The State operates on a budget basis, using a modified accrual
system of accounting, with revenues credited in the period in which they are
measurable and available and expenditures debited in the period in which the
corresponding liabilities are incurred.
The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under state law,
the annual proposed Governor's Budget cannot provide for projected
expenditures in excess of projected revenues and balances available from
prior fiscal years. Following the submission of the Governor's Budget, the
Legislature takes up the proposal.
Under the State Constitution, money may be drawn from the Treasury
only through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature
and signed by the Governor. The Budget Act must be approved by a two-thirds
majority vote of each House of the Legislature. The Governor may reduce or
eliminate specific line items in the Budget Act or any other appropriations
bill without vetoing the entire bill. Such individual line-item vetoes are
subject to override by a two-thirds majority vote of each House of the
Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except for local school and
community college ("K-14") education) must be approved by a two-thirds
majority vote in each House of the Legislature and be signed by the
Governor. Bills containing K-14 education appropriations only require a
simple majority vote. Continuing appropriations, available without regard
to fiscal year, may also be provided by statute or the State Constitution.
There is litigation pending concerning the validity of such continuing
appropriations. See "Litigation" below.
Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be
appropriated in anticipation of their receipt.
The General Fund. The moneys of the State are segregated into the
General Fund and over 900 special funds, including bond, trust and pension
funds. The General Fund consists of revenues received by the State Treasury
and not required by law to be credited to any other fund, as well as
earnings from the investment of state moneys not allocable to another fund.
The General Fund is the principal operating fund for the majority of
governmental activities and is the depository of most of the major revenue
sources of the State. The General Fund may be expended as a consequence of
appropriation measures enacted by the Legislature and approved by the
Governor, as well as appropriations pursuant to various constitutional
authorizations and initiative statutes.
The Special Fund for Economic Uncertainties. The Special Fund for
Economic Uncertainties ("SFEU") is funded with General Fund revenues and was
established to protect the State from unforeseen revenue reductions and/or
unanticipated expenditure increases. Amounts in the SFEU may be transferred
by the State Controller as necessary to meet cash needs of the General Fund.
The State Controller is required to return moneys so transferred without
payment of interest as soon as there are sufficient moneys in the General
Fund.
The legislation creating the SFEU (Government Code 16418) contains a
continuous appropriation from the General Fund authorizing the State
Controller to transfer to the SFEU, as of the end of each fiscal year, the
lesser of (i) the unencumbered balance in the General Fund and (ii) the
difference between the State's "appropriations subject to limitation" for
the fiscal year then ended and its "appropriations limit" as defined in
Section 8 of Article XIII B of the State Constitution and established in the
Budget Act for that fiscal year, as jointly estimated by the State's
Legislative Analyst's Office and the Department of Finance. For a further
description of Article XIII B, see "State Appropriations Limit" below. In
certain circumstances, moneys in the SFEU may be used in connection with
disaster relief.
For budgeting and accounting purposes, any appropriation made from the
SFEU is deemed an appropriation from the General Fund. For year-end
reporting purposes, the State Controller is required to add the balance in
the SFEU to the balance in the General Fund so as to show the total moneys
then available for General Fund purposes.
The June 30, 1999, SFEU projection reflects the latest revenue
projections and expenditure amounts as updated in the 1999-00 Governor's
Budget. As in any year, the Budget Act and related trailer bills are not
the only pieces of legislation which appropriate funds. Other factors
including re-estimates of revenues and expenditures, existing statutory
requirements, and additional legislation introduced and passed by the
Legislature may impact the reserve amount.
In the 1999-00 Governor's Budget, released January 8, 1999, the
Department of Finance projects the SFEU will have a balance of about $617
million at June 30, 1999 and $415 million at June 30, 2000. The June 30,
1999 estimate is reduced from an estimate of approximately $1.2 billion
after adoption of the 1998-99 Budget Act. See "Current State Budget" below.
Welfare Reform. Congress passed and the President signed (on August
22, 1996) the Personal Responsibility and Work Opportunity Reconciliation
Act of 1996 (P.L. 104-193, the "Law") fundamentally reforming the nation's
welfare system. Among its many provisions, the Law includes: (i) conversion
of Aid to Families with Dependent Children from an entitlement program to a
block grant titled Temporary Assistance for Needy Families (TANF), with
lifetime time limits on TANF recipients, work requirements and other
changes; (ii) provisions denying certain federal welfare and public benefits
to legal noncitizens (this provision has been amended by subsequent federal
law), allowing states to elect to deny additional benefits (including TANF)
to legal noncitizens, and generally denying almost all benefits to illegal
immigrants; and (iii) changes in the Food Stamp program, including reducing
maximum benefits and imposing work requirements.
California's response to the federal welfare reforms is embodied in
Chapter 270, Statutes of 1997. This new basic state welfare program is
called California Work Opportunity and Responsibility to Kids ("CalWORKs"),
which replaced the former Aid to Families with Dependent Children (AFDC) and
Greater Avenues to Independence (GAIN) programs, effective January 1, 1998.
Consistent with the federal law, CalWORKs contains new time limits on
receipt of welfare aid, both lifetime as well as for any current period on
aid. The centerpiece of CalWORKs is the linkage of eligibility to work
participation requirements. Administration of the new CalWORKs program is
largely at the county level, and counties are given financial incentives for
success in this program.
The long-term impact of the new federal Law and CalWORKs cannot be
determined until there has been more experience and until an independent
evaluation of the CalWORKs program is completed. In the short-term, the
implementation of the CalWORKs program has continued the trend of declining
welfare caseloads. The CalWORKs caseload trend is projected to be 651,350
in 1998-99 and 598,000 in 1999-00, down from a high of 921,000 cases in
1994-95.
The 1999-00 Governor's Budget limits CalWORKs expenditures to the
annual $3.7 billion federal TANF Block Grant and prior year carryover
amounts, and the state General Fund and county General Fund combined
Maintenance of Effort Requirement of $2.9 billion. Any decision to maintain
or exceed the Maintenance of Effort Requirement would need to be made in the
context of available resources and competing budget demands.
Local Governments. The primary units of local government in California
are the counties, ranging in population from 1,200 in Alpine County to over
9,600,000 in Los Angeles County. Counties are responsible for the provision
of many basic services, including indigent health care, welfare, jails and
public safety in unincorporated areas. There are also about 470
incorporated cities, and thousands of other special districts formed for
education, utility and other services. The fiscal condition of local
governments has been constrained since the enactment of "Proposition 13" in
1978, which reduced and limited the future growth of property taxes, and
limited the ability of local governments to impose "special taxes" (those
devoted to a specific purpose) without two-thirds voter approval. Counties,
in particular, have had fewer options to raise revenues than many other
local government entities, and have been required to maintain many services.
In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property
tax moneys, including taking over the principal responsibility for funding K-
12 schools and community colleges. During the recession, the Legislature
eliminated most of the remaining components of post-Proposition 13 aid to
local government entities other than K-14 education districts by requiring
cities and counties to transfer some of their property tax revenues to
school districts. However, the Legislature also provided additional funding
sources (such as sales taxes) and reduced certain mandates for local
services. Since then the State has also provided additional funding to
counties and cities through such programs as health and welfare realignment,
welfare reform, trial court restructuring, the COPs program supporting local
public safety departments, and various other measures. In his 1999-00
Budget Proposal, the Governor has proposed a review and "accounting" of
state-local fiscal relationships, with the goal of ultimately restoring
local government finances to an equivalent fiscal condition to the period
prior to the 1991-93 recession-induced tax shifts. Litigation has been
brought challenging the legality of the property tax shifts from counties to
schools. See "Litigation" below.
Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
implemented a restructuring of the State's trial court funding system.
Funding for the courts, with the exception of costs for facilities, local
judicial benefits, and revenue collection, was consolidated at the State
level. The county contribution for both their general fund and fine and
penalty amounts is capped at the 1994-95 level and becomes part of the Trial
Court Trust Fund, which supports all trial court operations. The State
assumed responsibility for future growth in trial court funding. The
consolidation of funding is intended to streamline the operation of the
courts, provide a dedicated revenue source, and relieve fiscal pressure on
the counties. Beginning in 1998-99, the county general fund contribution
for court operations is reduced by $300 million, and cities will retain $62
million in fine and penalty revenue previously remitted to the State; the
General Fund reimbursed the $362 million revenue loss to the Trial Court
Trust Fund. The 1999-00 Governor's Budget would further reduce the county
general fund contribution by an additional $48 million to reduce by 50
percent the contributions of the next 18 smallest counties and reduce by 5
percent the general fund contribution of the remaining 21 counties.
The entire statewide welfare system has been changed in response to
the change in federal welfare law enacted in 1996 (see "Welfare Reform"
above). Under the CalWORKs program, counties are given flexibility to
develop their own plans, consistent with state law, to implement the program
and to administer many of its elements, and their costs for administrative
and supportive services are capped at the 1996-97 levels. Counties are also
given financial incentives if, at the individual county level or statewide,
the CalWORKs program produces savings associated with specified standards.
Counties will still be required to provide "general assistance" aid to
certain persons who cannot obtain welfare from other programs.
In 1996, voters approved Proposition 218, entitled the "Right to Vote
on Taxes Act," which incorporates new Articles XIII C and XIII D into the
California Constitution. These new provisions place limitations on the
ability of local government agencies to impose or raise various taxes, fees,
charges and assessments without voter approval. Certain "general taxes"
imposed after January 1, 1995, must be approved by voters in order to remain
in effect. In addition, Article XIIIC clarifies the right of local voters
to reduce taxes, fees, assessments or charges through local initiatives.
There are a number of ambiguities concerning the Proposition and its impact
on local governments and their bonded debt which will require interpretation
by the courts or the Legislature. Proposition 218 does not affect the State
or its ability to levy or collect taxes.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution
(the "Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit.
"Appropriations subject to limitation," with respect to the State, are
authorizations to spend "proceeds of taxes," which consist of tax revenues,
and certain other funds, including proceeds from regulatory licenses, user
charges or other fees to the extent that such proceeds exceed "the cost
reasonably borne by that entity in providing the regulation, product or
service," but "proceeds of taxes" exclude most state subventions to local
governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply
with mandates of courts or the federal government, appropriations for
qualified capital outlay projects, appropriations of revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January
1, 1990 levels, and appropriation of certain special taxes imposed by
initiative (e.g., cigarette and tobacco taxes). The Appropriations Limit
may also be exceeded in cases of emergency.
