GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JANUARY 31, 1997
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
General California Municipal Bond Fund, Inc. (the "Fund"), dated January 31,
1997, 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 toll free 1-800-645-6561.
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.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies.............. B-2
Management of the Fund.................................... B-12
Management Agreement...................................... B-16
Purchase of Shares........................................ B-17
Service Plan.............................................. B-18
Shareholder Services Plan................................. B-19
Redemption of Shares...................................... B-19
Shareholder Services...................................... B-21
Determination of Net Asset Value.......................... B-24
Portfolio Transactions.................................... B-25
Dividends, Distributions and Taxes........................ B-25
Performance Information................................... B-28
Information About the Fund................................ B-29
Transfer and Dividend Disbursing Agent, Custodian,
Counsel and Independent Auditors..................... B-29
Appendix A................................................ B-30
Appendix B................................................ B-43
Financial Statements...................................... B-51
Report of Independent Auditors............................ B-62
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the sections in the Fund's Prospectus entitled "Description of the Fund"
and "Appendix."
Portfolio Securities
Municipal Obligations. The average distribution of investments (at value) in
Municipal Obligations (including notes) by ratings for the fiscal year ended
September 30, 1996, computed on a monthly basis, was as follows:
Fitch Moody's Standard
Investors Investors & Poor's
Service, L.P. Service, Inc. Ratings Group Percentage
("Fitch") or ("Moody's") or ("S&P") of Value
AAA Aaa AAA 43.6%
AA Aa AA 7.9
A A A 24.4
BBB Baa BBB 11.2
BB Ba BB .4
D C D .4
F-1+/F-1 VMIG1/MIG1, SP-1+/SP-1, 5.1
P-1 A-1
Not Rated Not Rated Not Rated 7.0(*)
100.0%
___________________________________________________
* Included in the Not Rated category are securities comprising 7.0% of the
Fund's market value which, while not rated, have been determined by the
Manager to be of comparable quality to securities in the following rating
categories: Aaa/AAA (1.9%), A (.3%) and Baa/BBB (4.8%).
The term "Municipal Obligations" generally includes debt obligations
issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may
be issued include refunding outstanding obligations, obtaining funds for
general operating expenses and lending such funds to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide for the construction, equipment, repair or improvement of
privately operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, industrial, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste
disposal; the interest paid on such obligations may be exempt from Federal
income tax, although current tax laws place substantial limitations on the
size of such issues. Such obligations are considered to be Municipal
Obligations if the interest paid thereon qualifies as exempt from Federal
income tax in the opinion of bond counsel to the issuer. There are, of
course, variations in the security of Municipal Obligations, both within a
particular classification and between classifications.
Floating and variable rate demand obligations 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. The issuer of such obligations ordinarily has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligation plus accrued interest upon a specified
number of days' notice to the holders thereof. The interest rate on a
floating rate demand obligation is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand obligation is adjusted
automatically at specified intervals.
The 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. The imposition
of the Fund's management fee, as well as other operating expenses, including
fees paid under the Fund's Shareholder Services Plan, will have the effect of
reducing the yield to investors.
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 cancelled; (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.
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.
Ratings of Municipal Obligations. 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 Moody's, S&P or Fitch 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
Fund's Prospectus and this Statement of Additional Information. The ratings
of Moody's, S&P and Fitch represent their opinions as to the quality of the
Municipal Obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings may be an initial criterion for
selection of portfolio investments, the Manager also will evaluate these
securities.
Illiquid Securities. Where a substantial market of qualified
institutional buyers develops for certain restricted securities purchased by
the Fund pursuant to Rule 144A under the Securities Act of 1933, as amended,
the Fund intends to treat such securities as liquid securities in accordance
with procedures approved by the Fund's Board. Because it is not possible to
predict with assurance how the market for restricted securities pursuant to
Rule 144A will develop, the Fund's Board has directed the Manager to monitor
carefully the Fund's investments in such securities with particular regard to
trading activity, availability of reliable price information and other
relevant information. To the extent that, for a period of time, qualified
institutional buyers cease purchasing restricted securities pursuant to Rule
144A, the Fund's investing in such securities may have the effect of
increasing the level of illiquidity in the Fund's portfolio during such
period.
Taxable Investments. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities, which differ in their interest rates, maturities and times of
issuance. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the right of the issuer to borrow from the U.S. Treasury;
others by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others only by the credit
of the agency or instrumentality. These securities bear fixed, floating or
variable rates of interest. While the U.S. Government provides financial
support to such U.S. Government-sponsored agencies or instrumentalities, no
assurance can be given that it will always do so, since it is not so
obligated by law.
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs.
Certificates of deposit are negotiable certificates representing the
obligation of a bank to repay funds deposited with it for a specified period
of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven
days) at a stated interest rate. Investments in time deposits generally are
limited to London branches of domestic banks that have total assets in excess
of one billion dollars. Time deposits which may be held by the Fund will not
benefit from insurance from the Bank Insurance Fund or the Savings
Association Insurance Fund administered by the Federal Deposit Insurance
Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of
a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the face amount of
the instrument upon maturity. Other short-term bank obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
In a repurchase agreement, the Fund buys, and the seller agrees to
repurchase, a security at a mutually agreed upon time and price (usually
within seven days). The repurchase agreement thereby determines the yield
during the purchaser's holding period, while the seller's obligation to
repurchase is secured by the value of the underlying security. The Fund's
custodian or sub-custodian will have custody of, and will hold in a
segregated account, securities acquired by the Fund under a repurchase
agreement. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund. In an attempt to
reduce the risk of incurring a loss on a repurchase agreement, the Fund will
enter into repurchase agreements only with domestic banks with total assets
in excess of $1 billion, or primary government securities dealers reporting
to the Federal Reserve Bank of New York, with respect to securities of the
type in which the Fund may invest, and will require that additional
securities be deposited with it if the value of the securities purchased
should decrease below resale price. Repurchase agreements could involve
risks in the event of a default or insolvency of the other party to the
agreement, including possible delays or restrictions upon the Fund's ability
to dispose of the underlying securities.
Management Policies
Derivatives. The Fund may invest in Derivatives (as defined in the
Prospectus) 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.
When required by the Securities and Exchange Commission, the Fund will
set aside permissible liquid assets in a segregated account to cover its
obligations relating to its purchase of 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. 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 payment
system (i.e., variation margin requirements) 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 a Series. 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 transaction
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 in connection with its commodities transactions in an amount generally
equal to the value of the underlying commodity. 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 purchase and write (i.e., sell) call or
put options with respect to specific securities. 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 cash or other securities. A put option written by
the Fund is covered when, among other things, cash or liquid securities
having a value equal to or greater than the exercise price of the option are
placed in a segregated account with the Fund's custodian 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 a Fund of options will be subject to the ability of
the Manager to predict correctly movements in interest rates. To the extent
such predictions are incorrect, a 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. 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 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.
Lending Portfolio Securities. 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 from
securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned:
(1) the Fund must receive at least 100% cash collateral from the borrower;
(2) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (3) the Fund must be
able to terminate the loan at any time; (4) the Fund must receive reasonable
interest on the loan, as well as any interest or other distributions payable
on the loaned securities, and any increase in market value; and (5) the Fund
may pay only reasonable custodian fees in connection with the loan.
Investment Considerations and Risks
Investing in California Municipal Obligations. Investors should
consider carefully the special risks inherent in the Fund's investment in
California Municipal Obligations. These risks result from certain amendments
to the California Constitution and other statues that limit the taxing and
spending authority of California governmental entities, as well as from the
general financial condition of the State of California. From mid-1990 to
late 1993, the State suffered a recession with the worst economic, fiscal and
budget conditions since the 1930s. At June 30, 1994, according to
California's Department of Finance, the State's Special Fund for Economic
Uncertainties had an accumulated deficit, on a budget basis, of approximately
$1.8 billion. A further consequence of the large budget imbalances over the
last three fiscal years has been that the State depleted its available cash
resources and has had to use a series of external borrowings to meet its cash
needs. To meet its cash flow needs in the 1994-95 fiscal year, the State
issued, in July and August 1994, $4.0 billion of revenue anticipation
warrants and $3.0 billion of revenue anticipation notes. The 1994-95 budget
Act contained a plan to retire a projected $1.025 billion deficit in the 1995-
96 fiscal year. As a result of the deterioration of the State's budget and
cash situation between October 1991 and July 1994, the rating on the State's
general obligation bonds were reduced by S&P from AAA to A, by Moody's from
Aaa to A1 and by Fitch AAA to A. These and other factors may have the effect
of impairing the ability of the issuers of California Municipal Obligations
to pay interest on, or repay principal of, such California Municipal
Obligations. Investors should review "Appendix A" which sets forth
additional information relating to investing in California Municipal
Obligations.
Lower Rated Bonds. The Fund is permitted to invest in securities rated
Ba or lower by Moody's or BB or lower by S&P and Fitch and as low as the
lowest rating assigned by Moody's, S&P or Fitch. Such bonds, though higher
yielding, are characterized by risk. See "Description of the Fund--
Investment Considerations and Risks--Lower Rated Bonds" in the Prospectus for
a discussion of certain risks and "Appendix B" for a general description of
Moody's, S&P and Fitch 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.
Investors 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. These bonds generally are considered by Moody's, S&P and Fitch
to be 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 could disrupt severely the market for
such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and 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 persons 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 net assets. Such zero coupon, pay-in-kind or delayed
interest 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."
Investment Restrictions
The Fund has adopted investment restrictions numbered 1 through 9 as
fundamental policies, which cannot be changed without approval by the holders
of a majority (as defined in the Investment Company Act of 1940, as amended
(the "1940 Act")) of the Fund's outstanding voting shares. Investment
restrictions numbered 10 and 11 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. 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.
2. Borrow money, except to the extent permitted under the 1940 Act
(which currently limits borrowing to no more than 33-1/3% of the value of the
Fund's total assets). Transactions in futures and options do not involve any
borrowings for purposes of this restriction.
3. Sell securities short or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions,
but the Fund may make margin deposits in connection with transactions in
futures, including those related 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.
5. Purchase, hold or deal in real estate, real estate investment trust
securities or oil and gas interests, but the Fund may invest in Municipal
Obligations secured by real estate or interests therein.
6. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to indices, and options on
futures contracts or indices, as described in the Fund's Prospectus.
7. Lend any funds or other assets, except through the purchase of
qualified debt obligations and the entry into repurchase agreements referred
to above and in the Fund's Prospectus; 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.
8. Invest more than 25% of its total assets in the securities of
issuers in any single industry; provided that there shall be no such
limitation on the purchase of Municipal Obligations and, for temporary
defensive purposes, obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
9. Purchase securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of assets.
10. Pledge, mortgage, hypothecate, or otherwise encumber its assets,
except to the extent necessary to secure permitted borrowings, and except 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
futures contracts, including those relating 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 if, in
the aggregate, more than 15% of the value of the Fund's net assets would be
so invested.
In addition, the Fund will not issue any senior security (as such term
is defined in Section 18(f) of the 1940 Act), except to the extent the
activities permitted in Investment Restriction Nos. 2, 3, 6 and 10 may be
deemed to give rise to a senior security.
For purposes of Investment Restriction No. 8, 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 or decrease in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Fund shares in certain states.
Should the Fund determine that a commitment is no longer in the best
interests of the Fund and its shareholders, the Fund reserves the right to
revoke the commitment by terminating the sale of Fund shares in the state
involved.
