UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-04525
| T. Rowe Price California Tax-Free Income Trust |
|
|
| (Exact name of registrant as specified in charter) |
| 100 East Pratt Street, Baltimore, MD 21202 |
|
|
| (Address of principal executive offices) |
| David Oestreicher |
| 100 East Pratt Street, Baltimore, MD 21202 |
|
|
| (Name and address of agent for service) |
Registrant’s telephone number, including area
code: (410) 345-2000
Date of fiscal year end: February
28
Date of reporting period: February 28, 2013
Item 1. Report to Shareholders
 |
|
California Tax-Free Money Fund |
February 28, 2013 |
The views and opinions in this report were current as of February 28, 2013. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.
REPORTS ON THE WEB
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Manager’s Letter
Fellow Shareholders
Despite historically low interest rates, California municipal bonds produced good returns in the year ended February 28, 2013, as yields declined amid strong investor demand for securities providing attractive levels of tax-free income. Short-dated securities produced lower returns than longer-term bonds as the continuing rate compression in shorter-term tax-free yields near 0% reduced their potential for significant capital appreciation. Lower-quality municipals with their yield advantage outperformed higher-quality issues in both the investment-grade and high yield markets. The California Tax-Free Money Fund was roughly flat over the period, while the California Tax-Free Bond Fund posted a solid return but lagged its benchmark average of similar funds due to its more conservative positioning.
MARKET ENVIRONMENT
The U.S. economy expanded at a modest pace over the last year. Employment growth has been steady, but the national unemployment level remains elevated. The housing market recovery has been gaining traction, although its contribution to overall growth is smaller than in previous expansions. We believe gross domestic product growth will continue in 2013, but uncertainty about U.S. fiscal policy, which restrained economic activity in late 2012, could continue to do so in the months ahead. On January 1, 2013, a lame-duck session of Congress passed legislation to avoid the full brunt of the federal tax increases and automatic spending cuts that had been scheduled to take place at the end of 2012. Tax increases were not as significant as they could have been, although the 39.6% federal tax bracket has been reinstated and the 2% payroll tax cut in place since the beginning of 2011 was allowed to expire. Scheduled budget sequestration was delayed for two months. The new Congress, which did not act by the end of our reporting period to stop the spending cuts from taking effect on March 1, will need to address the approaching legal borrowing limit for the federal government—the “debt ceiling”—in the near future.
To support the economy over the last year, the Federal Reserve kept its fed funds target rate in the 0.00% to 0.25% range. The central bank is purchasing $40 billion of agency mortgage-backed securities every month—a plan that started in September. In addition, the Fed announced in late 2012 that it will purchase $45 billion worth of Treasury securities monthly starting in 2013 and that it plans to keep short-term rates very low as long as the national unemployment rate remains above 6.5% and inflation is projected to be no more than 2.5% in the next 12 to 24 months.
Shorter-term municipal yields remained very low and were little changed over the last 12 months. Yields of long-term, high-quality munis generally declined during our fiscal year. With municipal yields about the same as Treasury yields across the yield curve, tax-free securities are a very attractive alternative for fixed income investors on a relative basis. As of February 28, 2013, the 2.91% yield offered by a 30-year tax-free municipal bond rated AAA was about 94% of the 3.09% pretax yield offered by a 30-year Treasury bond. An investor in the 28% federal tax bracket would need to invest in a taxable bond yielding about 4.04% in order to receive the same after-tax income. (To calculate a municipal bond’s taxable-equivalent yield, divide the municipal bond’s yield by the quantity of 1.00 minus your federal tax bracket expressed as a decimal—in this case, 1.00 – 0.28, or 0.72.)
MUNICIPAL MARKET NEWS
Municipal issuance totaled $373 billion in 2012, according to The Bond Buyer. Much of that reflects municipalities refinancing their debts to take advantage of low, long-term interest rates, rather than net new issuance. One positive factor for munis is that austerity-minded state and local government leaders have been conservative about adding to indebtedness, despite prevailing low yields. Another factor supporting the market is brisk demand, particularly for long-term issues. Issuance in the first two months of 2013 has been fairly strong, at $47.6 billion, and full-year issuance is likely to approximate that of 2012.