The State's Appropriations Limit in each year is based on the limit
for the prior year, adjusted annually for changes in state per capita
personal income and changes in population, and adjusted, when applicable,
for any transfer of financial responsibility of providing services to or
from another unit of government or any transfer of the financial source for
the provisions of services from tax proceeds to non tax proceeds. The
measurement of change in population is a blended average of statewide
overall population growth, and change in attendance at K-14 districts. The
Appropriations Limit is tested over consecutive two-year periods. Any
excess of the aggregate "proceeds of taxes" received over such two-year
period above the combined Appropriations Limits for those two years is
divided equally between transfers to K-14 districts and refunds to
taxpayers.
The Legislature has enacted legislation to implement Article XIII B
which defines certain terms used in Article XIII B and sets forth the
methods for determining the Appropriations Limit. California Government
Code Section 7912 requires an estimate of the Appropriations Limit to be
included in the Governor's Budget, and thereafter to be subject to the
budget process and established in the Budget Act.
The following table shows the State's Appropriations Limit for the past
three fiscal years, the current fiscal year, and the next fiscal year. In
the Governor's Budget for Fiscal Year 1999-00 proposed on January 8, 1999,
the Department of Finance projects the State's Appropriations Subject to
Limitations will be $7.1 billion under the State's Appropriations Limit in
Fiscal Year 1999-00.
State Appropriations Limit
(Millions)
Fiscal Years
______________________________________________
1995-96 1996-97 1997-98 1998-99* 1999-00*
State Appropriations Limit $39,309 $42,002 $44,778 $47,573 $50,052
Appropriations Subject to Limit (34,186) (35,103 (40,735) (40,797) (42,926)
Amount (Over)/Under Limit $ 5,123 $ 6,899 $ 4,043 $ 6,776 $ 7,126
______________________
*Estimated/Projected
SOURCE: State of California, Department of Finance.
Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit,
primarily by guaranteeing K-14 schools a minimum share of General Fund
revenues. Under Proposition 98 (as modified by Proposition 111, which was
enacted on June 5, 1990), K-14 schools are guaranteed the greater of (a) in
general, a fixed percent of General Fund revenues ("Test 1"), (b) the amount
appropriated to K-14 schools in the prior year, adjusted for changes in the
cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test,
which would replace Test 2 in any year when the percentage growth in per
capita General Fund revenues from the prior year plus one half of one
percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount
appropriated in the prior year adjusted for changes in enrollment and per
capita General Fund revenues, plus an additional small adjustment factor.
If Test 3 is used in any year, the difference between Test 3 and Test 2
would become a "credit" to schools which would be the basis of payments in
future years when per capita General Fund revenue growth exceeds per capita
personal income growth. Legislation adopted prior to the end of the 1988-89
Fiscal Year, implementing Proposition 98, determined the K-14 schools'
funding guarantee under Test 1 to be 40.3 percent of the General Fund tax
revenues, based on 1986-87 appropriations. However, that percent has been
adjusted to approximately 35 percent to account for a subsequent redirection
of local property taxes, since such redirection directly affects the share
of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both
houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIII B limit to K-14 schools. See "State Finances-State Appropriations
Limit" above.
During the recession in the early 1990s, General Fund revenues for
several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these
developments by designating the "extra" Proposition 98 payments in one year
as a "loan" from future years' Proposition 98 entitlements, and also
intended that the "extra" payments would not be included in the Proposition
98 "base" for calculating future years' entitlements. By implementing these
actions, per-pupil funding from Proposition 98 sources stayed almost
constant at approximately $4,200 from Fiscal Year 1991-92 to Fiscal Year
1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. The
settlement of this case, finalized in July, 1996, provides, among other
things, that both the State and K-14 schools share in the repayment of prior
years' emergency loans to schools. Of the total $1.76 billion in loans, the
State will repay $935 million by forgiveness of the amount owed, while
schools will repay $825 million. The State share of the repayment will be
reflected as an appropriation above the current Proposition 98 base
calculation. The schools' share of the repayment will count as
appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year
period of 1994-95 through 2001-02 to mitigate any adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 through 1998-99 have resulted in
retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of the State's increasing revenues,
per-pupil funding at the K-12 level has increased by about 42 percent from
the level in place from 1991-92 through 1993-94, and is estimated at about
$5,944 per ADA in 1999-00. A significant amount of the "extra" Proposition
98 monies in the last few years have been allocated to special programs,
most particularly an initiative to allow each classroom from grades K-3 to
have no more than 20 pupils by the end of the 1997-98 school year. Although
General Fund revenue growth is expected to slow in 1999-00, there are also
new initiatives proposed to improve pupil reading skills, to enhance teacher
quality, and to increase school accountability. See "Current State Budget"
for further discussion of education funding.
State Indebtedness
General. The State Treasurer is responsible for the sale of debt
obligations of the State and its various authorities and agencies. The
State has always paid the principal of and interest on its general
obligation bonds, general obligation commercial paper, lease-purchase debt
and short-term obligations, including revenue anticipation notes and revenue
anticipation warrants, when due.
Capital Facilities Financing.
General Obligation Bonds. The State Constitution prohibits the
creation of general obligation indebtedness of the State unless a bond law
is approved by a majority of the electorate voting at a general election or
a direct primary. General obligation bond acts provide that debt service on
general obligation bonds shall be appropriated annually from the General
Fund and all debt service on general obligation bonds is paid from the
General Fund. Under the State Constitution, debt service on general
obligation bonds is the second charge to the General Fund after the
application of moneys in the General Fund to the support of the public
school system and public institutions of higher education. Certain general
obligation bond programs receive revenues from sources other than the sale
of bonds or the investment of bond proceeds.
As of February 1, 1999, the State had outstanding $19,184,961,000
aggregate principal amount of long-term general obligation bonds, and unused
voter authorizations for the future issuance of $14,326,874,000 of long-term
general obligation bonds. This latter figure consists of $3,566,744,000 of
authorized commercial paper notes, described below (of which $484,250,000
had been issued), which had not yet been refunded by general obligation
bonds, and $10,760,130,000 of other authorized but unissued general
obligation debt.
At the November 3, 1998 election, voters approved a bond measure
("Proposition 1A") totaling $9.2 billion for public school construction and
renovation, and for higher education facilities. Not more than half the
total bond authorization from Proposition 1A can be issued (including bonds
in the form of commercial paper) before June 30, 2000. Proposition 1A also
encourages the Treasurer to sell the bonds in a manner such that the ratio
of State debt service to General Fund revenue does not exceed 6 percent.
Commercial Paper Program. Pursuant to legislation enacted in 1995,
voter approved general obligation indebtedness may be issued either as
long-term bonds, or, for some but not all bond acts, as commercial paper
notes. Commercial paper notes may be renewed or may be refunded by the
issuance of long-term bonds. The State intends to issue long-term general
obligation bonds from time to time to retire its general obligation
commercial paper notes. Pursuant to the terms of the bank credit agreement
presently in effect supporting the general obligation commercial paper
program, not more than $2.0 billion of general obligation commercial paper
notes may be outstanding at any time; this amount may be increased or
decreased in the future. Commercial paper notes are deemed issued upon
authorization by the respective Finance Committees, whether or not such
notes are actually issued. As of February 1, 1999, the Finance Committees
had authorized the issuance of up to $3,566,744,000 of commercial paper
notes; as of that date $484,250,000 aggregate principal amount of general
obligation commercial paper notes was actually issued and outstanding.
Lease-Purchase Debt. In addition to general obligation bonds, the
State builds and acquires capital facilities through the use of
lease-purchase borrowing. Under these arrangements, the State Public Works
Board, another State or local agency or a joint powers authority issues
bonds to pay for the construction of facilities such as office buildings,
university buildings or correctional institutions. These facilities are
leased to a State agency or the University of California under a long-term
lease which provides the source of payment of the debt service on the
lease-purchase bonds. In some cases, there is not a separate bond issue,
but a trustee directly creates certificates of participation in the State's
lease obligation, which are marketed to investors. Under applicable court
decisions, such lease arrangements do not constitute the creation of
"indebtedness" within the meaning of the Constitutional provisions which
require voter approval. For purposes of this section, "lease-purchase debt"
or "lease-purchase financing" means principally bonds or certificates of
participation for capital facilities where the rental payments providing the
security are a direct or indirect charge against the General Fund and also
includes revenue bonds for a State energy efficiency program secured by
payments made by various State agencies under energy service contracts.
Certain of the lease-purchase financings are supported by special funds
rather than the General Fund. The State had $6,689,709,397 General Fund-
supported lease-purchase debt outstanding at February 1, 1999. The State
Public Works Board, which is authorized to sell lease revenue bonds, had
$1,594,712,000 authorized and unissued as of February 1, 1999. Also, as of
that date certain joint powers authorities were authorized to issue
approximately $69,500,000 of revenue bonds to be secured by State leases.
Non-Recourse Debt. Certain State agencies and authorities issue
revenue obligations for which the General Fund has no liability. Revenue
bonds represent obligations payable from State revenue-producing enterprises
and projects, which are not payable from the General Fund, and conduit
obligations payable only from revenues paid by private users of facilities
financed by the revenue bonds. The enterprises and projects include
transportation projects, various public works projects, public and private
educational facilities (including the California State University and
University of California systems), housing, health facilities and pollution
control facilities. There are 17 agencies and authorities authorized to
issue revenue obligations (excluding lease-purchase debt). State agencies
and authorities had $25,463,613,639 aggregate principal amount of revenue
bonds and notes which are non-recourse to the General Fund outstanding as of
December 31, 1998.
Cash Flow Borrowings. As part of its cash management program, the
State has regularly issued short-term obligations to meet cash flow needs.