MANAGEMENT OF THE FUND
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. Each Board member who is deemed to be an "interested person" of
the Fund, as defined in the 1940 Act, is indicated by an asterisk.
Board Members of the Fund
CLIFFORD L. ALEXANDER, JR., Board Member. President of Alexander &
Associates, Inc., a management consulting firm. From 1977 to 1981, Mr.
Alexander served as Secretary of the Army and Chairman of the Board of
the Panama Canal Company, and from 1975 to 1977, he was a member of the
Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson and
Alexander. He is a director of American Home Products Corporation,
Cognizant Corporation, a service provider of marketing information and
information technology, The Dun & Bradstreet Corporation, MCI
Communications Corporation, Mutual of America Life Insurance Company and
TLC Beatrice International Holdings, Inc. He is 63 years old and his
address is 400 C Street, N.E., Washington, D.C. 20002.
PEGGY C. DAVIS, Board Member. Shad Professor of Law, New York University
School of Law. Professor Davis has been a member of the New York
University law faculty since 1983. Prior to that time, she served for
three years as a judge in the courts of New York State; was engaged for
eight years in the practice of law, working in both corporate and non-
profit sectors; and served for two years as a criminal justice
administrator in the government of the City of New York. She writes and
teaches in the fields of evidence, constitutional theory, family law,
social sciences and the law, legal process and professional methodology
and training. She is 53 years old and her address is c/o New York
University School of Law, 249 Sullivan Street, New York, New York 10011.
*JOSEPH S. DiMARTINO, Chairman of the Board. Since January 1995, Chairman of
the Board of various funds in the Dreyfus Family of Funds. He is also
Chairman of the Board of Directors of Noel Group, Inc., a venture
capital company; and a director of The Muscular Dystrophy Association,
HealthPlan Services Corporation, Belding Heminway Company, Inc., a
manufacturer and marketer of industrial threads and buttons, Curtis
Industries, Inc., a national distributor of security products,
chemicals, and automotive and other hardware, and Staffing Resources,
Inc. 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 52 years old
and his address is 200 Park Avenue, New York, New York 10166.
ERNEST KAFKA, Board Member. A physician engaged in private practice
specializing in the psychoanalysis of adults and adolescents. Since
1981, he has served as an Instructor at the New York Psychoanalytic
Institute and, prior thereto, held other teaching positions. He is
Associate Clinical Professor of Psychiatry at Cornell Medical School.
For more than the past five years, Dr. Kafka has held numerous
administrative positions and has published many articles on subjects in
the field of psychoanalysis. He is 64 years old and his address is 23
East 92nd Street, New York, New York 10128.
SAUL B. KLAMAN, Board Member. Chairman and Chief Executive Officer of SBK
Associates, which provides research and consulting services to financial
institutions. Dr. Klaman was President of the National Association of
Mutual Savings Banks until November 1983, President of the National
Council of Savings Institutions until June 1985, Vice Chairman of
Golembe Associates and BEI Golembe, Inc. until 1989 and Chairman
Emeritus of BEI Golembe, Inc. until November 1992. He also served as an
Economist to the Board of Governors of the Federal Reserve System and on
several Presidential Commissions, and has held numerous consulting and
advisory positions in the fields of economics and housing finance. He
is 76 years old and his address is 431-B Dedham Street, The Gables,
Newton Center, Massachusetts 02159.
NATHAN LEVENTHAL, Board Member. President of Lincoln Center for the
Performing Arts, Inc. Mr. Leventhal was Deputy Mayor for Operations of
New York City from September 1979 until March 1984 and Commissioner of
the Department of Housing Preservation and Development of New York City
from February 1978 to September 1979. Mr. Leventhal was an associate
and then a member of the New York law firm of Poletti Freidin Prashker
Feldman and Gartner from 1974 to 1978. He was Commissioner of Rent and
Housing Maintenance for New York City from 1972 to 1973. Mr. Leventhal
serves as Chairman of Citizens Union, an organization which strives to
reform and modernize city and state government. He is 53 years old and
his address is 70 Lincoln Center Plaza, New York, New York 10023-6583.
For so long as the Fund's plans described in the sections captioned
"Service Plan" and "Shareholder Services Plan" remain 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 to each Board member by the Fund for the fiscal year ended
September 30, 1996, and by all other funds in the Dreyfus Family of Funds for
which such person is 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, 1995, is as
follows:
Total Compensation
Aggregate from Fund and Fund
Name of Board Compensation from Complex Paid to
Member Fund* Board Member
Clifford L. Alexander, Jr. $3,750 $ 94,386 (17)
Peggy C. Davis $3,750 $ 81,636 (15)
Joseph S. DiMartino $4,688 $448,610 (94)
Ernest Kafka $3,500 $ 81,136 (15)
Saul B. Klaman $3,750 $ 81,886 (15)
Nathan Leventhal $3,750 $ 81,636 (15)
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $2,893 for all Board members as a group.
Officers of the Fund
MARIE E. CONNOLLY, President and Treasurer. President, Chief Executive
Officer and a director of the Distributor and an officer of other
investment companies advised or administered by the Manager. From
December 1991 to July 1994, she was President and Chief Compliance
Officer of Funds Distributor, Inc., the ultimate parent of which is
Boston Institutional Group, Inc. She is 39 years old.
JOHN E. PELLETIER, Vice President and Secretary. Senior Vice President and
General Counsel of the Distributor and an officer of other investment
companies advised or administered by the Manager. From February 1992 to
July 1994, he served as Counsel for The Boston Company Advisors, Inc.
From August 1990 to February 1992, he was employed as an Associate at
Ropes & Gray. He is 32 years old.
RICHARD W. INGRAM, Vice President and Assistant Treasurer. Senior Vice
President and Director of Client Services and Treasury Operations of
Funds Distributor, Inc. and an officer of other investment companies
advised or administered by the Manager. From March 1994 to November
1995, he was Vice President and Division Manager for First Data Investor
Services Group. From 1989 to 1994, he was Vice President, Assistant
Treasurer and Tax Director - Mutual Funds of The Boston Company, Inc.
He is 40 years old.
JOSEPH F. TOWER, III, Vice President and Assistant Treasurer. Senior Vice
President, Treasurer and Chief Financial Officer of the Distributor and
an officer of other investment companies advised or administered by the
Manager. From July 1988 to August 1994, he was employed by The Boston
Company, Inc. where he held various management positions in the
Corporate Finance and Treasury areas. He is 34 years old.
MARY A. NELSON, Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of Funds Distributor,
Inc. and an officer of other investment companies advised or
administered by the Manager. From September 1989 to July 1994, she was
an Assistant Vice President and Client Manager for The Boston Company,
Inc. She is 32 years old.
MICHAEL S. PETRUCELLI, Vice President and Assistant Treasurer. Director of
Strategic Client Initiatives for Funds Distributor, Inc. and an officer
of other investment companies advised or administrated by the Manager.
From December 1989 through November 1986, he was employed with GE
Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and
as Director of the GE Investment Services. He is 35 years old.
ELIZABETH A. KEELEY, Vice President and Assistant Secretary. Assistant Vice
President of the Distributor and an officer of other investment
companies advised or administered by the Manager. She is 26 years old.
DOUGLAS C. CONROY, Vice President and Assistant Secretary. Supervisor of
Treasury Services and Administration 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. From December 1991 to
March 1993, he was employed as a Fund Accountant at The Boston Company,
Inc. He is 27 years old.
MARK A. KARPE, Vice President and Assistant Secretary. Senior Paralegal of
the Distributor and an officer of other investment companies advised or
administered by the Manager. Prior to August 1993, he was employed by
an Associate Examiner at the National Association of Securities Dealers,
Inc. He is 27 years old.
The address of each officer of the Fund is 200 Park Avenue, New York,
New York 10166.
The Fund's Board members and officers, as a group, owned less than 1% of
the Fund's shares outstanding on January 6, 1997.
The following shareholder owned of record 5% or more of the Fund's
shares outstanding as of January 6, 1997: Charles Schwab & Co. Inc. Reinvest
Account, Attn: Mutual Funds Department, 101 Montgomery Street, San Francisco,
CA 94104-4122 (5.0270%).
MANAGEMENT AGREEMENT
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Management of the Fund."
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 3, 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
September 17, 1996. The Agreement is terminable without penalty, on 60 days'
notice, by the Fund's Board or by vote of the holders of a majority of the
Fund's shares, or, on 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: W.
Keith Smith, Chairman of the Board; Christopher M. Condron, President, Chief
Executive Officer, Chief Operating Officer and a director; Stephen E. Canter,
Vice Chairman, Chief Investment Officer and a director; Lawrence S. Kash,
Vice Chairman-Distribution and a director; William T. Sandalls, Jr., Senior
Vice President and Chief Financial Officer; William F. Glavin, Jr., Vice
President-Corporate Development; Mark N. Jacobs, Vice President, General
Counsel and Secretary; Patrice M. Kozlowski, Vice President-Corporate
Communications; Mary Beth Leibig, Vice President-Human Resources; Jeffrey N.
Nachman, Vice President-Mutual Fund Accounting; Andrew S. Wasser, Vice
President-Information Systems; Elvira Oslapas, Assistant Secretary; and
Mandell L. Berman, Burton C. Borgelt and Frank V. Cahouet, 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
Joseph P. Darcy, A. Paul Disdier, Douglas J. Gaylor, Karen M. Hand,
Stephen C. Kris, Richard J. Moynihan, 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. All purchases and sales are reported for the Board's review at the
meeting subsequent to such transactions.
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, without limitation: organizational costs, 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 holder 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 maintaining corporate existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, costs of
shareholders' reports and meetings, 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 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 1% of the
value of the Fund's average daily net assets. All fees and expenses are
accrued daily and deducted before payment of dividends to investors. For the
fiscal years ended September 30, 1994, 1995 and 1996, the management fees
payable amounted to $2,351,917, $1,897,821 and $1,865,723, respectively.
The Manager has agreed that if in any fiscal year the aggregate expenses
of the Fund, exclusive of taxes, brokerage, interest on borrowings and (with
the prior written consent of the necessary state securities commissions)
extraordinary expenses, but including the management fee, exceed the expense
limitation of any state having jurisdiction over the Fund, the Fund may
deduct from the payment to be made to the Manager under the Agreement, or the
Manager will bear, such excess expense to the extent required by state law.
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.
PURCHASE OF SHARES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Buy Shares."
The Distributor. The Distributor serves as the Fund's distributor on a
best efforts basis pursuant to an agreement dated August 24, 1994. The
Distributor also acts as distributor for the other funds in the Dreyfus
Family of Funds and for certain other investment companies. In some states,
certain financial institutions effecting transactions in Fund shares may be
required to register as dealers pursuant to state law.
Dreyfus TeleTransfer Privilege. Dreyfus TeleTransfer purchase orders
may be made at any time. Purchase orders received by 4:00 P.M., New York
time, on any business day that Dreyfus Transfer, Inc., the Fund's transfer
and dividend disbursing agent (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 business day the
Transfer Agent and the New York Sock 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 Fund 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 "Redemption of
Shares--Dreyfus TeleTransfer Privilege."
Reopening an Account. An investor 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.
SERVICE PLAN
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Service Plan."
Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an
investment company may bear expenses of distributing its shares only pursuant
to a plan adopted in accordance with the Rule. The Fund's Board has adopted,
but not implemented, such a plan (the "Service Plan") pursuant to which the
Fund may (i) reimburse the Distributor for payments to certain financial
institutions (which may include banks), securities dealers and other
financial industry professionals (collectively, "Service Agents") for
distributing the Fund's shares and servicing shareholder accounts and (ii)
pay the Manager, Dreyfus Service Corporation and any affiliate of either of
them for advertising and marketing relating to the Fund and for servicing
shareholder accounts. The Fund's Board believes that there is a reasonable
likelihood that the Plan may benefit the Fund and its shareholders.
A quarterly report of the amounts expended under the Service Plan, and
the purposes for which such expenditures were incurred, must be made to the
Board for its review. In addition, the Service Plan provides that it may not
be amended to increase materially the costs which the Fund may bear for
distribution pursuant to the Service Plan without shareholder approval and
that other material amendments of the Service Plan must be approved by the
Board, and by the Board members who are not "interested persons" (as defined
in the 1940 Act) of the Fund or the Manager and have no direct or indirect
financial interest in the operation of the Service Plan or in the related
service agreements, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Service Plan and the related
service agreements are 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
Service Plan. The Service Plan was last so approved at a meeting held on
September 17, 1996. 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 Service Plan or in any of
the related service agreements or by vote of a majority of the Fund's shares.
Management of the Fund currently does not intend to implement the
Service Plan and will only do so if prior written notice is given to
shareholders.
SHAREHOLDER SERVICES PLAN
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Shareholder Services
Plan."
The Fund has adopted a Shareholder Service Plan pursuant to which the
Fund reimburses Dreyfus Service Corporation 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 Shareholder
Services Plan, and the purposes for which such expenditures were incurred,
must be made to the Board for its review. In addition, the Shareholder
Services Plan provides that material amendments of the Shareholder Services
Plan must be approved by the 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 Shareholder
Services Plan by vote of the Board members cast in person at a meeting called
for the purpose of considering such amendments. The Shareholder Services
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 Shareholder
Services Plan. The Shareholder Services 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
Shareholder Services Plan.
During the fiscal year ended September 30, 1996, the Fund was charged an
aggregate $185,456 pursuant to the Shareholder Services Plan.
REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "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 fifteen days following the
issuance of such shares. The redemption fee will be deducted from the
redemption proceeds and retained by the Fund.
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
Service Agents approved by Dreyfus Service Corporation that utilize the
National Securities Clearing Corporation's networking system, or (4) acquired
through the reinvestment of dividends or distributions. The redemption fee
may be waived, modified or terminated at any time.
Check Redemption Privilege. An investor may indicate on the Account
Application, Shareholder Services Form or by later written request that the
Fund provide Redemption Checks ("Checks") drawn on the investor's Fund
account. Checks will be sent only to the registered owner(s) of the account
and only to the address of record. The Account Application, Shareholder
Services Form or later written request 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 the investor's agent, will cause
the Fund to redeem a sufficient number of full and fractional shares in the
investor's 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 the investor. Investors generally will be subject to the same
rules and regulations that apply to checking accounts, although election of
this Privilege creates only a shareholder-transfer agent relationship with
the Transfer Agent.
If the amount of the Check is greater than the value of the shares in an
investor's account, the Check will be returned marked insufficient funds.
Checks should not be used to close an account.
Wire Redemption Privilege. By using this Privilege, the investor
authorizes the Transfer Agent to act on wire or telephone redemption
instructions from any person representing himself or herself to be the
investor, or a representative of the investor's Service Agent, 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 the 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 the
investor on the Account Application or Shareholder Services Form, or to a
correspondent bank if the investor's bank is not a member of the Federal
Reserve System. Fees ordinarily are imposed by such bank and are borne by
the investor. Immediate notification by the correspondent bank to the
investor's bank is necessary to avoid a delay in crediting the funds to the
investor's bank account.
Investors with access to telegraphic equipment may wire redemption
requests to the Transfer Agent by employing the following transmittal code
which may be used for domestic or overseas transmission:
Transfer Agent's
Transmittal Code Answer Back Sign
144295 144295 TSSG PREP
Investors who do not have direct access to telegraphic equipment may
have the wire transmitted by contacting a TRT Cables operator at
1-800-654-7171, toll free. Investors 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. Investors should be aware that if they
have selected the Dreyfus TeleTransfer Privilege, any request for a wire
redemption will be effected as a Dreyfus TeleTransfer transaction through the
Automated Clearing House ("ACH") system unless more prompt transmittal
specifically is requested. Redemption proceeds will be on deposit in the
investor's account at an ACH member bank ordinarily two business days after
receipt of the redemption request. See "Purchase of 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 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 the telephone number 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. 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 (which may
include non-marketable securities) or other assets 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 portfolio of the Fund is valued. If the
recipient sold 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
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Shareholder Services."
Fund Exchanges. A .10% redemption fee will be charged upon an exchange
of Fund shares where the exchange occurs less than 15 days following 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 that are 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"), provided that, 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, shareholders must notify
the Transfer Agent of their prior ownership of fund shares and their account
number.
To request an exchange, an investor, or the investor's Service Agent
acting on the investor's behalf, 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 the investor checks the applicable "No" box on the Account
Application, indicating that the investor specifically refuses this
privilege. By using the Telephone Exchange Privilege, the investor
authorizes the Transfer Agent to act on telephonic instructions (including
over The Dreyfus Touchr automated telephone system) from any person
representing himself or herself to be the investor or a representative of the
investor's Service Agent, 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.
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. For Dreyfus-
sponsored Keogh Plans, IRAs and IRAs set up under a Simplified Employee
Pension ("SEP-IRAs") with only one participant, the minimum initial
investment is $750. To exchange shares held in corporate plans, 403(b)(7)
Plans and SEP-IRAs with more than one participant, the minimum initial
investment is $100 if the plan has at least $2,500 invested among the funds
in the Dreyfus Family of Funds. To exchange shares held in personal
retirement plans, the shares exchanged must have a current value of at least
$100.
Dreyfus Auto-Exchange Privilege. Dreyfus Auto-Exchange Privilege
permits an investor to purchase, in exchange for shares of the Fund, shares
of another fund in the Dreyfus Family of Funds. 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. An investor will
be notified if his account falls below the amount designated to be exchanged
under this Privilege. In this case, an investor's 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 the 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.
Fund Exchanges and the Dreyfus Auto-Exchange Privilege are available to
shareholders resident in any state in which shares of the fund being acquired
may legally be sold. Shares may be exchanged only between accounts having
identical names and other identifying designations.
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. The Fund Exchanges service or
Dreyfus Auto-Exchange Privilege may be modified or terminated at any time
upon notice to shareholders.
Automatic Withdrawal Plan. The Automatic Withdrawal Plan permits an
investor with a $5,000 minimum account to request withdrawal of a specified
dollar amount (minimum of $50) on either a monthly or quarterly basis.
Withdrawal payments are the proceeds from sales of Fund shares, not the yield
on the shares. If withdrawal payments exceed reinvested dividends and
distributions, the investor's shares will be reduced and eventually may be
depleted. Automatic Withdrawal may be terminated at any time by the
investor, the Fund or the Transfer Agent. Shares for which certificates have
been issued may not be redeemed through the Automatic Withdrawal Plan.
Dreyfus Dividend Sweep. Dreyfus Dividend Sweep allows investors to
invest automatically their 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 the investor is 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
that are 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 which charges a
sales load may be invested in shares of other funds sold with a
sales load (referred to herein as "Offered Shares"), provided
that, 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. Dividend 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.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. The Fund's investments are valued by
an independent pricing service (the "Service") approved by the 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 Board. Expenses and fees, including the
management fee (reduced by the expense limitation, if any) and fees pursuant
to the Shareholder Services Plan, 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,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
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,
although 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.
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.
The Fund's portfolio turnover rate for the fiscal years ended
September 30, 1995 and 1996 was 83.31% and 164.93%, respectively. The Fund
anticipates that its annual portfolio turnover rate generally will not exceed
100%, but the turnover rate will not be a limiting factor when the Fund deems
it desirable to sell or purchase securities. Therefore, depending upon
market conditions, the Fund's annual portfolio turnover rate may exceed 100%
in particular years.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Dividends, Distributions
and Taxes."
Management believes that the Fund has qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), for the fiscal year ended September 30, 1996, and the Fund intends
to continue to so qualify, if such qualification is in the best interests of
its shareholders. As a regulated investment company, the Fund will pay no
Federal income tax on net investment income and net realized capital gains to
the extent that such income and gains are distributed to shareholders in
accordance with applicable provisions of the Code. The term "regulated
investment company" does not imply the supervision of management or
investment practices or policies by any government agency.
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, then 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, 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 the 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.
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 the
investment in an economic sense although taxable as stated in "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides
that if a shareholder has not held his Fund 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.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gain or loss. However, all or a portion of any gains
realized from the sale or other 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 the Fund realizes from
certain 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, 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 in the manner described above.
Offsetting positions held by the Fund involving certain futures and
options transactions may 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, overrides or modifies the provisions of
Section 1256 of the Code. As such, all or a portion of any short or long-
term capital gain from certain "straddle" transactions may be recharacterized
to ordinary income.
If the Fund were treated as entering into "straddles" by reason of its
engaging in certain futures or options transactions, such "straddles" would
be characterized as "mixed straddles" if the futures or options transactions
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" 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 conversion transaction rules,
short-term capital losses on "straddle" positions may be recharacterized as
long-term capital losses, and long-term capital gains may be treated as
short-term capital gains.
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.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Performance Information."
The Fund's current yield for the 30-day period ended September 30, 1996
was 4.95%. 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
(net of reimbursements) 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 (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 1996 Federal and State of California effective tax
rate of 45.22%, the Fund's tax equivalent yield for the 30-day period ended
September 30, 1996 was 9.04%. 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 noted 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, a 39.60% tax
rate has been used. For California personal income tax purposes, an 11.00%
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
yields. 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 6.975 year
periods ended September 30, 1996 was 6.85%, 7.31% and 7.83%, 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 total return for the period October 10, 1989 (commencement of
operations) to September 30, 1996 was 69.19%. 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 not as representative of the Fund's
past or future performance.
From time to time, advertising materials for the Fund may refer to or
discuss then-current or past economic conditions, developments and/or events,
including those relating to or arising from actual or proposed tax
legislation, statistical or other information relating to investment
companies, as compiled by industry associations such as the Investment
Company Institute, and Morningstar ratings and related analysis supporting
the rating.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "General Information."
Each Fund share has one vote and, when issued and paid for in accordance
with the terms of the offering, is fully paid and non-assessable. Fund
shares are of one class and have equal rights as to dividends and
liquidation. Shares have no preemptive, subscription or conversion rights
and are freely transferable.
The Fund sends annual and semi-annual financial statements to all its
shareholders.
TRANSFER AND DIVIDEND DISBURSING AGENT, CUSTODIAN, COUNSEL,
AND INDEPENDENT AUDITORS
Dreyfus Transfer, Inc., 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. For the period December 1, 1995 (effective date of transfer
agency agreement) through September 30, 1996, the Fund paid the Transfer
Agent $83,601. The Bank of New York, 90 Washington Street, New York, New
York 10286, is the Fund's custodian. Neither the Transfer Agent nor The Bank
of New York has any part in determining the investment policies of the Fund
or which securities are to be purchased or sold by the Fund.
Stroock & Stroock & Lavan, 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 auditors of the Fund.
