Three voter-approved provisions of the state constitution have a major impact on how the California state budget is fashioned and they are having a big effect as the state sees a flood of new revenues.
As California’s governor and legislators go through the annual ritual of fashioning a state budget, they must contend with three uber-complex, voter-approved directives that largely dictate how revenues are to be distributed.
Collectively, they imply that politicians can’t be trusted to spend billions of dollars wisely. The three measures have particular impact when the Capitol is dominated by expansionist-minded Democrats and the treasury is overflowing with tax revenues, as it is now.
The first is the Gann Limit, named for anti-tax gadlfy Paul Gann, a co-author of the iconic Proposition 13 property tax limit. After its passage in 1978, Gann proposed an ideologically similar constraint for the state and found an ally in the governor of the era, Jerry Brown.
Brown had opposed Proposition 13 as “a ripoff” but after its passage quickly rebranded himself a “born-again tax cutter” and began campaigning for president as a proponent of balanced federal budgets. To burnish his new image, he called a special election in 1979 to help Gann’s measure, Proposition 4, win voter approval.
The Gann Limit’s complex language kicked in when certain conditions were met and required excess revenue to either be returned to taxpayers or spent on a few select categories. Eight years after its passage, circumstances triggered its provisions and the Legislature approved a $1.1 billion tax refund – a very substantial sum in those days.
The Gann Limit, however, worried those who depended on the state’s budget, particularly the California Teachers Association. The state had taken over school finance in the wake of Proposition 13 and the powerful union wanted to protect education from spending limits and tax cuts. Therefore, in 1988 it persuaded voters to endorse an even more complex ballot measure, Proposition 98.
Essentially, it gives schools first call on state revenues and while its precise effect varies, depending on economic circumstances and other factors, it roughly directs about 40% of general fund spending to schools.
Voters adopted the third big budget constraint in 2014 with Jerry Brown, once again governor, again playing a seminal role. The budget had become dependent on income taxes from a relative handful of high-income Californians, and their volatility had sparked a boom-and-bust syndrome in the budget process.
Brown asked voters to raise taxes to solve an immediate budget deficit and then championed Proposition 2 to deal with revenue volatility by requiring some revenues to be diverted into a “rainy day fund” that could be tapped when revenues declined.
In the last couple of years, as the wealthy saw huge gains on their investments and their taxes mushroomed, all three of the constitutional directives have affected how the financial bounty could be spent.
Schools have seen huge gains in state aid, rainy day reserves have swelled and, for the first time in nearly four decades, the Gann Limit has been a factor. Last year saw billions of dollars in “Golden State Stimulus” payments to taxpayers to get around the Gann Limit and Gov. Gavin Newsom and legislators are debating how to shower even more cash on California families this year.
The Legislature’s budget advisor, Gabe Petek, has warned that the Gann Limit could create a multi-billion-dollar “fiscal cliff” by requiring ever-more revenues to be confined to a few categories at the expense of broader spending.
The Gann Limit grates on those who see the surge of revenues as an opportunity to sharply expand spending on social and medical services, and there’s a nascent effort to change or even repeal it. Newsom says he would support some kind of change, so the saga continues