The following table shows the amount of revenue anticipation notes ("Notes")
and revenue anticipation warrants ("Warrants") issued over the past five
fiscal years. Between spring 1992 and summer 1994, the State had depended
upon external borrowing, including borrowings extending into the subsequent
fiscal year, to meet its cash needs, including repayment of maturing Notes
and Warrants. The State has not had to resort to such cross-year borrowing
after the 1994-95 Fiscal Year.
The State issued $1.7 billion of revenue anticipation notes for the
1998-99 Fiscal Year to mature on June 30, 1999. The Governor's Proposed
Budget anticipates the issuance of $2.5 billion of revenue anticipation
notes for the 1999-00 Fiscal Year.
State of California
Revenue Anticipation Notes and Warrants Issued
Fiscal Years 1994-95 to 1998-99
Principal
Fiscal Amount Date of
Year Type (Billions) Issue Maturity
______ ____ __________ _______ ________
1994- Warrants Series $4.0 July 26, 1994 April 25, 1996
1995 C-D 3.0 August 3, 1994 June 28, 1995
Notes Series A-C
1995- Notes 2.0 April 25, 1996 June 28, 1996
1996
1996- Notes Series A-C 3.0 August 6, 1996 June 30, 1997
1997
1997- Notes 3.0 September 9, 1997 June 30, 1998
1998
1998- Notes 1.7 October 1, 1998 June 30, 1999
1999
SOURCE: State of California, Office of the Treasurer.
Prior Fiscal Years' Financial Results
Fiscal Years Prior to 1995-96. Pressures on the State's budget in the
late 1980's and early 1990's were caused by a combination of external
economic conditions (including a recession which began in 1990) and growth
of the largest General Fund Programs-K-14 education, health, welfare and
corrections -at rates faster than the revenue base. During this period,
expenditures exceeded revenues in four out of six years up to 1992-93, and
the State accumulated and sustained a budget deficit approaching $2.8
billion at its peak at June 30, 1993. Between the 1991-92 and 1994-95
Fiscal Years, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance, including significant cuts
in health and welfare program expenditures; transfers of program
responsibilities and funding from the State to local governments; transfer
of about $3.6 billion in annual local property tax revenues from other local
governments to local school districts, thereby reducing state funding for
schools under Proposition 98; and revenue increases (particularly in the
1991-92 Fiscal Year budget), most of which were for a short duration.
Despite these budget actions, the effects of the recession led to
large, unanticipated budget deficits. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to retire
it in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end
of the fiscal year. When the economy failed to recover sufficiently in
1993-94, a second two-year plan was implemented in 1994-95, again using
cross-fiscal year revenue anticipation warrants to partly finance the
deficit into the 1995-96 fiscal year. See "State Indebtedness-Cash Flow
Borrowings" above.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to
pay its ongoing obligations. When the Legislature and the Governor failed
to adopt a budget for the 1992-93 Fiscal Year by July 1, 1992, which would
have allowed the State to carry out its normal annual cash flow borrowing to
replenish its cash reserves, the State Controller issued registered warrants
to pay a variety of obligations representing prior years' or continuing
appropriations, and mandates from court orders. Available funds were used
to make constitutionally-mandated payments, such as debt service on bonds
and warrants. Between July 1 and September 4, 1992, when the budget was
adopted, the State Controller issued a total of approximately $3.8 billion
of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of
notes and revenue anticipation warrants, often needed to pay previously
maturing notes or warrants, were issued in the period from June 1992 to July
1994. These borrowings were used also in part to spread out the repayment
of the accumulated budget deficit over the end of a fiscal year, as noted
earlier. The last and largest of these borrowings was $4.0 billion of
revenue anticipation warrants which were issued in July, 1994 and matured on
April 25, 1996. See "State Indebtedness-Cash Flow Borrowings" above.
1995-96 through 1997-98 Fiscal Years. The State's financial condition
improved markedly during the 1995-96, 1996-97 and 1997-98 fiscal years, with
a combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on the actions
taken in earlier years. The State's cash position also improved, and no
external deficit borrowing has occurred over the end of these three fiscal
years.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96, $1.6 billion in 1996-97 and $2.4 billion in 1997-98)
than were initially planned when the budgets were enacted. These additional
funds were largely directed to school spending as mandated by Proposition
98, and to make up shortfalls from reduced federal health and welfare aid in
1995-96 and 1996-97. The accumulated budget deficit from the recession
years was finally eliminated.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large
increase in funding for K-14 education under Proposition 98, reflecting
strong revenues which exceeded initial budgeted amounts. Part of the nearly
$1.75 billion in increased spending was allocated to prior fiscal years.
Funds were provided to fully pay for the cost-of-living-increase component
of Proposition 98, and to extend the class size reduction and reading
initiatives. See "State Finances-Proposition 98" above.
2. The Budget Act reflected payment of $1.228 billion to satisfy a
court judgment in a lawsuit regarding payments to the State pension fund,
and brought funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121 million
and $107 million, respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the
new CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds, already
included in the federal fiscal year 1997 and 1998 budgets, was included in
the Budget Act, to offset incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately
$500 million.
Current State Budget
1998-99 Fiscal Year Budget. When the Governor released his proposed
1998-99 Fiscal Year Budget on January 9, 1998, he projected General Fund
revenues for the 1998-99 Fiscal Year of $55.4 billion, and proposed
expenditures in the same amount. By the time the Governor released the May
Revision to the 1998-99 Budget ("May Revision") on May 14, 1998, the
Administration projected that revenues for the 1997-98 and 1998-99 Fiscal
Years combined would be more than $4.2 billion higher than was projected in
January. The Governor proposed that most of this increased revenue be
dedicated to fund a 75 percent cut in the Vehicle License Fee ("VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. Some 33 companion bills
necessary to implement the budget were also signed. In signing the Budget
Bill, the Governor used his line-item veto power to reduce expenditures by
$1.360 billion from the General Fund, and $160 million from special funds.
Of this total, the Governor indicated that about $250 million of vetoed
funds were "set aside" to fund programs for education. Vetoed items
included education funds, salary increases and many individual resources and
capital projects.
The 1998-99 Budget Act was based on projected General Fund revenues
and transfers of $57.0 billion (after giving effect to various tax
reductions enacted in 1997 and 1998), a 4.2 percent increase from the then
revised 1997-98 figures. Special Fund revenues were estimated at $14.3
billion. The revenue projections were based on the May Revision. Economic
problems overseas since that time may affect the May Revision projections.
After giving effect to the Governor's vetoes, the Budget Act provided
authority for expenditures of $57.3 billion from the General Fund (a 7.3
percent increase from 1997-98), $14.7 billion from Special Funds, and $3.4
billion from bond funds. The Budget Act projected a balance in the SFEU at
June 30, 1999 (but without including the "set aside" veto amount) of $1.255
billion, a little more than 2 percent of General Fund revenues. The Budget
Act assumed the State will carry out its normal intra-year cash flow
borrowing in the amount of $1.7 billion of revenue anticipation notes, which
were issued on October 1, 1998.
Revenues and expenditures for 1998-99 as updated in the 1999-00
Governor's Budget are $56.3 billion and $58.3 billion, respectively. As a
result, the projected balance in the SFEU at June 30, 1999 has been reduced
to $617 million. See "Proposed 1999-00 Budget" below for discussion of more
recent revenue estimates from the Legislative Analyst's Office.
The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which
provides for a phased-in reduction of the VLF. Since the VLF is currently
transferred to cities and counties, the bill provides for the General Fund
to replace the lost revenues. Started on January 1, 1999, the VLF has been
reduced by 25 percent, at a cost to the General Fund of approximately $500
million in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both
temporary and permanent increase in the personal income tax dependent credit
($612 million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted
business tax credits ($106 million).
Other significant elements of the revised 1998-99 Budget are as
follows:
1. Proposition 98 funding for K-12 schools is increased by $2.2
billion in General Fund moneys over the latest revised 1997-98 levels, over
$1 billion higher than the minimum Proposition 98 guarantee. Of the 1998-99
funds, major new programs include money for instructional and library
materials, deferred maintenance, support for increasing the school year to
180 days and reduction of class sizes in Grade 9. Overall, per-pupil
spending for K-12 schools under Proposition 98 is increased to $5,752, which
is $478 over the 1997-98 level. The Budget also includes $250 million as
repayment of prior years' loans to schools, as part of the settlement of the
CTA v. Gould lawsuit. See "State Finances-Proposition 98" above.
2. Funding for higher education increased substantially above the
actual 1997-98 level. General Fund support was increased by $339 million
(15.6 percent) for the University of California and $271 million (14.5
percent) for the California State University system. In addition, General
Fund support for Community Colleges increased by $183 million (9.0 percent).
3. The Budget includes increased funding for health, welfare and
social services programs. A 4.9 percent grant increase was included in the
basic welfare grants, the first increase in those grants in 9 years. Future
increases will depend on sufficient General Fund revenue to trigger the
phased cuts in VLF described above.
4. Funding for the judiciary and criminal justice programs increased
by about 15 percent over 1997-98, primarily to reflect increased state
support for local trial courts and rising prison population.
5. Various other highlights of the revised Budget included new
funding for resources projects, dedication of $240 million of General Fund
moneys for capital outlay projects, funding of a state employee salary
increase, funding of 2,000 new Department of Transportation positions to
accelerate transportation construction projects, and funding of the
Infrastructure and Economic Development Bank ($50 million).
6. The State of California received approximately $167 million of
federal reimbursements to offset costs related to the incarceration of
undocumented alien felons for federal fiscal year 1997. The state
anticipates receiving approximately $173 million in federal reimbursements
for federal fiscal year 1998.
The revised 1998-99 budget as reported in the 1999-00 Governor's
Budget, also reflects the latest estimated costs or savings as provided in
various pieces of legislation passed and signed after the 1998 Budget Act.
Major budget items include costs for the All-American Canal, state's share
of purchase of Headwaters Forest, and additional funds for state prisons and
juvenile facilities. The revised budget reflects a $433 million reduction
in the State's obligation to contribute to the State Teachers' Retirement
System ("STRS") in 1998-99.