APPENDIX A
Certain California (the "State") constitutional amendments, legislative
measures, executive orders, civil actions and voter initiatives, as well as
the general financial condition of the State, could adversely affect the
ability of issuers of California Municipal Obligations to pay interest and
principal on such obligations. The following information constitutes only a
brief summary, does not purport to be a complete description, and is based on
information drawn from official statements relating to securities offerings
of the State of California and various local agencies, available as of the
date of this Statement of Additional Information. While the Fund has not
independently verified such information, it has no reason to believe that
such information is not correct in all material respects.
Recent Developments. From mid-1990 to late 1993, the State suffered a
recession with the worst economic, fiscal and budget conditions since the
1930s. Construction, manufacturing (especially aerospace), exports and
financial services, among others, were all severely affected. Job losses
have been the worst of any post-war recession. Unemployment reached 10.1% in
January 1994, but fell sharply to 7.7% in October and November 1994.
According to the State's Department of Finance, recovery from the recession
in California began in 1994.
The recession seriously affected State tax revenues, which basically
mirror economic conditions. It also has caused increased expenditures for
health and welfare programs. The State also has been facing a structural
imbalance in its budget with the largest programs supported by the General
Fund (K-12 schools and community colleges, health and welfare, and
corrections) growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. As a result, the State experienced
recurring budget deficits in the late 1980s and early 1990s. The State
Controller reported that expenditures exceeded revenues for four of the five
fiscal years ending with 1991-92. The State had an operating surplus of
approximately $109 million in 1992-93 and $836 million in 1993-94. However,
at June 30, 1994, according to the Department of Finance, the State's Special
Fund for Economic Uncertainties ("SFEU") still had a deficit, on a budget
basis, of approximately $1.8 billion.
The accumulated budget deficits over the past several years, together
with expenditures for school funding which have not been reflected in the
budget, and reduction of available internal borrowable funds, have combined
to significantly deplete the State's cash resources to pay its ongoing
expenses. In order to meet its cash needs, the State has had to rely for
several years on a series of external borrowings, including borrowings past
the end of a fiscal year. Such borrowings are expected to continue in future
fiscal years. To meet its cash flow needs in the 1994-95 fiscal year the
State issued, in July and August 1994, $4.0 billion of revenue anticipation
warrants which matured on April 25, 1996, and $3.0 billion of revenue
anticipation notes which matured on June 28, 1995.
As a result of the deterioration in the State's budget and cash
situation, the rating agencies reduced the State's credit ratings. Between
October 1991 and July 1994, the ratings on the State's general obligation
bonds were reduced by S&P from "AAA" to "A," by Moody's from "Aaa" to "A1"
and by Fitch from "AAA" to "A."
The 1994-95 Fiscal Year Budget (as updated in the January 10, 1995
Governor's Budget) projected $42.4 billion of General Fund revenues and
transfers and $41.7 billion of budgeted expenditures. In addition, the 1994-
95 Budget Act anticipated deferring retirement of about $1 billion of the
accumulated budget deficit to the 1995-96 fiscal year when it is intended to
be fully retired by June 30, 1996.
The Governor's Budget for 1995-96 proposed General Fund revenues and
transfers of $42.5 billion and expenditures of $41.7 billion, which was
estimated to leave a balance of approximately $92 million in the budget
reserve, the SFEU, at June 30, 1996 after repayment of the accumulated budget
deficits. The Budget proposal was based on a number of assumptions,
including receipt of $830 million from the Federal government to offset costs
of undocumented and refugee immigrants.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "County Funds") filed for protection
under Chapter 9 of the Federal Bankruptcy Code, after reports that the County
Funds had suffered significant market losses in their investments, causing a
liquidity crisis for the County Funds and the County. More than 200 other
public entities, most of which, but not all, are located in the County, were
also depositors in the County Funds. As of mid-January 1995, following a
restructuring of most of the County Funds' assets to increase their liquidity
and reduce their exposure to interest rate increases, the County estimated
the County Funds' loss at about $1.69 billion, or about 23% of their initial
deposits of approximately $7.5 billion. Many of the entities which deposited
monies in the County Funds, including the County, faced interim and/or
extended cash flow difficulties because of the bankruptcy filing and may be
required to reduce programs or capital projects. The County has embarked on
a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to the County from other local governments pursuant to special
legislation enacted in October 1995.
The State has no existing obligation with respect to any outstanding
obligations or securities of the County or any of the other participating
entities. However, in the event the County is unable to maintain county
administered State programs because of insufficient resources, it may be
necessary for the State to intervene, but the State cannot presently predict
what, if any, action may occur.
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8
on the Richter Scale struck Los Angeles causing significant damage to public
and private structures and facilities. Although some individuals and
businesses suffered losses totaling in the billions of dollars, the overall
effect of the earthquake on the regional and State economy is not expected to
be serious.
State Finances. State moneys are segregated into the General Fund and
approximately 600 Special Funds. The General Fund consists of the revenues
received into the State Treasury and earnings from State investments, which
are not required by law to be credited to any other fund. The General Fund
is the principal operating fund for the majority of governmental activities
and is the depository of most major State revenue sources.
The SFEU is funded with General Fund revenues and was established to
protect the State from unforeseen reduced levels of revenues and/or
unanticipated expenditure increases. Amounts in the SFEU may be transferred
by the Controller as necessary to meet cash needs of the General Fund. The
Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. 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 Controller is required to add the balance in the SFEU to the
balance in the General Fund so as to show the total monies then available for
General Fund purposes.
Inter-fund borrowing has been used for many years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June 30,
1994, the General Fund had outstanding loans in the aggregate principal
amount of $43 million to the General Fund from the SFEU and outstanding loans
in the aggregate principal amount of $5.2 billion, which consisted of $4.0
billion of internal loans to the General Fund from the SFEU and other Special
Funds and $1.2 billion of external loans represented by the 1994 revenue
anticipation warrants.
Articles XIIIA and XIIIB to the State Constitution and Other Revenue Law
Changes. Prior to 1977, revenues of the State government experienced
significant growth primarily as a result of inflation and continuous
expansion of the tax base of the State. In 1978, State voters approved an
amendment to the State Constitution known as Proposition 13, which added
Article XIIIA to the State Constitution, reducing ad valorem local property
taxes by more than 50%. In addition, Article XIIIA provides that additional
taxes may be levied by cities, counties and special districts only upon
approval of not less than a two-thirds vote of the "qualified electors" of
such district, and requires not less than a two-thirds vote of each of the
two houses of the State Legislature to enact any changes in State taxes for
the purpose of increasing revenues, whether by increased rate or changes in
methods of computation.
Primarily as a result of the reductions in local property tax revenues
received by local governments following the passage of Proposition 13, the
Legislature undertook to provide assistance to such governments by
substantially increasing expenditures from the General Fund for that purpose
beginning in the 1978-79 fiscal year. In recent years, in addition to such
increased expenditures, the indexing of personal income tax rates (to adjust
such rates for the effects of inflation), the elimination of certain
inheritance and gift taxes and the increase of exemption levels for certain
other such taxes had a moderating impact on the growth in State revenues. In
addition, the State has increased expenditures by providing a variety of tax
credits, including renters' and senior citizens' credits and energy credits.
The State is subject to an annual "appropriations limit" imposed by
Article XIIIB of the State Constitution adopted in 1979. Article XIIIB
prohibits the State from spending "appropriations subject to limitation" in
excess of the appropriations limit imposed. "Appropriations subject to
limitations" 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 such entity in providing the regulation,
product or service." One of the exclusions from these limitations is "debt
service" (defined as "appropriations required to pay the cost of interest and
redemption charges, including the funding of any reserve or sinking fund
required in connection therewith, on indebtedness existing or legally
authorized as of January 1, 1979 or on bonded indebtedness thereafter
approved" by the voters). In addition, appropriations required to comply
with mandates of courts or the Federal government and, pursuant to
Proposition 111 enacted in June 1990, appropriations for qualified capital
outlay projects and appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels are
not included as appropriations subject to limitation. In addition, a number
of recent initiatives were structured or proposed to create new tax revenues
dedicated to certain specific uses, with such new taxes expressly exempted
from the Article XIIIB limits (e.g., increased cigarette and tobacco taxes
enacted by Proposition 99 in 1988). The appropriations limit also may be
exceeded in cases of emergency. However, unless the emergency arises from
civil disturbance or natural disaster declared by the Governor, and the
appropriations are approved by two-thirds of the Legislature, the
appropriations limit for the next three years must be reduced by the amount
of the excess.
The State's appropriations limit in each year is based on the limit for
the prior year, adjusted annually for changes in California 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. The measurement of change in population is a
blended average of statewide overall population growth, and change in
attendance at local school and community college ("K-14") districts. As
amended by Proposition 111, the appropriations limit is tested over
consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such two-year periods above the combined appropriations
limits for those two years is divided equally between transfers to
K-14 districts and refunds to taxpayers.
As originally enacted in 1979, the State's appropriations limit was
based on its 1978-79 fiscal year authorizations to expend proceeds of taxes
and was adjusted annually to reflect changes in cost of living and population
(using different definitions, which were modified by Proposition 111).
Commencing with the 1991-92 fiscal year, the State's appropriations limit is
adjusted annually based on the actual 1986-87 limit, and as if Proposition
111 had been in effect. The State Legislature has enacted legislation to
implement Article XIIIB which defines certain terms used in Article XIIIB and
sets forth the methods for determining the State's appropriations limit.
Government Code Section 7912 requires an estimate of the State's
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.
For the 1990-91 fiscal year, the State appropriations limit was $32.7
billion, and appropriations subject to limitation were $7.51 billion under
the limit. The limit for the 1991-92 fiscal year was $34.2 billion, and
appropriations subject to limitations were $3.8 billion under the limit. The
limit for the 1992-93 fiscal year was $35.01 billion, and the appropriations
subject to limitation were $7.53 billion under the limit. The limit for the
1993-94 fiscal year was $36.060 billion, and the appropriations subject to
limitation were $6.74 billion under the limit. The limit for the 1994-95
fiscal year was $37.55 billion, and the appropriations subject to limitations
were $5.93 billion under the limit. The estimated limit for the 1995-96
fiscal year end was $39.31 billion, and the appropriations subject to
limitations are estimated to have been $6.47 billion under the limit.
In November 1988, State voters approved Proposition 98, which changed
State funding of public education below the university level and the
operation of the State's 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 in June 1990), K-14 schools
are guaranteed the greater of (a) 40.3% of General Fund revenues ("Test 1"),
(b) the amount appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in Article XIIIB by reference to
California per capita personal income) and enrollment ("Test 2"), or (c) a
third test, which would replace the second test in any year when the
percentage growth in per capita General Fund revenues from the prior year
plus .5% is less than the percentage growth in California 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.
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. In the fall of 1989, the Legislature
and the Governor utilized this provision to avoid having 40.3% of revenues
generated by a special supplemental sales tax enacted for earthquake relief
go to K-14 schools. Proposition 98 also contains provisions transferring
certain State tax revenues in excess of the Article XIIIB limit to K-14
schools.
The 1991-92 Budget Act, applying "Test 2" of Proposition 98,
appropriated approximately $18.5 billion for K-14 schools pursuant to
Proposition 98. During the course of the fiscal year, revenues proved to be
substantially below expectations. By the time the Governor's Budget was
introduced in January 1992, it became clear that per capita growth in General
Fund revenues for 1991-92 would be far smaller than the growth in California
per capita personal income and the Governor's Budget therefore reflected a
reduction in Proposition 98 funding in 1991-92 by applying "Test 3" rather
than "Test 2."
In response to the changing revenue situation and to fully fund the
Proposition 98 guarantee in both the 1991-92 and 1992-93 fiscal years without
exceeding it, the Legislature enacted several bills as part of the 1992-93
budget package which responded to the fiscal crisis in education funding.
