Date: December 1, 2003
To: Members of the
From: Elizabeth G. Hill, Legislative Analyst
Subject: Comments on the
Administration’s Spending Limit Proposal
During the November 25, 2003 hearings of the Assembly
Budget and Senate Budget and Fiscal Review Committees, our office was asked for
comments on the administration’s spending limit proposal. This memo (with
attachment) responds to those requests.
Please feel free to contact me with any questions at
The Administration’s Spending Limit and
Budgetary Reserve Proposal
On November 24, 2003, the administration released a draft of
its expenditure limit and budgetary reserve fund proposal. In order to assist
the Legislature in reviewing the proposal, we have prepared the following
initial comments regarding its provisions and key issues associated with it.
Provisions of the Measure
Scope and Coverage
The proposal adds an article to the State Constitution which
creates (1) a more stringent General Fund spending cap, (2) a budget
stabilization fund, and (3) expanded fiscal powers for the Governor.
It generally leaves intact the existing Gann spending limit,
which would continue to apply to special funds and local governments.
General Fund Spending Cap
2004-05 spending would be based on the amount of General Fund
revenues from sources other than borrowing or prior-year reserves. This amount
would be estimated by the Director of Finance and fixed as of the 2004 May
Spending thereafter would be limited to the 2004-05 level, as
adjusted annually for population and per capita personal income. These growth
factors are the same as those used for the state’s current spending limit.
Budget Stabilization Fund
Revenues above the spending cap would be placed into this fund.
Spending from this fund would be allowed for tax rebates,
debt-service on deficit bonds, emergencies decreed by the Governor (see below),
or revenue shortfalls.
Allows the Governor to implement midyear fiscal changes to
eliminate deficits unless alternatives are adopted by the Legislature with a
two-thirds vote in 30 days.
Allows money above the limit to be spent from the reserve for any
emergency the Governor declares, with legislative approval.
Proposition 98 Interactions
The proposed spending cap would have the following three
interactions with Proposition 98:
- Maintenance Factor. Generally, the minimum
guarantee calculation would no longer restore any outstanding “maintenance
factor” after 2004-05. We estimate that this would reduce Proposition 98
spending by hundreds of millions of dollars annually in the first couple of
years, and by around $2 billion annually in the long run absent
over-appropriations of the minimum guarantee.
- Funding Stability. Currently, the minimum guarantee
is susceptible to both upward and downward fluctuations in General Fund
revenues that tend to be more volatile than per capita personal income. If
funds from the measure’s stabilization account were used to assist the General
Fund in bad fiscal years, the proposal could smooth out the volatility in
minimum guarantee funding. If the stabilization funds were used for other
purposes, the proposal would require less Proposition 98 funding than would be
the case under current law.
- Funding Share. Under current law or under the
spending cap, the minimum guarantee is likely to require a declining share of
General Fund revenues for the foreseeable future because (1) student attendance
is growing at a slower rate than the general population (and is projected to decline
by 2008-09) and (2) local property tax revenues are forecasted to grow at a
faster rate than General Fund revenues. Proposition 98 would only “crowd out”
non-Proposition 98 funding under the proposed limit if (1) local property tax
revenues slowed significantly, (2) the state chose to over-appropriate the minimum
guarantee, or (3) the student population started to grow faster than state
Effects on Special Funds
As noted above, this measure does not alter the treatment of
special funds under the existing spending limit. For example, the current exemptions
for transportation funding and certain tobacco tax-supported expenditures would
remain. Thus, spending in these areas would not be directly affected by the
In addition, because the state has considerable room under its
existing spending limit, it would still be possible for new and expanded
programs to be financed from increased special funds revenues under the
Issues and Considerations
Are the New Gubernatorial and Administrative Powers Excessive?
The measure gives the administration and the Director of Finance
very broad and expanded powers, including defining what constitutes an
emergency for the State of California.
The Director of Finance is solely responsible for determining (1)
the initial revenue estimate for 2004-05 that ultimately determines the
spending cap, (2) whether expenditures exceed the limit, and (3) whether
there is a revenue shortfall that will precipitate a fiscal emergency.
The Governor can declare a fiscal emergency, and implement a plan
to address it involving either spending reductions or tax increases, without
legislative concurrence. Specifically, the Governor can submit a plan that will
take effect within 30 days unless alternative legislation is passed with a
two-thirds vote that addresses the problem.
- The above provisions have the potential to fundamentally shift
the balance of power between the Executive and Legislative branches of
government. Given this, does the measure eliminate important checks and
balances in our system regarding spending or taxation decisions?
Is the Base Spending Amount the Right One?
The measure sets the base from which future expenditures can grow
as the level of revenues projected for 2004-05—roughly $75 billion by our estimate.
However, this is $15 billion below our estimate of current-law expenditures for
Actions taken to close this gap in 2004-05 will—to a large
degree—“lock in” future revenue and expenditure levels.
For example, if the 2004-05 shortfall were addressed partly
through borrowing or other one-time measures, an unresolved funding gap would
remain in future years, absent other actions. The proposed limit would largely
preclude the state from raising taxes after 2004-05 to cover any such remaining
In addition, the economy and revenues are still in the early
stages of recovering from the recession. Typically, the state experiences
above-average revenue growth as the economy continues to recover. Use of these
“additional” revenues to resolve remaining portions of the budget gap would be
restricted under the measure.
This raises the question: Is the 2004-05 revenue level
reasonable for locking-in future expenditures?
- Which Expenditures Are Subject to the Limit? The
measure states, “for the 2004-05 fiscal year, total expenditures of General
Fund revenues may not exceed the amount of General Fund revenues . . .,” where
revenues are defined as excluding borrowed funds and carry-over reserves.
- The measure would appear to allow expenditure of these excluded
funds, without regard to the limit.
- If this is the case, loans—whether from within and/or outside of
state government—could be used to support spending above the limit in future
- Should Loan Repayments Be Exempt? The measure
allows spending from the reserve to retire deficit bonds to be exempt from the
limit, but does not provide similar exemptions for repayment of other types of
budgetary borrowing, such as loans from transportation funds or local
governments. Should repayment on these alternative forms of debt also be
- Treatment of Fees. The measure requires that the
General Fund spending limit be reduced when funding responsibilities are
shifted from General Fund taxes to other sources. This would appear to limit
the state’s ability to utilize fee increases to replace General Fund support
for such things as higher education and fire protection.