California Politics: Does the state’s spending limit need a makeover?

Just four months after he helped launch a tax revolt that changed the course of American history, Paul Gann decided it wasn’t enough.

Gann believed the success of Proposition 13, the iconic 1978 property tax cut he co-sponsored with Howard Jarvis, was proof that California voters were willing to do even more to constrain the size and scope of their government.

“The important thing is that something is done to put the brakes on the runaway spending which is sending us to the poorhouse,” he said during an event in Sacramento, reported by The Times on Jan. 17, 1979.

Nearly 43 years later, the spending limit that Gann convinced voters to add to the California Constitution may be more relevant than at any time since the 1980s. Gov. Gavin Newsom made it clear this week in his budget proposal that the constitutional provision poses a major governing challenge.

And he hinted that it might be time to ask voters to modernize the law.

Gann: Finish what Prop. 13 started

Gann, who died in 1989, was more mild-mannered than the flamboyant Jarvis. But he was no less driven in the quest to shrink the size of California’s local and state governments. He called his spending limit, which qualified for a special statewide election in 1979, the “Spirit of 13.”

“If you want to retain the tax cut you got last year, you should support my initiative,” Gann said in an article in The Times on March 11, 1979.

It wasn’t hard to see why voters would like the “Gann limit,” as it’s still nicknamed today. It not only promised to limit growth in state and local government appropriations to changes in population and cost of living, but any cash above the threshold had to be refunded to taxpayers. More than 74% of voters said yes to the constitutional amendment that November.

But it had no real immediate effect, as high inflation and tepid growth in tax revenue left plenty of room for more government spending. That changed when tax revenues grew strongly in the late 1980s and in the fall of 1987, then-Gov. George Deukmejian agreed to a $1.1-billion taxpayer rebate — the first, and so far only, time that portion of Gann’s dream has been realized.

Things soon changed. In 1988, advocates for California schools convinced voters to require any future excess cash to be evenly split between taxpayers and education. An even bigger change came two years later.

The Gann limit fades, then roars back

In 1990, Deukmejian and legislators convinced voters to loosen the Gann limit while boosting the state’s gas tax to fund repairs of California’s roadways. Their ballot measure also exempted more categories of government spending from the spending cap’s calculation. And it stretched those calculations over two fiscal years, giving lawmakers more time to rework the budget in ways that avoid a tax refund.

The changes made Gann’s crowning achievement — formally known as the state appropriations limit — all but invisible at the state Capitol for most of the ensuing quarter-century, only briefly coming into view during the peak of California’s dot-com boom of the late 1990s.

But the recent combination of sharply rising revenues and stagnating population growth has brought new urgency to the Gann limit.

In the wake of voter-approved tax increases in 2012 and 2016, room for new spending under the cap’s provisions quickly disappeared. Then-Gov. Jerry Brown floated a variety of ideas, resulting in a 2017 budget that exempted billions of dollars in federal and court mandates from being counted. And last year, Newsom warned lawmakers about spillover revenues before ultimately agreeing to another short-term fix.

This week, the issue resurfaced. The budget Newsom presented to legislators on Monday projects the state is again on course to breach the Gann limit for what would be only the second time in its 42-year history.

It’s all about how to define ‘spending’

The annual process involves three basic steps: adjusting the existing spending limit for inflation and population, tallying up the state’s primary tax revenues and then determining how much spending is exempt from the limit.

But the reality is a lot more complicated.

First, California’s tax revenues have been known to sharply fluctuate and it can take months (or years) to get an accurate calculation. Second, several important spending categories are excluded from the appropriations limit — including some payments made to local governments, debt services, court-ordered mandates and withdrawals from reserve funds.

Last year, lawmakers shoved more spending into the exempt category. That included more than $12 billion given to local governments to fund social services and public safety operations in the current fiscal year; some $18 billion of long-term costs on land and buildings; and more than $4 billion in revisions to the fiscal relationship between the state and school districts.

“These, effectively, reduce appropriations subject to the limit on a one-time basis,” the Legislative Analyst’s Office noted in a report last summer.

Perhaps the most artful workaround to the Gann limit was to send millions of Californians a “Golden State Stimulus” check, limiting eligibility to those with annual reported incomes of $75,000 or less. Sounds like a rebate, right? Wrong, because the cash disbursements were categorized as emergency payments in response to the COVID-19 pandemic.

Last summer’s budget solutions weren’t enough to really solve the problem. And this week, the governor’s team announced the state is now poised to breach the Gann limit by at least $2.6 billion, largely due to the magnitude of tax revenues collected in the fiscal year that ended some six months ago.

Should Gann’s limit be fixed by voters?

Keely Martin Bosler, the governor’s budget director, told reporters on Monday that Newsom has asked his staff to come up with a robust solution to the spending limit challenges by the time he proposes a revised budget in May. She also noted more of the state’s surplus could be socked away for lean years if not for the way Paul Gann’s constitutional amendment works.

If the state wants to add extra cash into its “rainy day” reserve fund, for example, the Gann limit defines that action as spending and counts it toward the two-year cap on appropriations — even though some categories of actual spending, such as infrastructure, often don’t count toward the cap.

“I know it sounds very strange,” Bosler said.

And Newsom hinted that it might be time to formally rewrite the constitutional provision and go back to voters to ask for changes to the rules rooted in the anti-tax activism of 1978 and 1979.

“I am open to reforms and discussions,” he said.

Changes won’t be easy. For starters, the 1979 law applies to local governments too, including school districts, and modifications could have a significant effect in communities a long way from Sacramento. Meanwhile, government skeptics would no doubt wonder whose special interests might be in mind when cryptic details are written — especially if there’s any possibility that the changes might block future tax rebates.

Voters will have the final say. And that’s probably how Gann would have wanted it.

“We the people do control our own destiny,” The Times reported him telling a Long Beach crowd in the fall of 1979, “if we can get off our butts and do something about it.”

California politics lightning round

— Newsom on Thursday blocked the parole of Sirhan Sirhan, saying the assassin of Robert F. Kennedy “lacks the insight that would prevent him from making the same types of dangerous decisions he made in the past.”

— California would allow all income-eligible residents to qualify for the state’s Med-Cal program regardless of immigration status under Newsom’s budget proposal.

— A group of Democratic lawmakers are pushing a massive restructuring of the state’s healthcare system under legislation that would guarantee medical coverage for every resident by enacting billions in new taxes to create a single-payer system.

— This week’s budget proposal pointed to a population decline in California schools driven by plummeting birth rates that have “eroded” K-12 enrollment projections, and Newsom proposed tweaking the state’s education funding formula to “minimize the impact” of fewer students in schools.

— California’s overflowing coffers have handed the Democratic governor “every politician’s dream.”