Fiscal year 1991-92 Proposition 98 appropriations for K-14 schools were
reduced by $1.083 billion. In order to not adversely impact cash received by
school districts, however, a short-term loan was appropriated from the non-
Proposition 98 State General Fund. The Legislature then appropriated $16.6
billion to K-14 schools for 1992-93 (the minimum guaranteed by Proposition
98), but designated $1.083 billion of this amount to "repay" the prior year
loan, thereby reducing cash outlays in 1992-93 by that amount. In addition
to reducing the 1991-92 fiscal year appropriations for K-14 schools by $1.083
billion and converting the amount to a loan (the "inter-year adjustment"),
Chapter 703, Statutes of 1992 also made an adjustment to "Test 1," based on
the additional $1.2 billion of local property taxes that were shifted to
schools and community colleges. The "Test 1" percentage changed from 40% to
37%. Additionally, Chapter 703 contained a provision that if an appellate
court should determine that the "Test 1" recalculation or the inter-year
adjustment is unconstitutional, unenforceable or invalid, Proposition 98
would be suspended for the 1992-93 fiscal year, with the result that K-14
schools would receive the amount intended by the 1992-93 Budget Act
compromise.
The State Controller stated in October 1992 that, because of a drafting
error in Chapter 703, he could not implement the $1.083 billion reduction of
the 1991-92 school funding appropriation, which was part of the inter-year
adjustment. The Legislature untimely enacted corrective legislation as part
of the 1993-94 Budget package to implement the $1.083 billion inter-year
adjustment as originally intended.
In the 1992-93 Budget Act, a new loan of $732 million was made to K-12
schools in order to maintain per-average daily attendance ("ADA") funding at
the same level as 1991-92, at $4,187. An additional loan of $241 million was
made to community college districts. These loans are to be repaid from
future Proposition 98 entitlements. (The teachers' organization lawsuit
discussed above also seeks to declare invalid the provision making the $732
million a loan "repayable" from future years' Proposition 98 funds.
Including both State and local funds, and adjusting for the loans and
repayments, on a cash basis, total Proposition 98 K-12 funding in 1992-93
increased to $21.5 billion, 2.4% more than the amount in 1992-93 ($21.0
billion).
Based on revised State tax revenues and estimated decreased reported
pupil enrollment, the 1993-94 Budget Act projected that the 1992-93
Proposition 98 Budget Act appropriations of $16.6 billion exceeded a revised
minimum guarantee by $313 million. As a result, the 1993-94 Budget Act
reverted $25 million in 1992-93 appropriations to the General Fund. Limiting
the reversion to this amount ensures that per ADA funding for general
purposes will remain at the prior year level of $4,217 per pupil. The 1993-
94 Governor's Budget subsequently proposed deficiency funding of $121 million
for school apportionments and special education, increasing funding per pupil
in 1992-93 to $4,244. The 1993-94 Budget Act also designated $98 million in
1992-93 appropriations toward satisfying prior years' guarantee levels, an
obligation that resulted primarily from updating State tax revenues for 1991-
92, and designates $190 million as a loan repayable from 1993-94 funding.
The 1993-94 Budget Act projected the Proposition 98 minimum funding
level at $13.5 billion based on the "Test 3" calculation where the guarantee
is determined by the change in per capita growth in General Fund revenues,
which are projected to decrease on a year-over-year basis. This amount also
takes into account increased property taxes transferred to school districts
from other local governments.
Legislation accompanying the 1993-94 Budget Act (Chapter 66/93) provided
a new loan of $609 million to K-12 schools in order to maintain per ADA
funding at $4,217 and a loan of $178 million to community colleges. These
loans have been combined with the K-14 1992-93 loans into one loan totalling
$1.760 billion. Repayment of this loan would be from future years'
Proposition 98 entitlements, and would be conditioned on maintaining current
funding levels per pupil for K-12 schools. Chapter 66 also reduced the "Test
1" percentage to 35% to reflect the property tax shift among local government
agencies.
The 1994-95 Budget Act appropriated $14.4 billion of Proposition 98
funds for K14 schools based on Test 2. This exceeded the minimum Proposition
98 guarantee by $8 million to maintain K-12 funding per pupil at $4,217.
Based upon updated State revenues, growth rates and inflation factors, the
1994-95 Budget Act appropriated an additional $286 million within Proposition
98 for the 1993-94 fiscal year, to reflect a need in appropriations for
school districts and county offices of education, as well as an anticipated
deficiency in special education fundings. These and other minor
appropriation adjustments increased the 1993-94 Proposition 98 guarantee to
$13.8 billion, which exceeded the minimum guarantee in that year by $272
million and provided per pupil funding of $4,225.
The 1995-96 Governor's Budget adjusted the 1993-94 minimum guarantee to
reflect changes in enrollment and inflation, and 1993-94 Proposition 98
appropriations were increased to $14.1 billion, primarily to reflect changes
in the statutory continuous appropriation for apportionments. The revised
appropriations exceeded the minimum guarantee by $32 million. This
appropriation level provided per-pupil funding of $4,225.
The 1994-95 Proposition 98 minimum guarantee also has been adjusted for
changes in factors described above, and was calculated to be $14.9 billion.
Within the minimum guarantee, the dollars per pupil were maintained at the
prior year's level; consequently, the 1994-95 minimum guarantee included a
loan repayment of $135 million, and the per-pupil funding increased to
$4,231.
The 1995-96 Governor's Budget proposed to appropriate $15.9 billion of
Proposition 98 funds to K-14 to meet the guarantee level. Included within
the guarantee was a loan repayment of $379 million for the combined
outstanding loans of $1.76 billion. Funding per pupil was estimated to have
increased by $61 over 1994-95 to $4,292.
Sources of Tax Revenue. The California personal income tax, which in
1994-95 contributed about 43% of General Fund revenues, is closely modeled
after the Federal income tax law. It is imposed on net taxable income (gross
income less exclusions and deductions). The tax is progressive with rates
ranging from 1% to 9.3%. Personal, dependent, and other credits are allowed
against the gross tax liability. In addition, taxpayers may be subject to an
alternative minimum tax ("AMT") which is much like the Federal AMT. This is
designed to ensure that excessive use of tax preferences does not reduce
taxpayers' liabilities below some minimum level. Legislation enacted in July
1991 added two new marginal tax rates, at 10% and 11%, effective for tax
years 1991 through 1995. After 1995, the maximum personal income tax rate is
scheduled to return to 9.3%, and the AMT rate is scheduled to drop from 8.5%
to 7%.
The personal income tax is adjusted annually by the change in the
consumer price index to prevent taxpayers from being pushed into higher tax
brackets without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas,
electricity and water. Sales tax accounted for about 34% of General Fund
revenue in 1994-95. Bank and corporation tax revenues comprised about 13% of
General Fund revenue in 1994-95. In 1989, Proposition 99 added a 25 cents
per pack excise tax on cigarettes, and a new equivalent excise tax on other
tobacco products. Legislation enacted in 1993 added an additional 2 cents
per pack for the purpose of funding breast cancer research.
General Financial Condition of the State. In the years following
enactment of the Federal Tax Reform Act of 1986, and conforming changes to
the State's tax laws, taxpayer behavior became more difficult to predict, and
the State experienced a series of fiscal years in which revenue came in
significantly higher or lower than original estimates. The 1989-90 fiscal
year ended with revenues below estimates and the SFEU was fully depleted by
June 30, 1990. This date essentially coincided with the date of the most
recent recession, and the State subsequently accumulated a budget deficit in
the SFEU approaching $2.8 billion at its peak. The State's budget problems
in recent years also have been caused by a structural imbalance which has
been identified by the current and previous Administrations. The largest
General Fund programs -- K-14 education, health, welfare and corrections --
were increasing faster than the revenue base, driven by the State's rapid
population increases.
Starting in the 1990-91 fiscal year, each budget required multibillion
dollar actions to bring projected revenues and expenditures into balance and
to close large "budget gaps" which were identified. The Legislature and
Governor eventually agreed on significant cuts in program expenditures, some
transfers of program responsibilities and funding from the State to local
governments, revenue increases (particularly in the 1991-92 fiscal year
budget), and various one-time adjustments and accounting changes. However,
as the recession took hold and deepened after the summer of 1990, revenues
dropped sharply and expenditures for health and welfare programs increased as
job losses mounted, so that the State ended each of the 1990-91 and 1991-92
fiscal years with an unanticipated deficit in the budget reserve, the SFEU,
as compared to projected positive balances.
As a result of the revenue shortfalls accumulating for the previous two
fiscal years, the Controller in April 1992 indicated that cash resources
(including borrowing from Special Funds) would not be sufficient to meet all
General Fund obligations due on June 30 and July 1, 1992. On June 25, 1992,
the Controller issued $475 million of 1992 Revenue Anticipation Warrants (the
"1992 Warrants") in order to provide funds to cover all necessary payments
from the General Fund at the end of the 1991-92 fiscal year and on July 1,
1992. The 1992 Warrants were paid on July 24, 1992. In addition to the 1992
Warrants, the Controller reported that as of June 30, 1992, the General Fund
had borrowed $1.336 billion from the SFEU and $4.699 billion from other
Special Funds, using all but about $183 million of borrowable cash resources.
To balance the 1992-93 Governor's Budget, program reductions totalling
$4.365 billion and a revenue and transfer increase of $872 million were
proposed for the 1991-92 and 1992-93 fiscal years. Economic performance in
the State continued to be sluggish after the 1992-93 Governor's Budget was
prepared. By the time of the "May Revision," issued on May 20, 1992, the
Administration estimated that the 1992-93 Budget needed to address a gap of
about $7.9 billion, much of which was needed to repay the accumulated budget
deficits of the previous two years.
The severity of the budget actions needed led to a long delay in
adopting the budget. With the failure to enact a budget by July 1, 1992, the
State had no legal authority to pay many of its vendors until the budget was
passed. Starting on July 1, 1992, the Controller was required to issue
"registered warrants" in lieu of normal warrants backed by cash to pay many
State obligations. Available cash was used to pay constitutionally mandated
and priority obligations, such as debt service on bonds and revenue
anticipation warrants. Between July 1 and September 4, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants
payable from the General Fund, all of which were called for redemption by
September 4, 1992 following enactment of the 1992-93 Budget Act and issuance
by the State of $3.3 billion of interim notes.
The Legislature enacted the 1992-93 Budget Bill on August 29, 1992, and
it was signed by the Governor on September 2, 1992. The 1992-93 Budget Act
provided for expenditures of $57.4 billion and consisted of General Fund
expenditures of $40.8 billion and Special Fund and Bond Fund expenditures of
$16.6 billion. The Department of Finance estimated a balance in the SFEU of
$28 million on June 30, 1993.
The $7.9 billion budget gap was closed primarily through cuts in the
program expenditures (principally for health and welfare programs, aid to
schools and support for higher education), together with some increases in
revenues from accelerated collections and changes in tax laws to confirm to
Federal law changes, and a variety of on-time inter-fund transfers and
deferrals. The other major component of the budget compromise was a law
requiring local governments to transfer a total of $1.3 billion to K-12
school and community college districts, thereby reducing by that amount
General Fund support for those districts under Proposition 98.
In May 1993, the Department of Finance projected that the General Fund
would end the fiscal year on June 30, 1993 with an accumulated budget deficit
of about $2.8 billion, and a negative fund balance of about $2.2 billion (the
difference being certain reserves for encumbrances and school funding costs).