Since the 2007–2009 recession, many states have faced stiff fiscal challenges, and most have acted responsibly by cutting spending and raising taxes and fees to close budget deficits. While tax revenues collected by states are growing again, the pattern has been slower and more uneven than in the past, and expense pressures continue. We believe that many states deserve high credit ratings and that state governments will be able to continue servicing their outstanding debts. However, we have longer-term concerns about some states’ willingness and ability to address sizeable pension obligations and other retirement benefits.
Municipal bond performance throughout the last year was driven by investors’ search for higher yields in a low interest rate environment. Revenue bonds outperformed local and state general obligations (GOs). We prefer bonds backed by a dedicated revenue stream over GOs, with a bias toward transportation and utility bonds issued by providers of these essential services. Among revenue bonds, industrial revenue issues fared best, especially tobacco names. We are underweight tobacco bonds due to their poor long-term fundamentals and unfavorable consumption trends. Health care bonds did well, but we are being more selective among hospital revenue bonds, as new issue supply and some credit concerns are weighing on the sector. Prerefunded bonds, which are backed by U.S. Treasuries, lagged significantly.
CALIFORNIA MARKET NEWS
California’s economy continued its anemic recovery in 2012. Nonfarm employment rose 1.7% to 14.3 million jobs—the second straight year of growth—but is still below the 2007 peak of 15.2 million jobs. The annual jobless rate fell to 10.5% from 11.8%. Encouragingly, home prices are rising, and the median price for a single family home climbed 25% to $337,040 in January 2013 from a year earlier. The number of sales, though, fell at a seasonally adjusted annual rate of 5.0%, according to the California Association of Realtors.
For the first seven months of fiscal year 2013, total receipts in the general fund rose 12.3% to $55.3 billion from the previous year, according to the California State Controller’s Office. The increase was largely due to higher personal income taxes, driven by growth in jobs, incomes, stock prices, and higher tax rates that were retroactive to January 1, 2012. General fund disbursements fell 1.4% to $61.4 billion as officials continued cost-cutting efforts.
Moody’s rates California’s GO bonds A1 with a stable outlook. S&P upgraded its credit rating from A- to A with a stable outlook, while Fitch, which rates the bonds A-, revised its outlook from stable to positive. California also issues lease- and appropriation-backed debt, which is typically rated one notch below the GO pledge. As of February 1, 2013, California had $72.9 billion of GO bonds and $13.6 billion of lease- and appropriation-backed and Proposition 1A receivables debt outstanding.
PORTFOLIO STRATEGIES
California Tax-Free Money
Fund
The California Tax-Free Money Fund
returned 0.01% for the six and 12 months ended February 28, 2013, in line with
the Lipper California Tax-Exempt Money Market Funds Index. All money market
rates continue to be closely tied to the fed
funds target range of 0.00% to 0.25%.
As the Fed’s zero interest rate policy continues, California municipal money market rate movements were minimal. Generally, yields on California-specific names were unchanged to slightly lower. Rates ranged from around 0.08% for overnight maturities to around 0.17% for notes maturing in one year. The municipal money market curve steepened a few basis points as yields on commercial paper with maturities of 30 to 90 days moved lower, while yields on one-year maturities were relatively unchanged. Short-term issuance will continue to be constrained with interest rates at or near record lows as issuers prefer to lock in favorable rates on longer-dated maturities. This reduction in supply will add to pressure on short-term rates.
Credit quality continues to play a big role in managing the fund. The challenging credit backdrop affecting many California issuers has made investing somewhat more difficult. We are maintaining an overweight to highly rated hospital, dedicated tax, and education revenue bonds and certain housing issues that are backed by Fannie Mae (FNMA). As always, the quality of bank liquidity providers plays an integral part in the financing of short-term debt. Our largest liquidity exposures are to FNMA, Federal Home Loan Bank, and U.S. Bank.
Measures implemented by the Securities and Exchange Commission (SEC) in 2010 that mandated higher liquidity requirements and reduced credit risk for all money market funds have resulted in much more resilient products for shareholders. However, the government’s Financial Stability Oversight Council has weighed in on the regulatory debate after the SEC failed to come to a consensus on the topic. We expect money fund reform to remain a main focus for regulators and the money fund industry.
Yields are expected to remain stable over the next six months barring a flare-up in the European crisis or another event that would disrupt supply. Given this outlook and the Fed’s accommodative stance, we continue to operate at the long end of our targeted weighted average maturity range of 50 to 55 days. As always, we are committed to managing a high-quality and diversified portfolio with a focus on liquidity and stability of principal.