Proposed 1999-00 Budget. On January 8, 1999, Governor Davis released
his proposed budget for Fiscal Year 19992000 (the "Governor's Budget"). The
Governor's Budget generally reported that General Fund revenues for FY
1998-99 and FY 1999-00 would be lower than earlier projections (primarily
due to the overseas economic downturn), while some caseloads would be higher
than earlier projections. The Governor's Budget was designed to meet
ongoing caseloads and basic inflation adjustments, and included certain new
programs.
The Governor's Budget projects General Fund revenues and transfers in
1999-00 of $60.3 billion. This includes anticipated initial payments from
the tobacco litigation settlement of about $560 million, and receipt of
one-time revenue from sale of assets. The Governor also assumes receipt of
about $400 million of federal aid for certain health and welfare programs
and reimbursement for costs for incarceration of undocumented felons, above
the amount presently received by California from the federal government.
The Governor's Budget notes that more accurate revenue estimates will be
available in May and June before adoption of the budget. Among other
things, the amount of realized capital gains for 1998 is still unknown,
given the large fluctuations in the stock market last year. The Governor
has not proposed any tax cuts or increases.
The Governor's Budget proposes General Fund expenditures of $60.5
billion. The Governor's Budget gives highest priority to education, with
Proposition 98 funding increasing by almost 5 percent. The Governor
proposed certain new education initiatives focused on improving reading
skills, teacher quality and school accountability. The Governor proposed
modest increase in funding for higher education, and an 8 percent increase
in SSP payments (a State-funded welfare program), while assuming decreases
in Medi-Cal and CaIWORKs grant costs due to lowering caseloads. The
Governor also proposes to reduce expenditures by deferring certain
previously budgeted expenditures totaling about $170 million.
Based on the proposed revenues and expenditures, the Governor's Budget
projects the June 30, 2000 balance in the SFEU would drop to about $415
million.
On February 16, 1999, the Legislative Analyst released a report on the
1999-00 Governor's Budget (the "LAO Report"). The LAO Report was based in
part on actual revenues received in December, 1998 and January, 1999, which
had not been available when the Governor's Budget was prepared. These
revenues were higher than had been predicted in the Governor's Budget,
apparently reflecting stronger than expected economic activity in the nation
and the State. The LAO report projected that General Fund revenues in
1998-99 could be as much as $750 million higher than predicted in the
Governor's Budget, and 1999-00 revenues could be $550 million above the
Governor's Budget.
The Governor's Budget includes a proposal to implement changes in law
to make "midcourse corrections" in the State's budget if ongoing revenues
fall short of projections during a fiscal year or expenditures increase
significantly. The proposals include two components: restoring authority
for the Director of Finance to reduce expenditures in certain circumstances,
and an automatic "trigger" mechanism which would produce spending cuts if
certain conditions were met. These proposals will require legislative
action.
Economy and Population
Introduction. California's economy, the largest among the 50 states
and one of the largest in the world, has major components in high
technology, trade, entertainment, agriculture, manufacturing, tourism,
construction and services. Since 1994, California's economy has been
performing strongly after suffering a deep recession between 1990-94.
Population and Labor Force. The State's July 1, 1997 population of
over 32.9 million represented over 12 percent of the total United States
population.
California's population is concentrated in metropolitan areas. As of
the April 1, 1990 census, 96 percent resided in the 23 Metropolitan
Statistical Areas in the State. As of July 1, 1997, the 5-county Los
Angeles area accounted for 49 percent of the State's population, with 16.0
million residents, and the 10-county San Francisco Bay Area represented 21
percent, with a population of 6.9 million.
The following table shows California's population data for 1993 through
1998.
Population 1993-98
% Increase % Increase
Over Over California
California Preceding United States Preceding as % of
Year Population(a) Year Population(a) Year United States
1993 31,517,000 1.1 257,753,000 1.1 12.2
1994 31,790,000 0.9 260,292,000 1.0 12.2
1995 32,063,000 0.9 262,761,000 0.9 12.2
1996 32,383,000 1.0 265,179,000 0.9 12.2
1997 32,957,000 1.8 267,636,000 0.9 12.3
1998 33,494,000 1.6 270,029,000 0.9 12.4
________________
(a) Population as of July 1.
SOURCE: U.S. Department of Commerce, Bureau of the Census; State of
California, Department of Finance.
The following table presents civilian labor force data for the resident
population, age 16 and over, for the years 1992 to 1998.
Labor Force
1992-98
Labor Force Trends
(Thousands) Unemployment Rate (%)
Labor United
Year Force Employment California States
1992 15,404 13,973 9.3 7.5
1993 15,359 13,918 9.4 6.9
1994 15,450 14,122 8.6 6.1
1995 15,412 14,203 7.8 5.6
1996 15,568 14,444 7.2 5.4
1997 15,971 14,965 6.3 4.9
1998 p/ 16,260 15,302 5.9 4.5
__________________
p/ Preliminary
SOURCE: State of California, Employment Development Department.
Employment, Income, Construction and Export Growth. The following
table shows California's nonagricultural employment distribution and growth for
1990 and 1998.
Payroll Employment By Major Sector
1990 and 1998
Employment % Distribution
(Thousands) of Employment
_______________ _________________
Industry Sector 1990 1998 1990 1998
---- ---- ---- ----
Mining 39 29 0.3 0.2
Construction 605 605 4.8 4.5
Manufacturing
Nondurable Goods 721 739 5.7 5.4
High Technology 686 520 5.4 3.8
Other Durable Goods 690 683 5.4 5.0
Transportation and 624 680 4.9 5.0
Utilities
Wholesale and Retail Trade 3,002 3,129 23.7 23.0
Finance, Insurance
and Real Estate 825 781 6.5 5.7
Services 3,395 4,234 26.8 31.2
Government
Federal 362 279 2.9 2.1
State and Local 1,713 1,906 13.5 14.0
TOTAL
NONAGRICULTURAL 12,662 13,586 100 100
____________________
SOURCE: State of California, Employment Development Department and State of
California, Department of Finance.
The following tables show California's total and per capita income
patterns for selected years.
Total Personal Income 1992-97
California
_____________________________________________
California
% of
Year Millions % Change U.S.
1992 684,674 4.8* 13.1
1993 698,130 2.0 12.8
1994 a 718,321 2.9 12.5
1995 754,269 5.0 12.4
1996 798,020 5.8 12.5
1997 846,017 6.0 12.5
______________________
* Change from prior year.
* Reflects Northridge earthquake, which caused an estimated $15 billion drop
in personal income.
Note: Omits income for government employees overseas.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
Per Capita Personal Income 1992-97
California
United % of
Year California % Change States % Change U.S.
1992 22,163 3.2* 20,546 4.7* 107.9
1993 22,388 1.0 21,220 3.3 105.5
1994a 22,899 2.3 22,056 3.9 103.8
1995 23,901 4.4 23,063 4.6 103.6
1996 25,050 4.8 24,169 4.8 103.6
1997 26,218 4.7 25,298 4.7 103.6
_______________________
* Change from prior year
* Reflects Northridge earthquake, which caused an estimated $15 billion drop
in personal income.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
Employee Relations. In 1998-99, the state work force is estimated to
be comprised of approximately 290,000 personnel years. Of this total,
approximately 90,000 personnel years represent employees of institutions of
higher education. Civil service employees who are subject to collective
bargaining represent approximately 147,000 personnel years. The California
State Employees' Association (CSEA), represents 9 of the 21 collective
argaining units, or approximately 52 percent of those employees subject to
collective bargaining.
The Ralph C. Dills Act provides that state employees, defined as any
civil service employee of the State and teachers under the jurisdiction of
the Department of Education or the Superintendent of Public Instruction, and
excluding certain other categories, have a right to form, join, and participate
in the activities of employee organizations for the purpose of representation
on all matters of employer-employee relations. Law enforcement employees have
the right to be represented separately from other employees. The chosen
employee organization has the fight to represent its members, except that once
an employee organization is recognized as the exclusive representative of a
bargaining unit, only that organization may represent employees in that unit.
The scope of representation is limited to wages, hours, and other
terms and conditions of employment. Representatives of the Governor are
required to meet and confer in good faith and endeavor to reach agreement with
the employee organization, and, if agreement is reached, to prepare a
memorandum of understanding (MOU) and present it to the Legislature for
ratification. The Governor and the recognized employee organization are
authorized to agree mutually on the appointment of a mediator for the purpose
of settling any disputes between the parties, or either party could request the
Public Employment Relations Board to appoint a mediator.
As of mid-March 1999, for 1998-99, all twenty-one collective bargaining
units have reached agreement with the State. Five have ratified Memorandums of
Understanding (MOU) which will expire on June 30, 1999, and the other sixteen
MOUs are pending Legislative and union members' ratification. The State has
not experienced a major work stoppage in the last 23 years.
Employees' Retirement Systems. The two largest retirement benefit
programs administered by the State are the Public Employees' Retirement System
("PERS") and the STRS. PERS had assets with a market value of $139.7 billion
as of October 31, 1998, a decrease of $3.6 billion from June 30, 1998. STRS
had assets with a market value in excess of $88.3 billion as of June 30, 1998,
an increase of $13.5 billion from June 30, 1997.
Information Technology. The State's reliance on information technology
in every aspect of its operations has made Year 2000-related ("Y2K")
information technology ("IT") issues a high priority for the State. The
Department of Information Technology ("DOIT"), an independent office reporting
directly to the Governor, is responsible for ensuring the State's information
technology processes are fully functional before the year 2000. The DOIT has
created a Year 2000 Task Force and a California 2000 Office to establish
statewide policy requirements; to gather, coordinate, and share information;
and to monitor statewide progress. In December 1996, the DOIT began requiring
departments to report on Y2K activities and currently requires departmental
monthly reporting of Y2K status. The DOIT has emphasized to departments that
efforts should be focused on applications that support mission-critical
business practices.
The risks posed by Y2K information technology related issues are not
confined to computer systems, but also include problems presented by embedded
microchips (products or systems that contain microchips to perform functions
such as traffic control, instruments used in hospitals or medical laboratories,
and California aqueduct monitoring). To address these problems, the Governor
issued Executive Order W-163-97, broadening the responsibilities of the DOIT to
resolve these issues as well as legal questions associated with Y2K issues.
