As noted in another comment, California exempts dividends and interests from funds only if they hold 50% Federal and California bonds.
The transfer of Federal information to the California return is VERY confusing. Dividends from a California tax exempt mutual fund carry over as "interest"; other Federal interest (Treasuries, government money market funds), come across as "interest" (I think... the California adjustment form shows an amount that I can't find anywhere on the Federal return, but is about what the purely Federal tax exempt interest would be.
I also got dividends from a tax-managed fund that is NOT 50% state-or-Federal, which was deducted under "dividends" even though the income was listed under "interest". Again, VERY confusing. I reversed these two manually, which TurboTax allowed without comment, but I'm not sure it's correct. We'll see.
TurboTax: When you transfer an amount from Federal to state return, it would be REALLY useful to have a way to link that amount back to the Federal return. Otherwise, I just have to speculate where the numbers come from :(
