California's legislative analyst has recommended lawmakers reject the governor's spending plans or face deficits in coming years.
The state’s massive surpluses of the past few years, and expectations they will continue for the next few years, put the state in a quandary, because of revenue ceilings approved by voters during the state’s tax revolt in the late 1970s.
The Gann limit, also known as the State Appropriations Limit, or SAL, is a constitutional spending cap approved by voters in a 1979 special election.
“Whether revenues trend upward or downward from here, the state likely faces budget deficits,” Legislative Analyst Gabriel Petek
Under the Gann Limit, spending is restricted to levels set in 1978-79, adjusted for changes in population and per capita personal income. If revenues exceed the limit over a two-year period, state policymakers must spend revenue over that limit in specific ways like returning money to taxpayers, spending more on K-14 education, infrastructure or fiscal emergencies.
The LAO’s office estimates that fiscal 2023 revenues could be as much as $20 billion above the SAL, Petek said in an interview, adding that the governor’s January budget proposal didn’t have anything that specifically addresses the spending limit.
The governor plans to provide specific proposals related to the Gann limit during his May budget revisions expected to be released in mid-May, said H.D. Palmer, a state Department of Finance spokesman.
“In January, we said the Gann limit will likely be exceeded in the 2020-21 and 2021-22 fiscal years, with any funds above what is constitutionally required to be allocated evenly between schools and a tax refund,” Palmer said. “We also said an updated calculation of this limit, and proposals to address it, will be included in the May revision. That still remains the case, and the May revisions will be sent to the Legislature by mid-month.”
The finance department believes the governor’s budget is sustainable and prudent as it’s balanced in the coming and the following fiscal years, it reflects a record level of reserves at $35 billion in all accounts, and of the more than $20 billion in those reserves that are discretionary, 88 cents of every dollar is dedicated to either one-time spending or is parked in reserves, exactly what the LAO recommends to the Legislature, Palmer said.
March revenues have come in more than $17 billion above forecast, he said.
The most serious of the triggers from the SAL limit have never come into play during the decades since it was passed, Petek said, but they are now. The LAO said he wrote the analysis to make sure lawmakers understood the ramifications of Proposition 4, and what their options are.
“What is important to understand is that once the state’s revenue level gets above the State Appropriations Limit, which is where we are now, all the revenue above that must be spent in keeping with Proposition 4,” Petek said. “That means it’s not available to cover existing expenditures.”
The situation this creates goes like this: under rules set by
The proposals being floated by the governor and some lawmakers for a rebate or gas tax rebates lowers revenues so they aren’t as far above the SAL, but doesn’t solve the whole problem, Petek said.
“Lowering gas taxes would reduce the extent we are over the limit,” Petek said. “But at this point, the discussions are fluid and under development, so we don’t know what that will shape up to look like.”
Lawmakers did make a recommendation to go to voters to change the spending ceiling in 2024, but Petek said there is really a larger policy decision to be made.
“Long term they need to confront issues like the size of state government they want overall,” Petek said. “Right now, we are more expansive than in 1979. That would suggest state lawmakers should shrink taxes to comply with what happened in 1979.”