California Tax-Free Bond
Fund
The California Tax-Free Bond Fund
returned 3.06% and 6.87% for the six and 12 months, respectively, ended February
28, 2013. The fund performed in line with the Lipper California Municipal Debt
Funds Average over the six months and slightly lagged the benchmark for the full
year due to its conservative positioning versus its peers.
Over the past year, we have consistently maintained an overweight to longer-dated bonds and an underweight to shorter-term maturities. Our positioning shifted from one year ago, when the fund was overweight in bonds maturing in one to two years. We significantly reduced our holdings in this range and redeployed proceeds into longer-term issues. Our bias for longer-term bonds benefited returns as the yield curve flattened, boosting returns for longer-term issues. The fund is currently underweight relative to the benchmark in shorter-term bonds, particularly those with maturities from three to 15 years, given their paltry yields and greater volatility in 10-year yields during periods of elevated supply. While longer-dated bonds are more vulnerable to interest rate risk, our holdings are generally defensive as they have structures that provide greater protection from rising interest rates. Going forward, we expect muted U.S. economic growth and continued robust demand for tax-exempt bonds.
The fund’s duration—a measure of its sensitivity to interest rate changes—stayed relatively unchanged at 5.3 years, slightly longer than the Barclays Municipal Bond Index. Its weighted average maturity increased almost two years to 18 years, reflecting our preference for longer-dated bonds. Our longer-duration posture and overweight in longer maturities helped returns over the last six months, allowing the fund to perform in line with its peers. However, given that our peers were positioned more aggressively from a credit and duration standpoint, we benefited less as longer-duration and lower-quality securities outperformed over the past year.
From a sector perspective, we continue to prefer revenue-backed bonds. We remain underweight GO debt relative to the benchmark largely due to our concerns about many local municipalities in California that face fiscal challenges. Revenue bonds outperformed GO debt over the past year, while health care, the largest sector allocation, performed strongly.
There were no major changes in the fund’s quality diversification. High-quality AAA and AA rated holdings slightly declined, while exposure to A rated bonds rose. Holdings in lower-rated bonds, namely BB rated credits, increased to 6% of the fund as we sought opportunities for added yield. As we noted in our last letter, some of the increase in the below investment-grade segment resulted from Moody’s downgrade of all investment-grade redevelopment authorities in the state to Ba1. We believe that Moody’s downgrade was overly aggressive and note that Standard & Poor’s and our own credit research team still rate these holdings investment grade. We would also add that a number of these downgraded securities were top performers over the past year.
The fund’s best-performing bonds have been fairly consistent over the past year. Bonds with longer maturities and longer durations fared best, as did lower-rated securities. Our modest holdings in tobacco and zero coupon bonds issued by local college and school districts were top performers; however, our conservative positioning in these sectors and in zero coupon structures account for the fund’s underperformance for the year. Other top performers included lower-rated life care and hospital credits and redevelopment bonds. Shorter-term holdings, namely those with maturities of three years or less, lagged longer-dated issues.
We were net buyers of bonds over the year, thanks to new investor inflows and reinvestment of coupon payments and maturing bonds. In recent months, we have added to the health care and leasing sectors. New additions include Alameda Corridor Transportation Authority, California EFA Claremont McKenna College, and California Statewide CDA for Episcopal Communities & Services. (Please refer to the fund’s portfolio of investments for a complete list of our holdings and the amount each represents in the portfolio.)
OUTLOOK
While we are pleased with the tremendous performance of municipal bonds over the last two years, we believe that returns in the period ahead will moderate, as the credit and economic environment for municipalities will likely remain challenging and yields are unlikely to fall significantly from current levels. Modest economic growth and improving income and sales tax revenues are providing some support for state and local governments. However, cutbacks in state support for municipalities and persistent downward pressure on property tax revenues could keep local municipal issuers vulnerable. State and local government liabilities, such as pension benefits and health care costs, are a growing long-term concern. While most state and local governments are maintaining balanced budgets, fewer municipalities have addressed these longer-term liabilities meaningfully. States will need to continue these efforts on their own, since a federal bailout of state and local governments without some losses to bondholders seems unlikely.
