In response to the wave of proposals to increase taxes of nearly every type, on nearly every Californian, an alternative approach to our chronic budget woes was recently filed as a proposed initiative to restore the Gann Spending Limit, which had until the early 1990’s worked to control government spending. In 1979, voters approved Proposition 4, the original spending limit measure, named after its sponsor Paul Gann, by a 74 percent margin. Then-Governor Jerry Brown supported it. The limit worked so well, taxpayers actually received a refund of excess revenue under Governor Deukmejian.
The tax and spend lobby couldn’t stand to see large reserves and tax rebates, thus began a drive to dilute the Gann limit to the point of ineffectiveness. The principal way in which the Gann Limit was undermined was the change in the “base year” from which the spending limit was calculated. The only way to control government spending, root out waste, pay off our debt, and protect taxpayers is to impose a reasonable spending limit that will force California politicians to once again live within our means and stop the unrestrained growth of government spending. Here’s how it works:
THE LIMIT
1) The Gann Limit set the annual spending limit for an entity of government in a given year at the total amount appropriated from the proceeds of taxes for the prior year, adjusted for the change in cost of living and the change in population. That formula is unchanged.
2) The “Base Year” (that is the fiscal year upon which the calculation commences) is changed from the 1986-87 fiscal year to the 2010-11 fiscal year for the State. In essence, by “re-setting” the base year, we restore the effectiveness of the limit going forward.
3) The initiative makes no change to the manner in which an increase in population is determined and no change to the manner in which a change in the cost of living is calculated.
EXCESS REVENUE
1) The initiative provides a method for dealing with any revenue received by an entity of government in excess of the spending limit. The first call on excess revenue is the reduction of debt. The total amount of debt service that consumes the State General Fund has grown dramatically and dangerously in recent years. Budget experts believe that debt service should not exceed 4 or 5 percent of total expenditures. Thus, under the initiative, if the government’s debt service is 5% or more, any excess revenue must be used to reduce government debt.
2) If and when government debt is under control, excess revenue can thereafter be used in one of two ways: If the amount of excess revenue is less than $2 Billion, then half of the excess goes into a prudent reserve and the other half goes to schools. If the schools receive money under this provision, that amount does not increase the Proposition 98 calculation in the future. If the amount of excess revenue is more than $2 Billion, then the excess goes back to the taxpayers in the form of rebates or tax rate reductions. Why not give it all back to taxpayers? We concluded that the amounts that would be returned to taxpayers if the excess revenue was between $1 and $2 Billion was simply too small to justify the administrative cost of providing for a rebate.
LOOPHOLE CLOSING
1) Over the years, attempts to circumvent the spending limit have been tried. The initiative closes those loopholes. For example, the Legislature and other initiative proponents have attempted to exclude new revenue raised by a new tax statute or to exclude certain expenditures from the Constitutional spending limit by statute (i.e. without amending the Constitution). The initiative says that no statute can create any exemption from the Constitutional spending limit. Further, even after the adoption of Prop.26 last year, there were some in the Legislature searching for ways to approve taxes without a two-thirds vote. If permitted, these attempts would further erode the effectiveness of a spending limit. The initiative slams the door on any perceived loophole that would allow a tax increase on less than a two-thirds vote.
That’s it. The remaining provisions of the Gann spending limit are untouched. Had we never tinkered with the original limit, California would not be in the fiscal mess it finds itself in now. If it is not broke don’t fix it. If you accidentally broke it, fix it up to its original condition. That’s what the proposed initiative will do.