The executive order also required that mission critical systems be remediated
by December 31, 1998, that purchases of new systems, hardware, software and
equipment be Year 2000 compliant and further limited new computer projects to
those required by law until a department's Y2K problems are resolved. The DOIT
has also more recently required departments to address interfacing of State IT
systems with external IT systems, and to report on contingency planning status
for problems which might occur if IT systems are not fully remediated by the
end of 1999.
In its quarterly report for the period ending December 31, 1998, ("January
Quarterly Report") the DOIT unveiled the new administration's strategy for
addressing Y2K issues. The key components of this strategy include
centralization and coordination of the State's Y2K efforts, delivery
of essential services and emergency preparedness, elimination of obstacles
and barriers in an effort to streamline the current funding request process,
and broad-based collaboration across public and private sectors through a
comprehensive communication plan. Departments, programs and systems will be
categorized by tier according to the amount of assistance required to become
Y2K compliant. The first tier, which consists of departments that are of no
specific cause of concern, will be required to report their status and may
be subject to independent review. The second tier consists of departments that
require targeted assistance. The California 2000 Project Office will deploy an
action team to provide the necessary assistance. The third tier consists of
seriously troubled departments where the California Year 2000 Project Office
will assume Y2K management responsibility.
In addition to setting forth a new action plan, the January Quarterly Report
updated the survey of State departments and reported that of a total
of about 564 mission critical IT systems, 372 had completed remediation. Of
the remaining 192 systems, 54 systems are scheduled to be retired and 138
are in the process of being remediated. The January Quarterly Report also
updated the status of embedded systems, noting that State entities have not yet
reported on all facilities nor have they completed the survey of all of their
facilities. Of the 606 facilities that were reported, remediation has been
completed in 52 facilities.
In the January Quarterly Report, the DOIT estimates total Y2K costs
identified by the departments under its supervision at about $342 million,
of which more than $200 million was projected to be expended in fiscal years
1998-1999 and 1999-2000. These costs are part of much larger overall IT costs
incurred annually by the State, including costs incurred by certain independent
State entities, such as the judiciary, the Legislature, the University of
California and California State University System. Furthermore, cost estimates
for embedded systems only apply to the subset of embedded systems posing the
highest risk to essential programs. For fiscal year 1998-99, the Legislature
created a $20 million fund for unanticipated Y2K costs, which can be increased
if necessary.
On February 18, 1999, the Bureau of State Audits (the "BSA") presented
its report concerning state agencies' progress in resolving Y2K problems. The
report highlighted the following issues: remediation efforts at 14 agencies
that it identified as critical; the status of Y2K compliance for other State
programs; deficiencies in Y2K planning at one of the primary data centers for
the State; and coordination among public and private entities to ensure
uninterrupted service of essential utilities.
The BSA indicated that each of the 14 agencies identified as administering
programs critical to the State has appointed a Y2K project manager, developed
an overall Y2K plan and is actively working to complete planned tasks.
However, the report further noted that although state agencies are making
progress toward correcting critical computer systems, remediation efforts at 11
of these agencies are not complete. The report defined completion as including
three key steps: completion of all planned testing, removal of threats from
embedded technology, and resolution of potential problems caused by data
exchange partners. None of these 11 agencies have fully tested the systems
reviewed, which industry experts consider to be the most crucial and time-
consuming phase. Furthermore, seven agencies have not yet replaced or
corrected embedded microchips in equipment their systems rely upon.
As part of the audit, the BSA also surveyed all 140 agencies, which
administer 462 separate budgetary programs, listed in the Governor's Budget.
Although the BSA does not consider all of these programs to be as critical
as those administered by the 14 agencies it reviewed, the BSA has similar
concerns about testing, embedded technology and coordination with data exchange
partners. The report also contained certain recommendations for one of the
State's two primary data centers to enhance their Y2K efforts. Finally, the
BSA noted that no single entity is charged with overseeing the Y2 preparedness
of all utilities in California and recommended that the Governor or Legislature
should designate one representative or agency to assess and disclose the Y2K
readiness of critical public utilities.
The State Treasurer's Office reports that as of December 31, 1998, its
systems for bond payments were fully Y2K compliant. The State Controller's
Office reported that it had completed the necessary Y2K remediation projects
for the State fiscal and accounting system by December 31, 1998, consistent
with the Governor's Executive Order. The final steps of testing will be
completed during 1999. Both offices are actively working with the outside
entities with whom they interface to ensure that they are also compliant.
In sum, although substantial progress has been made toward the goal of
Y2K compliance, the task is very large and will likely encounter unexpected
difficulties. The State cannot predict whether all mission critical systems
will be ready and tested by late 1999 or what the impact failure of any
particular IT system(s) or of outside interfaces with IT systems might have.
Litigation
On December 24, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to school
districts beginning in 1993-94, is a reimbursable state mandated cost. See
"State Finances--Local Government" above. The test claim was heard on October
29, 1998, and the Commission on State Mandates found in favor of the State. In
March, 1999, Sonoma County filed suit in the Superior Court to overturn the
Commission's decision. The State is contesting this lawsuit. Should the
courts find in favor of the counties, the impact to the State General Fund
could be as high as $10.0 billion with an annual Proposition 98 General Fund
cost of at least $3.6 billion. This cost would grow in accordance with the
annual assessed value growth rate.
In Professional Engineers in California Government v. Wilson, the Superior
Court ruled in December 1998 that $30.7 million of the $258.2 million
transferred from the State Highway Account to the General Fund violated the
California Constitution. The court also invalidated $130.9 million transferred
from the Motor Vehicle Account to the General Fund. The court ordered further
briefing on the $130 million transfer from the State Highway Account to the
Motor Vehicle Account. A hearing on this transfer is scheduled for April 1999.
No decision has been made as to whether an appeal will be taken from the
court's ruling.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et
al. v Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the
trial court issued a preliminary injunction prohibiting the State Controller
from paying moneys from the State Treasury for fiscal year 1998-99, with
certain limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation.
On July 22 and 27, 1998, various employee unions which had intervened in the
case appealed the trial court's preliminary injunction and asked the Court of
Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August
5, 1998, the Court of Appeal denied the plaintiffs' request to reconsider the
stay. Also on July 22, 1998, the State Controller asked the California Supreme
Court to immediately stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on the merits. On July
29, 1998, the Supreme Court transferred the State Controller's request to the
Court of Appeal. The matters are now pending before the Court of Appeal.
Briefs are being submitted; no date has yet been set for oral argument.
In Thomas Hayes v. Commission on State Mandates, the Commission on State
Mandates issued a decision in December 1998 determining that a portion, but not
all, of the claims constituted state mandated local costs. The Commission is
now developing parameters and guidelines for claims for reimbursement. The
Department of Finance has not yet determined whether to seek judicial review of
the Commission's decision.
In Capitola Land v. Anderson and other related state and federal cases,
plaintiffs sought payments from the State under the AFDC-Foster Care program.
Judgment was rendered against the State in Capitola, which the State appealed
and lost. The State then filed a state plan amendment with the federal
Department of Health and Human Services to enable the State to comply with the
Capitola ruling and receive federal funding. The DHHS denied the state plan
amendment, and the State has filed suit against DHHS. The Legislature also
enacted a statute which required federal funding in order to comply with the
Capitola judgment. The State then refused to implement the Capitola judgment
based on the new statute. Certain plaintiffs moved for an order of contempt
against the State, which was granted by the trial court, but was stayed and
annulled by the Court of Appeal. The plaintiffs are petitioning the California
Supreme Court for review. If, as a result of this litigation, compliance with
the Capitola judgment is required and the judgment is applied retroactively,
liability to the State could exceed $200 million.
In the Northern California 1997 Flood Litigation, a substantial number of
plaintiffs have joined the suit against the State, local agencies, and private
companies and contractors seeking compensation for the damages they suffered as
a result of the 1997 flooding. Property damages have been estimated up to $2
billion. The State is vigorously defending the action.
In Just Say No to Tobacco Dough Campaign v. State of California, the
superior court issued an order in December 1998, granting the State's demurrer
to the entire action and dismissing the case. Plaintiffs have asked the court
to reconsider its ruling.
APPENDIX B
Description of certain S&P, Moody's and Fitch ratings:
S&P
Municipal Bond Ratings
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include:
(1) likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A
Principal and interest payments on bonds in this category are regarded
as safe. This rating describes the third strongest capacity for payment of
debt service. It differs from the two higher ratings because:
General Obligation Bonds -- There is some weakness in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer
to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Of the investment grade, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several
of the above factors could contribute to a lesser capacity for payment of
debt service. The difference between an A and BBB rating is that the latter
shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC, CC, C
Debt rated BB, B, CCC, CC or C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB
Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payment.
B
Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC
Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC
The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C
The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
D
Bonds rated D are in default, and payment of interest and/or payment of
principal is in arrears.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus designation to show relative standing within
the major rating categories.
Municipal Note Ratings
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Issues assigned an A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree of
safety.
A-1
This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation.
Moody's
Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca
Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Generally, Moody's provides either a generic rating or a rating with a
numerical modifier of 1 for the bonds in the generic rating category Aa.
Moody's also provides numerical modifiers of 2 and 3 in this category for
bond issues in the health care, higher education and other not-for-profit
sectors; the modifier 1 indicates that the issue ranks in the higher end of
that generic rating category; the modifier 2 indicates that the issue is in
the mid-range of that generic category; and the modifier 3 indicates that
the issue is in the low end of that generic category.
Municipal Note Ratings
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). Such ratings recognize
the difference between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG or, if the demand feature
is not rated, as NR. Short-term ratings on issues with demand features are
differentiated by the use of the VMIG symbol to reflect such characteristics
as payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should be alert to
the fact that the source of payment may be limited to the external liquidity
with no or limited legal recourse to the issuer in the event the demand is
not met.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1
This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
Commercial Paper Ratings
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be
evidenced by leading market positions in well established industries, high
rates of return on funds employed, conservative capitalization structures
with moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity.