We continue to believe that the municipal bond market is a high-quality market, with good opportunities for long-term investors. In this low-rate environment, we believe long-term bonds and A rated sectors still represent reasonable value relative to taxable fixed income alternatives. While we are comforted somewhat by the Fed’s assurances that interest rate hikes are not imminent and by the demonstrated ability of states to balance their budgets in tough times, we are mindful that municipal yields are at or near historical lows and that there is the potential for losses if rates rise in response to stronger economic growth or inflation. Although we expect rates to stay range-bound in the period ahead, we are careful with any investment shift that might increase our portfolios’ interest rate sensitivity materially.
We believe T. Rowe Price’s strong credit research capabilities have been and will remain an asset for our investors. As always, we are on the lookout for attractively valued bonds issued by municipalities with good long-term fundamentals—an investment strategy that we believe will continue to serve our investors well.
Respectfully submitted,
Joseph K. Lynagh
Chairman of the Investment Advisory
Committee
California Tax-Free Money Fund
Konstantine B.
Mallas
Chairman of the Investment
Advisory Committee
California Tax-Free Bond Fund
March 13, 2013
The committee chairmen have day-to-day responsibility for managing the portfolios and work with committee members in developing and executing the funds’ investment programs.
RISKS OF INVESTING
Since money market funds are managed to maintain a constant $1.00 share price, there should be little risk of principal loss. However, there is no assurance the fund will avoid principal losses if fund holdings default or are downgraded or if interest rates rise sharply in an unusually short period. In addition, the fund’s yield will vary; it is not fixed for a specific period like the yield on a bank certificate of deposit. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in it.
Bonds are subject to interest rate risk (the decline in bond prices that usually accompanies a rise in interest rates) and credit risk (the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default by failing to make timely payments of interest or principal), potentially reducing the fund’s income level and share price. The fund is less diversified than one investing nationally. Some income may be subject to state and local taxes and the federal alternative minimum tax.
GLOSSARY
Barclays Municipal Bond Index: A broadly diversified index of tax-exempt bonds.
Duration: A measure of a bond fund’s sensitivity to changes in interest rates. For example, a fund with a duration of five years would fall about 5% in price in response to a one-percentage-point rise in interest rates, and vice versa.
Federal funds rate: The interest rate charged on overnight loans of reserves by one financial institution to another in the United States. The Federal Reserve sets a target federal funds rate to affect the direction of interest rates.
General obligation debt: A government’s strongest pledge that obligates its full faith and credit, including, if necessary, its ability to raise taxes.
Investment grade: High-quality bonds as measured by one of the major credit rating agencies. For example, Standard & Poor’s designates the bonds in its top four categories (AAA to BBB) as investment grade.
Lipper averages: The averages of available mutual fund performance returns for specified time periods in categories defined by Lipper Inc.
Prerefunded bond: A bond that originally may have been issued as a general obligation or revenue bond but that is now secured by an escrow fund consisting entirely of direct U.S. government obligations that are sufficient for paying the bondholders.
SEC yield (7-day simple): A method of calculating a money fund’s yield by annualizing the fund’s net investment income for the last seven days of each period divided by the fund’s net asset value at the end of the period. Yield will vary and is not guaranteed.
SEC yield (30-day): A method of calculating a fund’s yield that assumes all portfolio securities are held until maturity. Yield will vary and is not guaranteed.
Weighted average life: A measure of a fund’s credit quality risk. In general, the longer the average life, the greater the fund’s credit quality risk. The average life is the dollar-weighted average maturity of a portfolio’s individual securities without taking into account interest rate readjustment dates. Money funds must maintain a weighted average life of less than 120 days.
Weighted average maturity: A measure of a fund’s interest rate sensitivity. In general, the longer the average maturity, the greater the fund’s sensitivity to interest rate changes. The weighted average maturity may take into account the interest rate readjustment dates for certain securities. Money funds must maintain a weighted average maturity of less than 60 days.
Yield curve: A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux. One of the key activities in managing any fixed income portfolio is to study the trends reflected by yield curves.
Performance and Expenses
| Growth of $10,000 |
This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
| Growth of $10,000 |
This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
| Fund Expense Example |
As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.
Actual
Expenses
The first line of the
following table (Actual) provides information about actual account values and
expenses based on the fund’s actual returns. You may use the information on this
line, together with your account balance, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number on the first line under the heading “Expenses Paid During Period” to
estimate the expenses you paid on your account during this period.
Hypothetical Example for
Comparison Purposes
The information
on the second line of the table (Hypothetical) is based on hypothetical account
values and expenses derived from the fund’s actual expense ratio and an assumed
5% per year rate of return before expenses (not the fund’s actual return). You
may compare the ongoing costs of investing in the fund with other funds by
contrasting this 5% hypothetical example and the 5% hypothetical examples that
appear in the shareholder reports of the other funds. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period.
Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Preferred Services, Personal Services, or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $100,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
| Notes to Financial Statements |
T. Rowe Price California Tax-Free Income Trust (the trust), is registered under the Investment Company Act of 1940 (the 1940 Act). The California Tax-Free Money Fund (the fund) is a diversified, open-end management investment company established by the trust. The fund commenced operations on September 15, 1986. The fund seeks to provide preservation of capital, liquidity, and, consistent with these objectives, the highest level of income exempt from federal and California state income taxes.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by management. Management believes that estimates and valuations are appropriate; however, actual results may differ from those estimates, and the valuations reflected in the accompanying financial statements may differ from the value ultimately realized upon sale or maturity.
Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. Income tax-related interest and penalties, if incurred, would be recorded as income tax expense. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Distributions to shareholders are recorded on the ex-dividend date. Income distributions are declared daily and paid monthly.
Credits The fund earns credits on temporarily uninvested cash balances held at the custodian, which reduce the fund’s custody charges. Custody expense in the accompanying financial statements is presented before reduction for credits.
New Accounting Guidance In December 2011, the Financial Accounting Standards Board issued amended guidance requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013. Adoption will have no effect on the fund’s net assets or results of operations.
NOTE 2 - VALUATION
The fund values its investments and computes its net asset value per share each day that the New York Stock Exchange is open for business. In accordance with Rule 2a-7 under the 1940 Act, securities are valued at amortized cost, which approximates fair value. Securities for which amortized cost is deemed not to reflect fair value are stated at fair value as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund’s Board of Trustees.
Various inputs are used to determine the value of the fund’s financial instruments. These inputs are summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical financial instruments
Level 2 – observable inputs other than Level 1 quoted prices (including, but not limited to, quoted prices for similar financial instruments, interest rates, prepayment speeds, and credit risk)
Level 3 – unobservable inputs
Observable inputs are those based on market data obtained from sources independent of the fund, and unobservable inputs reflect the fund’s own assumptions based on the best information available. The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level. For example, securities held by a money market fund are generally high quality and liquid; however, they are reflected as Level 2 because the inputs used to determine fair value are not quoted prices in an active market. On February 28, 2013, all of the fund’s financial instruments were classified as Level 2, based on the inputs used to determine their values.
NOTE 3 - OTHER INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks and/or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information.
Restricted Securities The fund may invest in securities that are subject to legal or contractual restrictions on resale. Prompt sale of such securities at an acceptable price may be difficult and may involve substantial delays and additional costs.
NOTE 4 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its income and gains. Distributions determined in accordance with federal income tax regulations may differ in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
The fund files U.S. federal, state, and local tax returns as required. The fund’s tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return but which can be extended to six years in certain circumstances. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.
Distributions during the years ended February 28, 2013 and February 29, 2012, totaled $8,000 and $8,000, respectively, and were characterized as tax-exempt income for tax purposes. At February 28, 2013, the tax-basis cost of investments and components of net assets were as follows:
NOTE 5 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. (Price Group). The investment management agreement between the fund and Price Associates provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.10% of the fund’s average daily net assets, and a group fee. The group fee rate is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.28% for assets in excess of $300 billion. The fund’s group fee is determined by applying the group fee rate to the fund’s average daily net assets. At February 28, 2013, the effective annual group fee rate was 0.30%.
The fund is also subject to a contractual expense limitation through June 30, 2013. During the limitation period, Price Associates is required to waive its management fee and reimburse the fund for any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses that would otherwise cause the fund’s ratio of annualized total expenses to average net assets (expense ratio) to exceed its expense limitation of 0.55%. For a period of three years after the date of any reimbursement or waiver, the fund may repay Price Associates for expenses previously reimbursed and management fees waived to the extent its net assets have grown or expenses have declined sufficiently to allow repayment without causing the fund’s expense ratio to exceed its expense limitation. Such repayment is subject to shareholder approval. Pursuant to this agreement, management fees in the amount of $108,000 were waived during the year ended February 28, 2013. Including these amounts, management fees waived in the amount of $322,000 remain subject to repayment by the fund at February 28, 2013.
