ME1963,
In my own portfolio, I have received capital gains distributions from such state tax exempt funds and had to pay tax on them. Fidelity investments discusses this at
https://www.fidelity.com/learning-center/investment-products/mutual-funds/tax-implications-bond-fund...
and states that only the interest income from a state-specific bond fund would qualify for tax exemption. Did you receive a 1099-DIV showing capital gains?