Fitch
Municipal Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to
other obligations of the issuer, the current financial condition and
operative performance of the issuer and of any guarantor, as well as the
political and economic environment that might affect the issuer's future
financial strength and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have an adverse
impact on these bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
DDD, DD and D
Bonds rated DDD, DD and D are in actual or imminent default of interest
and/or principal payments. Such bonds are extremely speculative and should
be valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery on these bonds and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36 months
or the DDD, DD or D categories.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Demand Bond or Notes Ratings
Certain demand securities empower the holder at his option to require
the issuer, usually through a remarketing agent, to repurchase the security
upon notice at par with accrued interest. This is also referred to as a put
option. The ratings of the demand provision may be changed or withdrawn at
any time if, in Fitch's judgment, changing circumstances warrant such
action.
Fitch demand provision ratings carry the same symbols and related
definitions as its short-term ratings.
DREYFUS CALIFORNIA TAX EXEMPT BOND FUND, INC.
PART C. OTHER INFORMATION
_________________________
Item 23. Exhibits.
_______ _____________________________________________________
(a) Articles of Incorporation are incorporated by reference to Exhibit
(1)(a) of Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A, filed, on September 3, 1996 and Articles of
Amendment are incorporated by reference to Exhibit (1)(b) of Post-
Effective Amendment No. 21 to the Registration Statement on Form N-1A,
filed, on September 3, 1996.
(b) By-Laws are incorporated by reference to Exhibit (2) of Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A, filed, on
September 3, 1996.
(d) Registrant's Management Agreement is incorporated by reference to
Exhibit (5) of Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A, filed on September 18, 1995.
(e) Registrant's Distribution Agreement is incorporated by reference to
Exhibit (6)(a) of Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A, filed on September 18, 1995.
(f) Amended and Restated Custody Agreement is incorporated by reference to
Exhibit (8)(a) of Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A, filed, on September 3, 1996. Sub-Custodian
Agreements is incorporated by reference to Exhibit (8)(b) of Post-
Effective Amendment No. 21 to the Registration Statement on Form N-1A,
filed, on September 3, 1996.
(i) Opinion and consent of Registrant's Counsel is incorporated by
reference to Exhibit (10) of Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A, filed, on September 3, 1996.
(j) Consent of Ernst & Young LLP, Independent Auditors.
(m) Registrant's Revised Shareholder Services Plan is incorporated by
reference to Exhibit (9) of Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A, filed on September 18, 1995.
Item 24. Persons Controlled by or under Common Control with Registrant.
_______ ______________________________________________________________
Not Applicable
Item 25. Indemnification
_______ _______________
Reference is made to Article SEVENTH of the Registrant's
Articles of Incorporation. The application of these provisions is
limited by Article VIII of the Registrant's By-Laws, and by the
following undertaking set forth in the rules promulgated by the
Securities and Exchange Commission:
Insofar as indemnification for
liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and
controlling persons of the registrant pursuant
to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion
of the Securities and Exchange
Commission such indemnification is
against public policy as expressed in such Act
and is, therefore, unenforceable. In the event
that a claim for indemnification against such
liabilities (other than the payment by the
registrant of expenses incurred or paid by a
trustee, officer or controlling person of the
registration in the successful defense of any
action, suit or proceeding) is asserted by such
trustee, officer or controlling person in
connection with the securities being registered,
the registrant will, unless in the opinion of
its counsel the matter has been settled by
controlling precedent, submit to a court of
appropriate jurisdiction the question whether
such indemnification by it is against public
policy as expressed in such Act and will be
governed by the final adjudication of such
issue.
Reference is also made to the Management Agreement and to the
Distribution Agreement, incorporated by reference to Exhibits (5)
and (6) to Post-Effective Amendment No. 19 to the Registration Statement
on Form N-1A, filed on September 18, 1995.
Item 26. Business and Other Connections of Investment Adviser.
_______ ____________________________________________________
The Dreyfus Corporation ("Dreyfus") and subsidiary companies comprise
a financial service organization whose business consists primarily of
providing investment management services as the investment adviser and
manager for sponsored investment companies registered under the
Investment Company Act of 1940 and as an investment adviser to
institutional and individual accounts. Dreyfus also serves as sub-
investment adviser to and/or administrator of other investment
companies. Dreyfus Service Corporation, a wholly-owned subsidiary of
Dreyfus, is a registered broker-dealer. Dreyfus Management, Inc.,
another wholly-owned subsidiary, provides investment management services
to various pension plans, institutions and individuals.
<TABLE>
<CAPTION>
ITEM 26. Business and Other Connections of Investment Adviser (continued)
Officers and Directors of Investment Adviser
<S> <C> <C> <C>
Name and Position
With Dreyfus Other Businesses Position Held Dates
Christopher M. Condron Franklin Portfolio Associates, LLC* Director 1/97 - Present
Chairman of the Board and
Chief Executive Officer
TBCAM Holdings, Inc.* Director 10/97 - Present
President 10/97 - 6/98
Chairman 10/97 - 6/98
The Boston Company Director 1/98 - Present
Asset Management, LLC* Chairman 1/98 - 6/98
President 1/98 - 6/98
The Boston Company President 9/95 - 1/98
Asset Management, Inc.* Chairman 4/95 - 1/98
Pareto Partners Partner Representative 11/95 - 5/97
271 Regent Street
London, England W1R 8PP
Franklin Portfolio Holdings, Inc.* Director 1/97 - Present
Certus Asset Advisors Corp.** Director 6/95 -Present
Mellon Capital Management Director 5/95 -Present
Corporation***
Mellon Bond Associates, LLP+ Executive Committee 1/98 - Present
Member
Mellon Bond Associates+ Trustee 5/95 -1/98
Mellon Equity Associates, LLP+ Executive Committee 1/98 - Present
Member
Mellon Equity Associates+ Trustee 5/95 - 1/98
Boston Safe Advisors, Inc.* Director 5/95 - Present
President 5/95 - Present
Mellon Bank, N.A. + Director 1/99 - Present
Chief Operating Officer 3/98 - Present
President 3/98 - Present
Vice Chairman 11/94 - 3/98
Mellon Bank Corporation+ Chief Operating Officer 1/99 - Present
President 1/99 - Present
Director 1/98 - Present
Vice Chairman 11/94 - 1/99
Christopher M. Condron The Boston Company, Inc.* Vice Chairman 1/94 - Present
Chairman and Chief Director 5/93 - Present
Executive Officer
(Continued) Laurel Capital Advisors, LLP+ Exec. Committee 1/98 - 8/98
Member
Laurel Capital Advisors+ Trustee 10/93 - 1/98
Boston Safe Deposit and Trust Director 5/93 -Present
Company*
The Boston Company Financial President 6/89 - Present
Strategies, Inc. * Director 6/89 - Present
Mandell L. Berman Self-Employed Real Estate Consultant, 11/74 - Present
Director 29100 Northwestern Highway Residential Builder and
Suite 370 Private Investor
Southfield, MI 48034
Burton C. Borgelt DeVlieg Bullard, Inc. Director 1/93 - Present
Director 1 Gorham Island
Westport, CT 06880
Mellon Bank Corporation+ Director 6/91 - Present
Mellon Bank, N.A. + Director 6/91 - Present
Dentsply International, Inc. Director 2/81 - Present
570 West College Avenue
York, PA
Quill Corporation Director 3/93 - Present
Lincolnshire, IL
Stephen E. Canter Dreyfus Investment Chairman of the Board 1/97 - Present
President, Chief Operating Advisors, Inc.++ Director 5/95 - Present
Officer, Chief Investment President 5/95 - Present
Officer, and Director
Newton Management Limited Director 2/99 - Present
London, England
Mellon Bond Associates, LLP+ Executive Committee 1/99 - Present
Member
Mellon Equity Associates, LLP+ Executive Committee 1/99 - Present
Member
Franklin Portfolio Associates, LLC* Director 2/99 - Present
Franklin Portfolio Holdings, Inc.* Director 2/99 - Present
The Boston Company Asset Director 2/99 - Present
Management, LLC*
TBCAM Holdings, Inc.* Director 2/99 - Present
Mellon Capital Management Director 1/99 - Present
Corporation***
Stephen E. Canter Founders Asset Management, LLC Member, Board of 12/97 - Present
President, Chief Operating 2930 East Third Ave. Managers
Officer, Chief Investment Denver, CO 80206 Acting Chief Executive 7/98 - 12/98
Officer, and Director Officer
(Continued)
The Dreyfus Trust Company+++ Director 6/ 95 - Present
Thomas F. Eggers Dreyfus Service Corporation++ Executive Vice President 4/96 - Present
Vice Chairman - Institutional Director 9/96 - Present
and Director
Founders Asset Management, LLC Member, Board of 2/99 - Present
2930 East Third Avenue Managers
Denver, CO 80206
Steven G. Elliott Mellon Bank Corporation+ Senior Vice Chairman 1/99 - Present
Director Chief Financial Officer 1/90 - Present
Vice Chairman 6/92 - 1/99
Treasurer 1/90 - 5/98
Mellon Bank, N.A.+ Senior Vice Chairman 3/98 - Present
Vice Chairman 6/92 - 3/98
Chief Financial Officer 1/90 - Present
Mellon EFT Services Corporation Director 10/98 - Present
Mellon Bank Center, 8th Floor
1735 Market Street
Philadelphia, PA 19103
Mellon Financial Services Director 1/96 - Present
Corporation #1 Vice President 1/96 - Present
Mellon Bank Center, 8th Floor
1735 Market Street