Price Associates may voluntarily waive all or a portion of its management fee and reimburse operating expenses to the extent necessary for the fund to maintain a zero or positive net yield (voluntary waiver). This voluntary waiver is in addition to the contractual expense limit in effect for the fund. Any amounts waived or reimbursed under this voluntary agreement are not subject to repayment by the fund. Price Associates may amend or terminate this voluntary arrangement at any time without prior notice. For the year ended February 28, 2013, management fees waived and operating expenses reimbursed totaled $315,000.
In addition, the fund has entered into service agreements with Price Associates and a wholly owned subsidiary of Price Associates (collectively, Price). Price Associates computes the daily share price and provides certain other administrative services to the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund’s transfer and dividend disbursing agent. For the year ended February 28, 2013, expenses incurred pursuant to these service agreements were $96,000 for Price Associates and $38,000 for T. Rowe Price Services, Inc. The total amount payable at period-end pursuant to these service agreements is reflected as Due to Affiliates in the accompanying financial statements.
| Report of Independent Registered Public Accounting Firm |
To the Board of Trustees of T.
Rowe Price California Tax-Free Income Trust
and Shareholders of California
Tax-Free Money Fund
In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of California Tax-Free Money Fund (one of the portfolios comprising T. Rowe Price California Tax-Free Income Trust, hereafter referred to as the “Fund”) at February 28, 2013, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2013 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers
LLP
Baltimore, Maryland
April 12, 2013
| Tax Information (Unaudited) for the Tax Year Ended 2/28/13 |
We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements.
The fund’s distributions to shareholders included $8,000 which qualified as exempt-interest dividends for Federal and California state purposes.
| Information on Proxy Voting Policies, Procedures, and Records |
A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund’s Statement of Additional Information. You may request this document by calling 1-800-225-5132 or by accessing the SEC’s website, sec.gov.
The description of our proxy voting policies and procedures is also available on our website, troweprice.com. To access it, click on the words “Social Responsibility” at the top of our corporate homepage. Next, click on the words “Conducting Business Responsibly” on the left side of the page that appears. Finally, click on the words “Proxy Voting Policies” on the left side of the page that appears.
Each fund’s most recent annual proxy voting record is available on our website and through the SEC’s website. To access it through our website, follow the directions above to reach the “Conducting Business Responsibly” page. Click on the words “Proxy Voting Records” on the left side of that page, and then click on the “View Proxy Voting Records” link at the bottom of the page that appears.
| How to Obtain Quarterly Portfolio Holdings |
The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available electronically on the SEC’s website (sec.gov); hard copies may be reviewed and copied at the SEC’s Public Reference Room, 100 F St. N.E., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330.
| About the Fund’s Trustees and Officers |
Your fund is overseen by a Board of Trustees (Board) that meets regularly to review a wide variety of matters affecting the fund, including performance, investment programs, compliance matters, advisory fees and expenses, service providers, and other business affairs. The Board elects the fund’s officers, who are listed in the final table. At least 75% of the Board’s members are independent of T. Rowe Price Associates, Inc. (T. Rowe Price), and its affiliates; “inside” or “interested” trustees are employees or officers of T. Rowe Price. The business address of each trustee and officer is 100 East Pratt Street, Baltimore, Maryland 21202. The Statement of Additional Information includes additional information about the fund trustees and is available without charge by calling a T. Rowe Price representative at 1-800-638-5660.