As a result, the State issued $5 billion of revenue anticipation notes and
warrants.
The Governor's 1993-94 Budget, introduced on January 8, 1993, proposed
General Fund expenditures of $37.3 billion, with projected revenues of $39.9
billion. It also proposed Special Fund expenditures of $12.4 billion and
Special Fund revenues of $12.1 billion. The 1993-94 fiscal year represented
the third consecutive year the Governor and the Legislature were faced with a
very difficult budget environment, requiring revenue actions and expenditure
cuts totaling billions of dollars to produce a balanced budget. To balance
the budget in the face of declining revenues, the Governor proposed a series
of revenue shifts from local government, reliance on increased Federal aid
and reductions in state spending.
The "May Revision" of the Governor's Budget, released on May 20, 1993,
indicated that the revenue projections of the January Budget Proposal were
tracking well, with the full year 1992-93 about $80 million higher than the
January projection. Personal income tax revenue was higher than projected,
sales tax was close to target, and bank and corporation taxes were lagging
behind projections. The May Revision projected the State would have an
accumulated deficit of about $2.75 billion by June 30, 1993. The Governor
proposed to eliminate this deficit over an 18-month period. He also agreed
to retain the 0.5% sales tax scheduled to expire June 30 for a six-month
period, dedicated to local public safety purposes, with a November election
to determine a permanent extension. Unlike previous years, the Governor's
Budget and May Revision did not calculate a "gap" to be closed, but rather
set forth revenue and expenditure forecasts and proposals designed to produce
a balanced budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993,
along with implementing legislation. The Governor vetoed about $71 million
in spending. With enactment of the Budget Act, the State carried out its
regular cash flow borrowing program for the fiscal year, which included the
issuance of approximately $2 billion of revenue anticipation notes that
matured on June 28, 1994.
The 1993-94 Budget Act was predicated on General Fund revenues and
transfers estimated at $40.6 billion, about $700 million higher than the
January Governor's Budget, but still about $400 million below 1992-93 (and
the second consecutive year of actual decline). The principal reasons for
declining revenues were the continued weak economy and the expiration (or
repeal) of three fiscal steps taken in 1991--a half cent temporary sales tax,
a deferral of operating loss carry forwards, and repeal by initiative of a
sales tax on candy and snack foods.
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9
billion, an increase of 2.9% over 1992-93.
The 1993-94 Budget Act included General Fund expenditures of $38.5
billion (a 6.3% reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available revenues.
The Budget also included Special Fund expenditures of $12.1 billion, a 4.2%
increase.
The 1993-94 Budget Act contained no General Fund tax/revenue increases
other than a two year suspension of the renters' tax credit.
Administration reports during the course of the 1993-94 fiscal year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had
been anticipated when the 1993-94 Budget Act was adopted. Overall, revenues
for the 1993-94 fiscal year were about $800 million lower than original
projections, and expenditures were about $780 million higher, primarily
because of higher health and welfare caseloads, lower property taxes which
require greater State support for K-14 education to make up to shortfall, and
lower than anticipated Federal government payments for immigration-related
costs. The reports in May and June 1994, indicated that revenues in the
second half of the 1993-94 fiscal year were very close to the projections
made in the Governor's Budget of January 10, 1994, which was consistent with
a slow turn around in the economy.
The Department of Finance's July 1994 Bulletin, which included final
June receipts, reported that June revenues were $114 million (2.5%) above
projection, with final end-of-year results at $377 million (about 1%) above
the May Revision projections. Part of this result was due to the end-of-year
adjustments and reconciliations. Personal income tax and sales tax continued
to track projections. The largest factor in the higher than anticipated
revenues was from bank and corporation taxes, which were $140 million (18.4%)
above projection in June.
During the 1993-94 fiscal year, the State implemented the Deficit
Retirement Plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 that matured
December 21, 1994. This borrowing reduced the cash deficit at the end of the
1993-94 fiscal year. Nevertheless, because of the $1.5 billion variance from
the original 1993-94 Budget Act assumptions, the General Fund ended the
fiscal year at June 30, 1994 carrying forward an accumulated deficit of
approximately $1.8 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the Deficit Retirement Plan, the
State issued an additional $2.0 billion of revenue anticipation warrants that
matured July 26, 1994, which were needed to fund the State's obligations and
expenses through the end of the 1993-94 fiscal year.
The 1994-95 fiscal year represented the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment
to produce a balanced budget. Many program cost and budgetary adjustments
had already been made in the last three years. The Governor's Budget
Proposal, as updated in May and June 1994 proposed a two-year solution to
pass the accumulated deficit. The budget proposal set forth revenue and
expenditure forecasts and revenue and expenditure proposals which estimated
operating surpluses for the budget for both 1994-95 and 1995-96, and lead to
the elimination of the accumulated budget deficit, estimated at about $1.8
billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projected revenues and transfers of $41.9 billion, $2.1 billion higher than
revenues in 1993-94. This reflected the Administration's forecast of an
improving economy. Also included in this figure was the projected receipt of
about $360 million from the Federal government to reimburse the State's cost
of incarcerating undocumented immigrants, most of which eventually was not
received.
The 1994-95 Budget Act projected Special Fund revenues of $12.1 billion,
a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projected General Fund expenditures of $40.9
billion, an increase of $1.6 billion over the 1993-94 fiscal year. The 1994-
95 Budget Act also projected Special Fund expenditures of $13.7 billion, a
5.4% increase over 1993-94 fiscal year estimated expenditures.
The 1994-95 Budget Act contained no tax increases. Under legislation
enacted for the 1993-94 Budget Act, the renters' tax credit was suspended for
two years (1993 and 1994). A ballot proposition to permanently restore the
renters' tax credit after 1995 failed at the June 1994 election. The
Legislature enacted a further one-year suspension of the renters' tax credit,
for 1995, saving about $390 million in the 1995-96 fiscal year.
The 1994-95 Budget Act assumed that the State would use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which were issued. Issuance of the warrants allows the State to
defer repayment of approximately $1.0 billion of its accumulated budget
deficit into the 1995-96 fiscal year. The Budget Adjustment Law enacted
along with the 1994-95 Budget Act is designed to ensure that the warrants
will be repaid in the 1995-96 fiscal year.
The Department of Finance Bulletin for April 1995 reported that General
Fund revenues for March 1995 were $28 million, or 1.1%, below forecast, and
that year-to-date General Fund revenues were $110 million, or 0.4%, below
forecast.
Initial analysis of the Federal fiscal year 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of undocumented and refugee
immigrants, less than the $356 million which was assumed in the State's 1994-
95 Budget Act.
For the first time in four years, the State entered the upcoming 1995-96
fiscal year with strengthening revenues based on an improving economy. On
January 10, 1995, the Governor presented his 1995-96 Fiscal Year Budget
Proposal (the "Proposed Budget"). The Proposed Budget estimated General Fund
revenues and transfers of $42.5 billion (an increase of 0.2% over 1994-95).
This nominal increase from 1994-95 fiscal year reflects the Governor's
realignment proposal and the first year of his tax cut proposal. Without
these two proposals, General Fund revenues would have been projected at
approximately $43.8 billion, or an increase of 3.3% over 1994-95.
Expenditures were estimated at $41.7 billion (essentially unchanged from 1994-
95). Special Fund revenues were estimated at $13.5 billion (10.7% higher
than 1994-95) and Special Fund expenditures are estimated at $13.8 billion
(12.2% higher than 1994-95). The Proposed Budget projected that the General
Fund would end the fiscal year at June 30, 1996 with a budget surplus in SFEU
of about $92 million, or less than 1% of General Fund expenditures, and will
have repaid all of the accumulated budget deficits. The Department of
Finance projected in June 1996 that the General Fund would end the fiscal
year at June 30, 1996 with a budget surplus in SEFU of $28 million.
On January 10, 1996, the Governor released his proposed budget for the
Fiscal Year 1996-97 (the "Governor's Budget"). The Governor requested total
General Fund appropriations of about $45.2 billion, based on projected
revenues and transfers of about $45.6 billion, which would leave a budget
reserve in SFEU at June 30, 1997 of about $400 million. The Governor renewed
a proposal, which had been rejected by the Legislature in 1995, for a 15%
phased cut in individual and corporate tax rates over three years (the budget
proposal assumes this will be enacted, reducing revenues in 1996-97 by about
$600 million). There was also a proposal to restructure trial court funding
in a way which would result in a $300 million decrease in General Fund
revenues. The Governor requested legislation to make permanent a moratorium
on cost of living increases for welfare payments, and suspension of a renters
tax credit, which otherwise would go back into effect in the 1996-97 fiscal
year. He further proposed additional costs in certain health and welfare
programs, and assumed that cuts previously approved by the Legislature will
receive Federal approval. The Governor's Budget proposes increases in
funding for K-12 school under Proposition 98, for State higher education
systems (with a second year of no student fee increases), and for
corrections. The Governor's Budget projects external cash flow borrowing of
up to $3.2 billion, to mature by June 30, 1997.
Recent Economic Trends. Revised employment data indicate that
California's recession ended in 1993, and following a period of stability, a
solid recovery is now underway. The State's unemployment rate fell sharply
last year, from 10.1% in January to 7.7% in October and November 1994. The
gap between the national and California jobless rates narrowed from 3.4
percentage points at the beginning of 1994 to an average of 2 percentage
points in October and November. The number of unemployed Californians fell
by nearly 400,000 during the year, while civilian employment increased more
than 300,000 in 1994.
Other indicators, including retail sales, homebuilding activity,
existing home sales and bank lending volume all confirm the State's recovery.
Personal income was severely affected by the Northridge Earthquake,
which reduced the first quarter 1994 figure by $22 billion at an annual rate,
reflecting the uninsured damage to residences and unincorporated businesses.
As a result, personal income growth for all of 1994 was about 4.2%. However,
excluding the Northridge effects, growth would have been in excess of 5%.
Personal income is expected to grow 6.6% for 1995.
APPENDIX B
Description of 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 "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 payments.
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 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 repayment
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 sign to show relative standing within the
major ratings 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
The designation A-1 by S&P 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 sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
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 some time 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 bonds in each of the generic rating categories
Aa, A, Baa, and B. Moody's also provides numerical modifiers of 2 and 3 in
each of these categories 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 its generic rating category; the modifier 2
indicates that the issue is in the mid-range of the generic category; and the
modifier 3 indicates that the issue is in the low end of the generic
category.
Municipal Note Ratings
Moody's ratings for state municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run.
A short-term rating may also be assigned on an issue having a demand
feature. 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 Rating
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 wide range of financial markets and assured
sources of alternative liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
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 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 in 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.