Philadelphia, PA 19103
Boston Group Holdings, Inc.* Vice President 5/93 - Present
APT Holdings Corporation Treasurer 12/87 - Present
Pike Creek Operations Center
4500 New Linden Hill Road
Wilmington, DE 19808
Allomon Corporation Director 12/87 - Present
Two Mellon Bank Center
Pittsburgh, PA 15259
Collection Services Corporation Controller 10/90 - 2/99
500 Grant Street Director 9/88 - 2/99
Pittsburgh, PA 15258 Vice President 9/88 - 2/99
Treasurer 9/88 - 2/99
Mellon Financial Company+ Principal Exec. Officer 1/88 - Present
Chief Financial Officer 8/87 - Present
Director 8/87 - Present
President 8/87 - Present
Mellon Overseas Investments Director 4/88 - Present
Corporation+ Chairman 7/89 - 11/97
President 4/88 - 11/97
Chief Executive Officer 4/88 - 11/97
Mellon International Investment Director 9/89 - 8/97
Corporation+
Steven G. Elliott Mellon Financial Services Treasurer 12/87 - Present
Director (Continued) Corporation # 5+
Mellon Financial Markets, Inc.+ Director 1/99 - Present
Mellon Financial Services Director 1/99 - Present
Corporation #17
Fort Lee, NJ
Mellon Mortgage Company Director 1/99 - Present
Houston, TX
Mellon Ventures, Inc. + Director 1/99 - Present
Lawrence S. Kash Dreyfus Investment Director 4/97 - Present
Vice Chairman Advisors, Inc.++
And Director
Dreyfus Brokerage Services, Inc. Chairman 11/97 - Present
401 North Maple Ave. Chief Executive Officer 11/97 - Present
Beverly Hills, CA
Dreyfus Service Corporation++ Director 1/95 - 2/99
President 9/96 - 3/99
Dreyfus Precious Metals, Inc.++ + Director 3/96 - 12/98
President 10/96 - 12/98
Dreyfus Service Director 12/94 - Present
Organization, Inc.++ President 1/97 - Present
Seven Six Seven Agency, Inc. ++ Director 1/97 - Present
Dreyfus Insurance Agency of Chairman 5/97 - Present
Massachusetts, Inc.++++ President 5/97 - Present
Director 5/97 - Present
The Dreyfus Trust Company+++ Chairman 1/97 - 1/99
President 2/97 - 1/99
Chief Executive Officer 2/97 - 1/99
Director 12/94 - Present
The Dreyfus Consumer Credit Chairman 5/97 - Present
Corporation++ President 5/97 - Present
Director 12/94 - Present
Founders Asset Management, LLC Member, Board of 12/97 - Present
2930 East Third Avenue Managers
Denver, CO. 80206
The Boston Company Advisors, Chairman 12/95 - Present
Inc. Chief Executive Officer 12/95 - Present
Wilmington, DE President 12/95 - Present
The Boston Company, Inc.* Director 5/93 - Present
President 5/93 - Present
Mellon Bank, N.A.+ Executive Vice President 6/92 - Present
Laurel Capital Advisors, LLP+ Chairman 1/98 - 8/98
Executive Committee 1/98 - 8/98
Member
Chief Executive Officer 1/98 - 8/98
President 1/98 - 8/98
Lawrence S. Kash Laurel Capital Advisors, Inc. + Trustee 12/91 - 1/98
Vice Chairman Chairman 9/93 - 1/98
And Director (Continued) President and CEO 12/91 - 1/98
Boston Group Holdings, Inc.* Director 5/93 - Present
President 5/93 - Present
Martin G. McGuinn Mellon Bank Corporation+ Chairman 1/99 - Present
Director Chief Executive Officer 1/99 - Present
Director 1/98 - Present
Vice Chairman 1/90 - 1/99
Mellon Bank, N. A. + Chairman 3/98 - Present
Chief Executive Officer 3/98 - Present
Director 1/98 - Present
Vice Chairman 1/90 - 3/98
Mellon Leasing Corporation+ Vice Chairman 12/96 - Present
Mellon Bank (DE) National Director 4/89 - 12/98
Association
Wilmington, DE
Mellon Bank (MD) National Director 1/96 - 4/98
Association
Rockville, Maryland
Mellon Financial Vice President 9/86 - 10/97
Corporation (MD)
Rockville, Maryland
J. David Officer Dreyfus Service Corporation++ Executive Vice President 5/98 - Present
Vice Chairman Director 3/99 - Present
And Director
Dreyfus Insurance Agency of Director 5/98 - Present
Massachusetts, Inc.++++
Seven Six Seven Agency, Inc.++ Director 10/98 - Present
Mellon Residential Funding Corp. + Director 4/97 - Present
Mellon Trust of Florida, N.A. Director 8/97 - Present
2875 Northeast 191st Street
North Miami Beach, FL 33180
Mellon Bank, NA+ Executive Vice President 7/96 - Present
The Boston Company, Inc.* Vice Chairman 1/97 - Present
Director 7/96 - Present
Mellon Preferred Capital Director 11/96 - Present
Corporation*
RECO, Inc.* President 11/96 - Present
Director 11/96 - Present
The Boston Company Financial President 8/96 - Present
Services, Inc.* Director 8/96 - Present
Boston Safe Deposit and Trust Director 7/96 - Present
Company* President 7/96 - 1/99
J. David Officer Mellon Trust of New York Director 6/96 - Present
Vice Chairman and 1301 Avenue of the Americas
Director (Continued) New York, NY 10019
Mellon Trust of California Director 6/96 - Present
400 South Hope Street
Suite 400
Los Angeles, CA 90071
Mellon Bank, N.A.+ Executive Vice President 2/94 - Present
Mellon United National Bank Director 3/98 - Present
1399 SW 1st Ave., Suite 400
Miami, Florida
Boston Group Holdings, Inc.* Director 12/97 - Present
Dreyfus Financial Services Corp. + Director 9/96 - Present
Dreyfus Investment Services Director 4/96 - Present
Corporation+
Richard W. Sabo Founders Asset Management LLC President 12/98 - Present
Director 2930 East Third Avenue Chief Executive Officer 12/98 - Present
Denver, CO. 80206
Prudential Securities Senior Vice President 07/91 - 11/98
New York, NY Regional Director 07/91 - 11/98
Richard F. Syron American Stock Exchange Chairman 4/94 - Present
Director 86 Trinity Place Chief Executive Officer 4/94 - Present
New York, NY 10006
Ronald P. O'Hanley Franklin Portfolio Holdings, Inc.* Director 3/97 - Present
Vice Chairman
TBCAM Holdings, Inc.* Chairman 6/98 - Present
Director 10/97 - Present
The Boston Company Asset Chairman 6/98 - Present
Management, LLC* Director 1/98 - 6/98
The Boston Company Asset Director 2/97 - 12/97
Management, Inc. *
Boston Safe Advisors, Inc.* Chairman 6/97 - Present
Director 2/97 - Present
Pareto Partners Partner Representative 5/97 - Present
271 Regent Street
London, England W1R 8PP
Mellon Capital Management Director 5/97 -Present
Corporation***
Certus Asset Advisors Corp.** Director 2/97 - Present
Mellon Bond Associates+ Trustee 2/97 - Present
Chairman 2/97 - Present
Mellon Equity Associates+ Trustee 2/97 - Present
Chairman 2/97 - Present
Mellon-France Corporation+ Director 3/97 - Present
Ronald P. O'Hanley Laurel Capital Advisors+ Trustee 3/97 - Present
Vice Chairman (Continued)
Mark N. Jacobs Dreyfus Investment Director 4/97 - Present
General Counsel, Advisors, Inc.++ Secretary 10/77 - 7/98
Vice President, and
Secretary The Dreyfus Trust Company+++ Director 3/96 - Present
The TruePenny Corporation++ President 10/98 - Present
Director 3/96 - Present
Dreyfus Service Director 3/97 - Present
Organization, Inc.++
William H. Maresca The Dreyfus Trust Company+++ Director 3/97 - Present
Controller
Dreyfus Service Corporation++ Chief Financial Officer 12/98 - Present
Dreyfus Consumer Credit Corp. ++ Treasurer 10/98 -Present
Dreyfus Investment Treasurer 10/98 - Present
Advisors, Inc. ++
Dreyfus-Lincoln, Inc. Vice President 10/98 - Present
4500 New Linden Hill Road
Wilmington, DE 19808
The TruePenny Corporation++ Vice President 10/98 - Present
Dreyfus Precious Metals, Inc. +++ Treasurer 10/98 - 12/98
The Trotwood Corporation++ Vice President 10/98 - Present
Trotwood Hunters Corporation++ Vice President 10/98 - Present
Trotwood Hunters Site A Corp. ++ Vice President 10/98 - Present
Dreyfus Transfer, Inc. Chief Financial Officer 5/98 - Present
One American Express Plaza,
Providence, RI 02903
Dreyfus Service Assistant Treasurer 3/93 - Present
Organization, Inc.++
Dreyfus Insurance Agency of Assistant Treasurer 5/98 - Present
Massachusetts, Inc.++++
William T. Sandalls, Jr. Dreyfus Transfer, Inc. Chairman 2/97 - Present
Executive Vice President One American Express Plaza,
Providence, RI 02903
Dreyfus Service Corporation++ Director 1/96 - Present
Executive Vice President 2/97 - Present
Chief Financial Officer 2/97-12/98
Dreyfus Investment Director 1/96 - Present
Advisors, Inc.++ Treasurer 1/96 - 10/98
William T. Sandalls, Jr. Dreyfus-Lincoln, Inc. Director 12/96 - Present
Executive Vice President 4500 New Linden Hill Road President 1/97 - Present
(Continued) Wilmington, DE 19808
Seven Six Seven Agency, Inc.++ Director 1/96 - 10/98
Treasurer 10/96 - 10/98
The Dreyfus Consumer Director 1/96 - Present
Credit Corp.++ Vice President 1/96 - Present
Treasurer 1/97 - 10/98
Dreyfus Partnership President 1/97 - 6/97
Management, Inc.++ Director 1/96 - 6/97
Dreyfus Service Organization, Director 1/96 - 6/97
Inc.++ Executive Vice President 1/96 - 6/97
Treasurer 10/96- Present
Dreyfus Insurance Agency of Director 5/97 - Present
Massachusetts, Inc.++++ Treasurer 5/97- Present
Executive Vice President 5/97 - Present
Diane P. Durnin Dreyfus Service Corporation++ Senior Vice President - 5/95 - 3/99
Vice President - Product Marketing and Advertising
Development Division
Patrice M. Kozlowski None
Vice President - Corporate
Communications
Mary Beth Leibig None
Vice President -
Human Resources
Theodore A. Schachar Dreyfus Service Corporation++ Vice President -Tax 10/96 - Present
Vice President - Tax
Dreyfus Investment Advisors, Inc.++ Vice President - Tax 10/96 - Present
Dreyfus Precious Metals, Inc. +++ Vice President - Tax 10/96 - 12/98
Dreyfus Service Organization, Inc.++ Vice President - Tax 10/96 - Present
Wendy Strutt None
Vice President
Richard Terres None
Vice President
Andrew S. Wasser Mellon Bank Corporation+ Vice President 1/95 - Present
Vice-President -
Information Systems
James Bitetto The TruePenny Corporation++ Secretary 9/98 - Present
Assistant Secretary
Dreyfus Service Corporation++ Assistant Secretary 8/98 - Present
Dreyfus Investment Assistant Secretary 7/98 - Present
Advisors, Inc.++
Dreyfus Service Assistant Secretary 7/98 - Present
Organization, Inc.++
Steven F. Newman Dreyfus Transfer, Inc. Vice President 2/97 - Present
Assistant Secretary One American Express Plaza Director 2/97 - Present
Providence, RI 02903 Secretary 2/97 - Present
Dreyfus Service Secretary 7/98 - Present
Organization, Inc.++ Assistant Secretary 5/98 - 7/98
_______________________________
* The address of the business so indicated is One Boston Place, Boston, Massachusetts, 02108.