| Independent Trustees | ||
| Name | ||
| (Year of Birth) | ||
| Year Elected* | ||
| [Number of T. Rowe Price | Principal Occupation(s) and Directorships of Public Companies and | |
| Portfolios Overseen] | Other Investment Companies During the Past Five Years | |
| William R. Brody | President and Trustee, Salk Institute for Biological Studies (2009 to | |
| (1944) | present); Director, Novartis, Inc. (2009 to present); Director, IBM | |
| 2009 | (2007 to present); President and Trustee, Johns Hopkins University | |
| [142] | (1996 to 2009); Chairman of Executive Committee and Trustee, | |
| Johns Hopkins Health System (1996 to 2009) | ||
| Anthony W. Deering | Chairman, Exeter Capital, LLC, a private investment firm (2004 to | |
| (1945) | present); Director, Under Armour (2008 to present); Director, | |
| 1986 | Vornado Real Estate Investment Trust (2004 to present); Director | |
| [142] | and Member of the Advisory Board, Deutsche Bank North America | |
| (2004 to present); Director, Mercantile Bankshares (2002 to 2007) | ||
| Donald W. Dick, Jr. | Principal, EuroCapital Partners, LLC, an acquisition and management | |
| (1943) | advisory firm (1995 to present) | |
| 2001 | ||
| [142] | ||
| Karen N. Horn | Senior Managing Director, Brock Capital Group, an advisory and | |
| (1943) | investment banking firm (2004 to present); Director, Eli Lilly and | |
| 2003 | Company (1987 to present); Director, Simon Property Group | |
| [142] | (2004 to present); Director, Norfolk Southern (2008 to present); | |
| Director, Fannie Mae (2006 to 2008) | ||
| Theo C. Rodgers | President, A&R Development Corporation (1977 to present) | |
| (1941) | ||
| 2005 | ||
| [142] | ||
| John G. Schreiber | Owner/President, Centaur Capital Partners, Inc., a real estate | |
| (1946) | investment company (1991 to present); Cofounder and Partner, | |
| 1992 | Blackstone Real Estate Advisors, L.P. (1992 to present); Director, | |
| [142] | General Growth Properties, Inc. (2010 to present) | |
| Mark R. Tercek | President and Chief Executive Officer, The Nature Conservancy (2008 | |
| (1957) | to present); Managing Director, The Goldman Sachs Group, Inc. | |
| 2009 | (1984 to 2008) | |
| [142] | ||
|
*Each independent trustee serves until retirement, resignation, or election of a successor. | ||
| Inside Trustees | ||
| Name | ||
| (Year of Birth) | ||
| Year Elected* | ||
| [Number of T. Rowe Price | Principal Occupation(s) and Directorships of Public Companies and | |
| Portfolios Overseen] | Other Investment Companies During the Past Five Years | |
| Edward C. Bernard | Director and Vice President, T. Rowe Price; Vice Chairman of the | |
| (1956) | Board, Director, and Vice President, T. Rowe Price Group, Inc.; | |
| 2006 | Chairman of the Board, Director, and President, T. Rowe Price | |
| [142] | Investment Services, Inc.; Chairman of the Board and Director, | |
| T. Rowe Price Retirement Plan Services, Inc., T. Rowe Price Savings | ||
| Bank, and T. Rowe Price Services, Inc.; Chairman of the Board, Chief | ||
| Executive Officer, and Director, T. Rowe Price International; Chief | ||
| Executive Officer, Chairman of the Board, Director, and President, | ||
| T. Rowe Price Trust Company; Chairman of the Board, all funds | ||
| Michael C. Gitlin | Director of Fixed Income, T. Rowe Price (2009 to present); Global | |
| (1970) | Head of Trading, T. Rowe Price (2007 to 2009); Vice President, Price | |
| 2010 | Hong Kong, Price Singapore, T. Rowe Price, T. Rowe Price Group, Inc., | |
| [50] | and T. Rowe Price International | |
|
*Each inside trustee serves until retirement, resignation, or election of a successor. | ||
| Officers | ||
| Name (Year of Birth) | ||
| Position Held With California | ||
| Tax-Free Income Trust | Principal Occupation(s) | |
| Steven G. Brooks, CFA (1954) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| M. Helena Condez (1962) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| G. Richard Dent (1960) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Charles E. Emrich (1961) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Roger L. Fiery III, CPA (1959) | Vice President, Price Hong Kong, Price | |
| Vice President | Singapore, T. Rowe Price, T. Rowe Price Group, | |
| Inc., T. Rowe Price International, and T. Rowe | ||
| Price Trust Company | ||
| Jared S. Franz (1977) | Vice President, T. Rowe Price | |
| Vice President | ||
| John R. Gilner (1961) | Chief Compliance Officer and Vice President, | |
| Chief Compliance Officer | T. Rowe Price; Vice President, T. Rowe Price | |
| Group, Inc., and T. Rowe Price Investment | ||
| Services, Inc. | ||
| Gregory S. Golczewski (1966) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Trust Company | |
| Gregory K. Hinkle, CPA (1958) | Vice President, T. Rowe Price, T. Rowe Price | |
| Treasurer | Group, Inc., and T. Rowe Price Trust Company | |
| Alan D. Levenson, Ph.D. (1958) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Patricia B. Lippert (1953) | Assistant Vice President, T. Rowe Price and | |
| Secretary | T. Rowe Price Investment Services, Inc. | |
| Joseph K. Lynagh, CFA (1958) | Vice President, T. Rowe Price, T. Rowe Price | |
| Executive Vice President | Group, Inc., and T. Rowe Price Trust Company | |