<TABLE>
<CAPTION>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS SEPTEMBER 30, 1996
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS-96.8% AMOUNT VALUE
_______ _______
<S> <C> <C>
CALIFORNIA-93.1%
ABAG Finance Corp., COP (ABAG XXIV) 6.90%, 4/1/2012......................... $ 3,500,000 $ 3,680,600
Alameda County, COP (Various Financing Projects)
6%, 9/1/2021 (Insured; MBIA, LOC; The Fuji Bank) (a,b).................. 5,000,000 5,082,400
Allan Hancock Joint Community College District, COP, Refunding
7.625%, 10/1/2005....................................................... 1,055,000 1,156,565
Anaheim Public Financing Authority, Tax Allocation Revenue
6.45%, 12/28/2018 (Insured; MBIA) (b)................................... 6,000,000 6,400,440
Beaumont Unified School District, COP (Capital Improvement Project)
7.70%, 1/1/2021......................................................... 1,100,000 1,162,227
California 5.25%, 10/1/2015................................................. 5,300,000 5,051,960
California Educational Facilities Authority, Revenue
(Chapman College) 7.50%, 1/1/2018....................................... 1,760,000 1,900,448
California Health Facilities Financing Authority, Revenue:
(HELP Group) 7%, 8/1/2021
(Insured; California Health Facilities Construction Loan Program)..... 1,800,000 1,922,976
(Pomona Valley Hospital Medical Center) 7.375%, 1/1/2014................ 750,000 798,412
(Walden House) 6.85%, 3/1/2022.......................................... 3,225,000 3,419,661
California Housing Finance Agency:
Home Mortgage Revenue:
6.37%, 8/1/2027 (c)................................................... 2,250,000 2,273,040
7.50%, 8/1/2029....................................................... 1,480,000 1,544,114
7.60%, 8/1/2030....................................................... 1,715,000 1,810,748
7.70%, 8/1/2030....................................................... 1,105,000 1,162,582
Multi-Family Housing Revenue 6.15%, 8/1/2022 (Insured; AMBAC) (c)....... 3,850,000 3,852,810
California Pollution Control Financing Authority, PCR, Refunding
(San Diego Gas and Electric) 5.90%, 6/1/2014 (Insured; MBIA)............ 5,000,000 5,181,300
California Public Works Board, LR, Refunding
(Department of Corrections):
5.20%, 12/1/2009 (Insured; MBIA)...................................... 2,830,000 2,783,984
5.625%, 11/1/2016 (Insured; MBIA) (c)................................. 4,000,000 3,990,000
California Statewide Communities Development Authority, COP,
Health Facilities Revenue, Refunding (Barton Memorial Hospital)
6.50%, 12/1/2009 (LOC; Banque Nationale De Paris) (a)................... 1,600,000 1,703,888
Chico Public Financing Authority, Revenue
(Chico Municipal Airport and Central Chico Redevelopment Project)
7.40%, 4/1/2021 (Prerefunded 4/1/2000) (d).............................. 2,410,000 2,684,981
Commerce Joint Powers Financing Authority, Revenue, Multiple Project Loans
8%, 3/1/2022............................................................ 2,445,000 2,607,470
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1996
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS (CONTINUED) AMOUNT VALUE
_______ _______
CALIFORNIA (CONTINUED)
Compton, COP, Refunding (Civic Center Project)
7.50%, 8/1/2005 (LOC; Mitsui Trust and Banking) (a)..................... $ 2,680,000 $ 2,881,884
Contra Costa County, Mortgage Revenue, Refunding (Cedar Pointe)
6.15%, 9/1/2025......................................................... 3,000,000 3,033,090
Del Mar Race Track Authority, Revenue, Refunding 6.20%, 8/15/2011........... 2,000,000 1,994,640
Dry Creek Joint School District, Special Tax
(Community Facilities District Number 1)
7.25%, 9/1/2011 (Insured; FSA, Prerefunded 9/1/2000) (d)................ 1,000,000 1,123,210
Duarte, COP (City of Hope Medical Center):
6%, 4/1/2008............................................................ 3,570,000 3,577,747
6.25%, 4/1/2023......................................................... 7,000,000 6,975,710
East Bay Municipal Utility District, Revenue, Refunding:
Wastewater Treatment System 5%, 6/1/2016 (Insured; FGIC)................ 8,035,000 7,432,455
Water System:
5%, 6/1/2014 (Insured; FGIC).......................................... 5,000,000 4,679,100
5%, 6/1/2016 (Insured; FGIC).......................................... 9,785,000 9,051,223
Folsom Public Financing Authority, Local Agency Revenue 7.70%, 10/1/2020.... 1,200,000 1,241,412
Fontana Public Financing Authority, Tax Allocation Revenue, Refunding
(North Fontana Redevelopment Project) 7.25%, 9/1/2020................... 2,000,000 1,993,080
Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue:
Zero Coupon, 1/1/2017................................................... 5,000,000 1,368,800
Zero Coupon, 1/1/2029................................................... 23,295,000 2,868,779
6%, 1/1/2034............................................................ 3,000,000 2,914,950
Fresno Unified School District, COP (Project Phase VI) 7.20%, 5/1/2011...... 4,250,000 4,568,622
Hollister Redevelopment Agency, Tax Allocation
(Hollister Community Development Project) 7.55%, 10/1/2013.............. 1,000,000 1,064,870
Inglewood, HR (Daniel Freeman Hospital) 6.75%, 5/1/2013..................... 2,000,000 2,099,860
Loma Linda, HR (Loma Linda University Medical Center Project)
6%, 12/1/2023........................................................... 5,000,000 4,821,250
Los Angeles County Public Works Financing Authority, LR, Refunding
4.375%, 9/1/2000........................................................ 9,370,000 9,347,980
Madera County, COP (Valley Childrens Hospital):
6.25%, 3/15/2007 (Insured; MBIA)........................................ 2,545,000 2,768,044
6.50%, 3/15/2008 (Insured; MBIA)........................................ 3,165,000 3,500,901
Metropolitan Water District, Southern California Waterworks Revenue
4.875%, 7/1/2010 (Insured; MBIA)........................................ 6,000,000 5,638,200
Newhall Elementary and Castaic Union School Districts, COP
(School Improvement Project) 7.70%, 3/1/2011............................ 2,695,000 2,860,177
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1996
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS (CONTINUED) AMOUNT VALUE
_______ _______
CALIFORNIA (CONTINUED)
Northern California Power Agency, Public Power Revenue
(Hydroelectric Project Number 1):
7.15%, 7/1/2024....................................................... $ 5,345,000 $ 5,616,098
Refunding 6.30%, 7/1/2018 (Insured; MBIA)............................. 20,400,000 22,302,912
Orange County:
COP (Juvenile Justice Center) 7.625%, 6/1/2019 (Prerefunded 6/1/1999) (d) 2,500,000 2,748,950
Special Tax (Community Facilities District Number 87-3)
7.80%, 8/15/2015 (Prerefunded 8/15/2000) (d).......................... 1,500,000 1,698,270
Orange County Recovery, COP, Refunding 6%, 7/1/2026 (Insured; MBIA)......... 5,720,000 5,803,741
Otay Municipal Water District (Improvement District Number 27) 6.70%, 9/1/2022 2,000,000 2,056,040
Palm Desert (Assessment District Number 94-1) 7.625%, 9/2/2019.............. 1,920,000 1,976,755
Port Oakland, Special Facilities Revenue (Mitsui O.S.K. Lines Limited)
6.80%, 1/1/2019 (LOC; Industrial Bank of Japan) (a)..................... 3,000,000 3,148,590
Richmond Joint Powers Financing Authority, Revenue
7.25%, 5/15/2013 (Prerefunded 5/15/2000) (d)............................ 2,000,000 2,214,900
Sacramento County, Special Tax (Community Facilities District Number 1)
8.25%, 12/1/2020........................................................ 5,610,000 6,009,376
San Bernardino, Health Care Systems Revenue (Sisters of Charity) 7%, 7/1/2021 2,000,000 2,236,240
San Diego Public Facilities Financing Authority, Sewer Revenue:
5%, 5/15/2020 (Insured; FGIC)........................................... 6,000,000 5,468,940
5%, 5/15/2025 (Insured; FGIC)........................................... 11,125,000 10,053,218
San Francisco City and County Airports Commission, International Airport
Revenue
5.70%, 5/1/2026 (Insured; MBIA)......................................... 4,000,000 3,935,160
San Jose Redevelopment Agency, Tax Allocation, Refunding
(Merged Area Redevelopment Project) 6%, 8/1/2008........................ 3,000,000 3,208,530
San Marcos Public Facilities Authority, Revenue, Refunding
(Public Improvement-Civic Center) 6.20%, 8/1/2022....................... 3,000,000 2,982,480
San Marcos Unified School District
(School Facilities Improvement District Number 1)
5.80%, 11/1/2014 (Insured; AMBAC)....................................... 3,540,000 3,610,411
Simi Valley, Single Family Residential Mortgage Revenue 7.625%, 8/1/2022 (e) 1,739,784 295,763
Southern California Home Finance Authority, SFMR
6.90%, 10/1/2024 (Collateralized: FNMA and GNMA)........................ 1,665,000 1,727,537
Southern California Public Power Authority, Power Project Revenue
(Multiple Projects) 6.75%, 7/1/2011..................................... 3,750,000 4,217,025
Tehachapi Unified School District, COP (Tompkins Elementary School Project)
7.80%, 2/1/2021 (Prerefunded 2/1/2001) (d).............................. 1,000,000 1,125,700
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1996
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS (CONTINUED) AMOUNT VALUE
_______ _______
CALIFORNIA (CONTINUED)
University of California, HR (Davis Medical Center):
5.75%, 7/1/2013 (Insured; AMBAC)........................................ $ 10,560,000 $10,725,898
6%, 7/1/2026 (Insured; AMBAC)........................................... 6,000,000 6,087,840
Valley Health System, HR, Refunding (Improvement Project) 6.50%, 5/15/2015.. 6,250,000 6,178,313
West Covina Redevelopment Agency, Special Tax, Refunding
(Community Facilities District - Fashion Plaza):
6%, 9/1/2017.......................................................... 6,000,000 6,017,400
6%, 9/1/2022.......................................................... 8,325,000 8,308,184
Yolo County Housing Authority, Mortgage Revenue (Walnut Park Apartments)
7.20%, 8/1/2033 (Insured; FHA).......................................... 4,150,000 4,342,436
U. S. RELATED-3.7%
Puerto Rico Commonwealth, Refunding 6%, 7/1/2014............................ 5,000,000 5,047,200
Puerto Rico Electric Power Authority, Power Revenue:
6.50%, 7/1/2006......................................................... 5,000,000 5,591,300
7.125%, 7/1/2014........................................................ 540,000 582,482
_______
TOTAL LONG-TERM MUNICIPAL INVESTMENTS (cost $284,635,506)................... $293,294,279
=======
SHORT-TERM MUNICIPAL INVESTMENTS-3.2%
California Pollution Control Financing Authority, PCR, Refunding, VRDN
(Pacific Gas and Electric)
3.85% (LOC; Bank of America National Trust & Saving Association) (a,f).. $ 8,500,000 $ 8,500,000
Los Angeles County Metropolitan Transportation Authority,
Sales Tax Revenue, Refunding, VRDN 3.65% (f)............................ 1,100,000 1,100,000
_______
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS (cost $9,600,000).................... $ 9,600,000
=======
TOTAL INVESTMENTS-100.0% (cost $294,235,506)................................ $302,894,279
=======
</TABLE>
<TABLE>
<CAPTION>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
SUMMARY OF ABBREVIATIONS
<S> <C> <S> <C>
AMBAC American Municipal Bond Assurance Corporation LOC Letter of Credit
COP Certificate of Participation LR Lease Revenue
FGIC Financial Guaranty Insurance Company MBIA Municipal Bond Investors Assurance
FNMA Federal National Mortgage Association Insurance Corporation
FHA Federal Housing Administration PCR Pollution Control Revenue
FSA Financial Security Assurance SFMR Single Family Mortgage Revenue
GNMA Government National Mortgage Association VRDN Variable Rate Demand Notes
HR Hospital Revenue
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF COMBINED RATINGS (UNAUDITED)
<S> <C> <C> <C>
FITCH (G) OR MOODY'S OR STANDARD & POOR'S PERCENTAGE OF VALUE
_____ _____ __________ ____________
AAA Aaa AAA 40.6%
AA Aa AA 6.8
A A A 22.4
BBB Baa BBB 9.6
BB Ba BB .7
D N/A D .6
F1+ & F1 MIG1, VMIG1 & P1 SP1 & A1 12.8
Not Rated (h) Not Rated (h) Not Rated (h) 6.5
____
100.0%
====
</TABLE>
NOTES TO STATEMENT OF INVESTMENTS:
(a) Secured by letters of credit.