** The address of the business so indicated is One Bush Street, Suite 450, San Francisco, California 94104.
*** The address of the business so indicated is 595 Market Street, Suite 3000, San Francisco, California 94105.
+ The address of the business so indicated is One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
++ The address of the business so indicated is 200 Park Avenue, New York, New York 10166.
+++ The address of the business so indicated is 144 Glenn Curtiss Boulevard, Uniondale, New York 11556-0144.
++++ The address of the business so indicated is 53 State Street, Boston, Massachusetts 02109.
</TABLE>
Item 27. Principal Underwriters
________ ______________________
(a) Other investment companies for which Registrant's principal
underwriter (exclusive distributor) acts as principal underwriter or
exclusive distributor:
1) Comstock Partners Funds, Inc.
2) Dreyfus A Bonds Plus, Inc.
3) Dreyfus Appreciation Fund, Inc.
4) Dreyfus Asset Allocation Fund, Inc.
5) Dreyfus Balanced Fund, Inc.
6) Dreyfus BASIC GNMA Fund
7) Dreyfus BASIC Money Market Fund, Inc.
8) Dreyfus BASIC Municipal Fund, Inc.
9) Dreyfus BASIC U.S. Government Money Market Fund
10) Dreyfus California Intermediate Municipal Bond Fund
11) Dreyfus California Tax Exempt Bond Fund, Inc.
12) Dreyfus California Tax Exempt Money Market Fund
13) Dreyfus Cash Management
14) Dreyfus Cash Management Plus, Inc.
15) Dreyfus Connecticut Intermediate Municipal Bond Fund
16) Dreyfus Connecticut Municipal Money Market Fund, Inc.
17) Dreyfus Florida Intermediate Municipal Bond Fund
18) Dreyfus Florida Municipal Money Market Fund
19) The Dreyfus Fund Incorporated
20) Dreyfus Global Bond Fund, Inc.
21) Dreyfus Global Growth Fund
22) Dreyfus GNMA Fund, Inc.
23) Dreyfus Government Cash Management Funds
24) Dreyfus Growth and Income Fund, Inc.
25) Dreyfus Growth and Value Funds, Inc.
26) Dreyfus Growth Opportunity Fund, Inc.
27) Dreyfus Debt and Equity Funds
28) Dreyfus Index Funds, Inc.
29) Dreyfus Institutional Money Market Fund
30) Dreyfus Institutional Preferred Money Market Fund
31) Dreyfus Institutional Short Term Treasury Fund
32) Dreyfus Insured Municipal Bond Fund, Inc.
33) Dreyfus Intermediate Municipal Bond Fund, Inc.
34) Dreyfus International Funds, Inc.
35) Dreyfus Investment Grade Bond Funds, Inc.
36) Dreyfus Investment Portfolios
37) The Dreyfus/Laurel Funds, Inc.
38) The Dreyfus/Laurel Funds Trust
39) The Dreyfus/Laurel Tax-Free Municipal Funds
40) Dreyfus LifeTime Portfolios, Inc.
41) Dreyfus Liquid Assets, Inc.
42) Dreyfus Massachusetts Intermediate Municipal Bond Fund
43) Dreyfus Massachusetts Municipal Money Market Fund
44) Dreyfus Massachusetts Tax Exempt Bond Fund
45) Dreyfus MidCap Index Fund
46) Dreyfus Money Market Instruments, Inc.
47) Dreyfus Municipal Bond Fund, Inc.
48) Dreyfus Municipal Cash Management Plus
49) Dreyfus Municipal Money Market Fund, Inc.
50) Dreyfus New Jersey Intermediate Municipal Bond Fund
51) Dreyfus New Jersey Municipal Bond Fund, Inc.
52) Dreyfus New Jersey Municipal Money Market Fund, Inc.
53) Dreyfus New Leaders Fund, Inc.
54) Dreyfus New York Insured Tax Exempt Bond Fund
55) Dreyfus New York Municipal Cash Management
56) Dreyfus New York Tax Exempt Bond Fund, Inc.
57) Dreyfus New York Tax Exempt Intermediate Bond Fund
58) Dreyfus New York Tax Exempt Money Market Fund
59) Dreyfus U.S. Treasury Intermediate Term Fund
60) Dreyfus U.S. Treasury Long Term Fund
61) Dreyfus 100% U.S. Treasury Money Market Fund
62) Dreyfus U.S. Treasury Short Term Fund
63) Dreyfus Pennsylvania Intermediate Municipal Bond Fund
64) Dreyfus Pennsylvania Municipal Money Market Fund
65) Dreyfus Premier California Municipal Bond Fund
66) Dreyfus Premier Equity Funds, Inc.
67) Dreyfus Premier International Funds, Inc.
68) Dreyfus Premier GNMA Fund
69) Dreyfus Premier Worldwide Growth Fund, Inc.
70) Dreyfus Premier Municipal Bond Fund
71) Dreyfus Premier New York Municipal Bond Fund
72) Dreyfus Premier State Municipal Bond Fund
73) Dreyfus Premier Value Equity Funds
74) Dreyfus Short-Intermediate Government Fund
75) Dreyfus Short-Intermediate Municipal Bond Fund
76) The Dreyfus Socially Responsible Growth Fund, Inc.
77) Dreyfus Stock Index Fund, Inc.
78) Dreyfus Tax Exempt Cash Management
79) The Dreyfus Third Century Fund, Inc.
80) Dreyfus Treasury Cash Management
81) Dreyfus Treasury Prime Cash Management
82) Dreyfus Variable Investment Fund
83) Dreyfus Worldwide Dollar Money Market Fund, Inc.
84) Founders Funds, Inc.
85) General California Municipal Bond Fund, Inc.
86) General California Municipal Money Market Fund
87) General Government Securities Money Market Fund, Inc.
88) General Money Market Fund, Inc.
89) General Municipal Bond Fund, Inc.
90) General Municipal Money Market Funds, Inc.
91) General New York Municipal Bond Fund, Inc.
92) General New York Municipal Money Market Fund
(b)
Positions and
Name and principal Positions and offices with offices with
business address the Distributor Registrant
__________________ ___________________________ _____________
Marie E. Connolly+ Director, President, Chief President and
Executive Officer and Chief Treasurer
Compliance Officer
Joseph F. Tower, III+ Director, Senior Vice President, Vice President
Treasurer and Chief Financial and Assistant
Officer Treasurer
Mary A. Nelson+ Vice President Vice President
and Assistant
Treasurer
Jean M. O'Leary+ Assistant Vice President, None
Assistant Secretary and
Assistant Clerk
William J. Nutt+ Chairman of the Board None
Stephanie D. Pierce++ Vice President Vice President,
Assistant Secretary
and Assistant
Treasurer
Patrick W. McKeon+ Vice President None
Joseph A. Vignone+ Vice President None
________________________________
+ Principal business address is 60 State Street, Boston, Massachusetts 02109.
++ Principal business address is 200 Park Avenue, New York, New York 10166.
Item 28. Location of Accounts and Records
_______ ________________________________
1. First Data Investor Services Group, Inc.,
a subsidiary of First Data Corporation
P.O. Box 9671
Providence, Rhode Island 02940-9671
2. The Bank of New York
90 Washington Street
New York, New York 10286
3. Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, Rhode Island 02940-9671
4. The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
Item 29. Management Services
_______ ___________________
Not Applicable
Item 30. Undertakings
_______ ____________
None
SIGNATURES
__________
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State
of New York on the 28th day of July, 1999.
DREYFUS CALIFORNIA TAX EXEMPT BOND FUND, INC.
BY: /s/Marie E. Connolly*
-----------------------------
MARIE E. CONNOLLY, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons
in the capacities and on the date indicated.
Signatures Title Date
__________________________ ______________________________ __________
/s/Marie E. Connolly* President and Treasurer 7/28/99
_______________________ (Principal Executive,
Marie E. Connolly Financial and Accounting Officer)
/s/Joseph Tower* Vice President and Assistant 7/28/99
________________________ Treasurer (Principal Accounting
Joseph Tower Officer)
/s/Joseph S. DiMartino* Chairman of the Board 7/28/99
________________________
Joseph S. DiMartino
/s/David W. Burke* Board Member 7/28/99
________________________
David W. Burke
/s/Samuel Chase* Board Member 7/28/99
________________________
Samuel Chase
/s/Gordon J. Davis* Board Member 7/28/99
________________________
Gordon J. Davis
/s/Joni Evans* Board Member 7/28/99
________________________
Joni Evans
/s/Arnold S. Hiatt* Board Member 7/28/99
________________________
Arnold S. Hiatt
/s/Burton N. Wallack* Board Member 7/28/99
________________________
Burton N. Wallack
*BY: /s/Stephanie Pierce*
_________________________
Stephanie Pierce
Attorney-in-Fact
INDEX OF EXHIBITS
Exhibit Item No. Exhibit
23 (j) Consent of Ernst & Young LLP, Independent
Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Counsel and Independent Auditors" and to the use of our
report dated July 2, 1999, which is incorporated by reference, in this
Registration Statement (Form N-1A No. 2-84105) of Dreyfus California Tax
Exempt Bond Fund, Inc.
ERNST & YOUNG LLP
New York, New York
July 26, 1999