| Konstantine B. Mallas (1963) | Vice President, T. Rowe Price and T. Rowe Price | |
| Executive Vice President | Group, Inc. | |
| Hugh D. McGuirk, CFA (1960) | Vice President, T. Rowe Price and T. Rowe Price | |
| President | Group, Inc. | |
| Samy B. Muaddi, CFA (1984) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Linda A. Murphy (1959) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| David Oestreicher (1967) | Director, Vice President, and Secretary, T. Rowe | |
| Vice President | Price Investment Services, Inc., T. Rowe | |
| Price Retirement Plan Services, Inc., T. Rowe | ||
| Price Services, Inc., and T. Rowe Price Trust | ||
| Company; Vice President and Secretary, | ||
| T. Rowe Price, T. Rowe Price Group, Inc., and | ||
| T. Rowe Price International; Vice President, | ||
| Price Hong Kong and Price Singapore | ||
| Deborah D. Seidel (1962) | Vice President, T. Rowe Price, T. Rowe Price | |
| Vice President | Group, Inc., T. Rowe Price Investment Services, | |
| Inc., and T. Rowe Price Services, Inc. | ||
| Michael K. Sewell (1982) | Assistant Vice President, T. Rowe Price | |
| Assistant Vice President | ||
| Chen Shao (1980) | Assistant Vice President, T. Rowe Price | |
| Assistant Vice President | ||
| Douglas D. Spratley, CFA (1969) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Timothy G. Taylor, CFA (1975) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Julie L. Waples (1970) | Vice President, T. Rowe Price | |
| Vice President | ||
| Edward A. Wiese, CFA (1959) | Director and Vice President, T. Rowe Price Trust | |
| Vice President | Company; Vice President, T. Rowe Price and | |
| T. Rowe Price Group, Inc.; Chief Investment | ||
| Officer, Director, and Vice President, T. Rowe | ||
| Price Savings Bank | ||
|
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least 5 years. | ||
Item 2. Code of Ethics.
The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant’s Board of Directors/Trustees has determined that Mr. Anthony W. Deering qualifies as an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mr. Deering is considered independent for purposes of Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) – (d) Aggregate fees billed for the last two fiscal years for professional services rendered to, or on behalf of, the registrant by the registrant’s principal accountant were as follows:
Audit fees include amounts related to the audit of the registrant’s annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Audit-related fees include amounts reasonably related to the performance of the audit of the registrant’s financial statements and specifically include the issuance of a report on internal controls and, if applicable, agreed-upon procedures related to fund acquisitions. Tax fees include amounts related to services for tax compliance, tax planning, and tax advice. The nature of these services specifically includes the review of distribution calculations and the preparation of Federal, state, and excise tax returns. All other fees include the registrant’s pro-rata share of amounts for agreed-upon procedures in conjunction with service contract approvals by the registrant’s Board of Directors/Trustees.
(e)(1) The registrant’s audit committee has adopted a policy whereby audit and non-audit services performed by the registrant’s principal accountant for the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant require pre-approval in advance at regularly scheduled audit committee meetings. If such a service is required between regularly scheduled audit committee meetings, pre-approval may be authorized by one audit committee member with ratification at the next scheduled audit committee meeting. Waiver of pre-approval for audit or non-audit services requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) – (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50 percent of the hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.
(g) The aggregate fees billed for the most recent fiscal year and the preceding fiscal year by the registrant’s principal accountant for non-audit services rendered to the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were $1,651,000 and $1,704,000, respectively.
(h) All non-audit services rendered in (g) above were pre-approved by the registrant’s audit committee. Accordingly, these services were considered by the registrant’s audit committee in maintaining the principal accountant’s independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of this filing and have concluded that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely.
(b) The registrant’s principal executive officer and principal financial officer are aware of no change in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant’s code of ethics pursuant to Item 2 of Form N-CSR is attached.
(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end companies: not applicable.
(b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price California Tax-Free Income
Trust
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date April 12, 2013 | ||
Pursuant to the
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date April 12, 2013 | ||
| By | /s/ Gregory K. Hinkle | |
| Gregory K. Hinkle | ||
| Principal Financial Officer | ||
| Date April 12, 2013 | ||