(b) Wholly held by the custodian in a segregated account as collateral
for delayed-delivery securities.
(c) Purchased on a delayed-delivery basis.
(d) Bonds which are prerefunded are collateralized by U.S. Government
securities which are held in escrow and are used to pay principal and
interest on the municipal issue and to retire the bonds in full at the
earliest refunding date.
(e) Non-income producing security; interest payments in default.
(f) Securities payable on demand. The interest rate, which is subject to
change, is based upon bank prime rates or an index of market interest
rates.
(g) Fitch currently provides creditworthiness information for a limited
number of investments.
(h) Securities which, while not rated by Fitch, Moody's or Standard &
Poor's have been determined by the Manager to be of comparable quality to
those rated securities in which the Fund may invest.
(i) At September 30, 1996, 27.1% of the Fund's net assets are insured by
MBIA.
See notes to financial statements.
<TABLE>
<CAPTION>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1996
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $294,235,506)-see statement..................................... $302,894,279
Interest receivable..................................................... 4,569,144
Prepaid expenses........................................................ 11,274
_______
307,474,697
LIABILITIES:
Due to The Dreyfus Corporation and affiliates........................... $ 141,918
Payable for investment securities purchased............................. 10,118,754
Accrued expenses and other liabilities.................................. 416,293 10,676,965
______ _______
NET ASSETS ................................................................ $296,797,732
=======
REPRESENTED BY:
Paid-in capital......................................................... $282,368,780
Accumulated undistributed investment income-net......................... 426,999
Accumulated undistributed net realized gain on investments.............. 5,343,180
Accumulated net unrealized appreciation on investments-Note 3(b)........ 8,658,773
_______
NET ASSETS at value applicable to 22,225,417 shares outstanding
(500 million shares of $.001 par value Common Stock authorized)......... $296,797,732
=======
NET ASSET VALUE, offering and redemption price per share
($296,797,732 / 22,225,417 shares)...................................... $13.35
=======
STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1996
INVESTMENT INCOME:
INTEREST INCOME......................................................... $ 18,741,512
EXPENSES:
Management fee-Note 2(a).............................................. $ 1,865,723
Shareholder servicing costs-Note 2(b)................................. 329,807
Professional fees..................................................... 43,856
Custodian fees........................................................ 40,300
Directors' fees and expenses-Note 2(c)................................ 31,020
Prospectus and shareholders' reports.................................. 24,632
Registration fees..................................................... 17,725
Miscellaneous......................................................... 22,760
______
TOTAL EXPENSES.................................................... 2,375,823
_______
INVESTMENT INCOME-NET............................................. 16,365,689
_______
REALIZED AND UNREALIZED GAIN ON INVESTMENTS-Note 3:
Net realized gain on investments........................................ $ 6,662,496
Net realized (loss) on financial futures................................ (490,245)
______
NET REALIZED GAIN..................................................... 6,172,251
Net unrealized (depreciation) on investments............................ (1,721,041)
_______
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................... 4,451,210
_______
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $ 20,816,899
=======
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30,
__________________________________
1995 1996
_______ ______
<S> <C> <C>
OPERATIONS:
Investment income-net................................................... $ 17,903,962 $ 16,365,689
Net realized gain on investments........................................ 2,920,516 6,172,251
Net unrealized appreciation (depreciation) on investments for the year.. 7,663,008 (1,721,041)
_______ ______
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. 28,487,486 20,816,899
_______ ______
DIVIDENDS TO SHAREHOLDERS FROM:
Investment income-net................................................... (17,856,933) (15,985,719)
Net realized gain on investments........................................ (2,098,798) (3,748,977)
_______ ______
TOTAL DIVIDENDS....................................................... (19,955,731) (19,734,696)
_______ ______
CAPITAL STOCK TRANSACTIONS:
Net proceeds from shares sold........................................... 136,023,008 159,413,680
Dividends reinvested.................................................... 13,460,614 13,771,940
Cost of shares redeemed................................................. (187,243,378) (195,305,564)
_______ ______
(DECREASE) IN NET ASSETS FROM CAPITAL STOCK TRANSACTIONS.............. (37,759,756) (22,119,944)
_______ ______
TOTAL (DECREASE) IN NET ASSETS.................................... (29,228,001) (21,037,741)
NET ASSETS:
Beginning of year....................................................... 347,063,474 317,835,473
_______ ______
End of year (including undistributed investment income-net:
$47,029 in 1995 and $426,999 in 1996)................................. $ 317,835,473 $ 296,797,732
======= ======
SHARES SHARES
_______ ______
CAPITAL SHARE TRANSACTIONS:
Shares sold............................................................. 10,429,450 11,970,554
Shares issued for dividends reinvested.................................. 1,047,791 1,027,566
Shares redeemed......................................................... (14,495,652) (14,661,989)
_______ ______
NET (DECREASE) IN SHARES OUTSTANDING.................................. (3,018,411) (1,663,869)
======= ======
See notes to financial statements.
</TABLE>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Reference is made to page 4 of the Fund's Prospectus
dated January 31, 1997.
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES:
General California Municipal Bond Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 ("Act") as a non-diversified
open-end management investment company. The Fund's investment objective is to
maximize current income exempt from Federal and State of California personal
income taxes to the extent consistent with the preservation of capital. The
Dreyfus Corporation ("Manager") serves as the Fund's investment adviser. The
Manager is a direct subsidiary of Mellon Bank, N.A. Premier Mutual Fund
Services, Inc. acts as the distributor of the Fund's shares, which are sold
to the public without a sales charge.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management
estimates and assumptions. Actual results could differ from those estimates.
(A) PORTFOLIO VALUATION: The Fund's investments (excluding options and
financial futures on municipal and U.S. treasury securities) are valued each
business day by an independent pricing service ("Service") approved by the
Board of Directors. Investments for which quoted bid prices are readily
available and are representative of the bid side of the market in the
judgment of the Service 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 securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Options
and financial futures on municipal and U.S. treasury securities are valued at
the last sales price on the securities exchange on which such securities are
primarily traded or at the last sales price on the national securities market
on each business day. Investments not listed on an exchange or the national
securities market, or securities for which there were no transactions, are
valued at the average of the most recent bid and asked prices. Bid price is
used when no asked price is available.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities
transactions are recorded on a trade date basis. Realized gain and loss from
securities transactions are recorded on the identified cost basis. Interest
income, adjusted for amortization of premiums and original issue discounts on
investments, is earned from settlement date and recognized on the accrual
basis. Securities purchased or sold on a when-issued or delayed-delivery
basis may be settled a month or more after the trade date.
The Fund follows an investment policy of investing primarily in municipal
obligations of one state. Economic changes affecting the state and certain of
its public bodies and municipalities may affect the ability of issuers within
the state to pay interest on, or repay principal of, municipal obligations
held by the Fund.
(C) DIVIDENDS TO SHAREHOLDERS: It is the policy of the Fund to declare
dividends daily from investment income-net. Such dividends are paid monthly.
Dividends from net realized capital gain are normally declared and paid
annually, but the Fund may make distributions on a more frequent basis to
comply with the distribution requirements of the Internal Revenue Code. To
the extent that net realized capital gain can be offset by capital loss
carryovers, if any, it is the policy of the Fund not to distribute such gain.
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(D) FEDERAL INCOME TAXES: It is the policy of the Fund to continue to
qualify as a regulated investment company, which can distribute tax exempt
dividends, by complying with the applicable provisions of the Internal Revenue
Code, and to make distributions of income and net realized capital gain
sufficient to relieve it from substantially all Federal income and excise
taxes.
NOTE 2-MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) Pursuant to a management agreement ("Agreement") with the Manager,
the management fee is computed at the annual rate of .60 of 1% of the value
of the Fund's average daily net assets and is payable monthly. The Agreement
provides that if in any full fiscal year the aggregate expenses of the Fund,
exclusive of taxes, brokerage, interest on borrowings and extraordinary
expenses, exceed the expense limitation of any state having jurisdiction over
the Fund, the Fund may deduct from payments to be made to the Manager, or the
Manager will bear the amount of such excess to the extent required by state
law. The most stringent state expense limitation applicable to the Fund
presently requires reimbursement of expenses in any full fiscal year that
such expenses (exclusive of certain expenses as described above) exceed 2-1/2%
of the first $30 million, 2% of the next $70 million and 1-1/2% of the excess
over $100 million of the value of the Fund's average daily net assets in
accordance with California "blue sky" regulations. There was no expense
reimbursement for the year ended September 30, 1996.
(B) Pursuant to the Fund's Shareholder Services Plan, the Fund reimburses
Dreyfus Service Corporation, a wholly-owned subsidiary of the Manager, an
amount not to exceed an annual rate of .25 of 1% 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.
During the year ended September 30, 1996, the Fund was charged an aggregate
of $185,456 pursuant to the Shareholder Services Plan.
Effective December 1, 1995, the Fund compensates Dreyfus Transfer, Inc.,
a wholly-owned subsidiary of the Manager, under a transfer agency agreement
for providing personnel and facilities to perform transfer agency services
for the Fund. Such compensation amounted to $83,601 during the period ended
September 30, 1996.
(C) Each director who is not an "affiliated person" as defined in the Act
receives from the Fund an annual fee of $2,500 and an attendance fee of $250
per meeting. The Chairman of the Board receives an additional 25% of such
compensation.
NOTE 3-SECURITIES TRANSACTIONS:
(A) The aggregate amount of purchases and sales of investment securities,
excluding short-term securities, during the year ended September 30, 1996
amounted to $481,249,225 and $504,465,540, respectively.
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Fund may invest in financial futures contracts in order to gain
exposure to or protect against changes in the market. The Fund is exposed to
market risk as a result of changes in the value of the underlying financial
instruments. Investments in financial futures require the Fund to "mark to
market" on a daily basis, which reflects the change in the market value of the
contract at the close of each day's trading. Accordingly, variation margin
payments are received or made to reflect daily unrealized gains or losses. When
the contracts are closed, the Fund recognizes a realized gain or loss. These
investments require initial margin deposits with a custodian, which consist of
cash or cash equivalents, up to approximately 10% of the contract amount. The
amount of these deposits is determined by the exchange or Board of Trade on
which the contract is traded and is subject to change. At September 30, 1996,
there were no financial futures contracts outstanding.
(B) At September 30, 1996, accumulated net unrealized appreciation on
investments was $8,658,773, consisting of $11,076,976 gross unrealized
appreciation and $2,418,203 gross unrealized depreciation.
At September 30, 1996, the cost of investments for Federal income tax
purposes was substantially the same as the cost for financial reporting
purposes (see the Statement of Investments).
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
We have audited the accompanying statement of assets and liabilities of
General California Municipal Bond Fund, Inc., including the statement of
investments, as of September 30, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and financial highlights
for each of the years indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1996 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of General California Municipal Bond Fund, Inc. at September 30,
1996, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the indicated years, in conformity with
generally accepted accounting principles.
[Ernst and Young LLP signature logo]
New York, New York
October 28, 1996
