March 16, 2012
Pursuant to Elections Code Section 9005, we have reviewed the
proposed constitutional initiative related to state appropriation limits
and legislative vote requirements for certain tax measures (A.G. File
State and Local Spending Limits
In November 1979, California voters approved Proposition 4. That
measure amended the State Constitution to establish an appropriations
limit (referred to below as the “spending limit” or the “limit”) for the
state government, as well as a limit for each city, county, school
district, and other local government entity. The limit for each
government constrains the amount of funds that can be spent
(appropriated) by that government each year. The spending limit was
modified by several later initiatives, including Proposition 98 in 1988
and Proposition 111 in 1990. This section describes the current version
of the spending limit, as modified by those two initiatives.
Calculation of the Spending Limit. The
state government’s annual spending limit is based on the amount of
appropriations in the 1978‑79 fiscal year (referred to as the “base
year”), as adjusted each year for population growth and cost-of-living
factors. The existing spending limit for the state government, school
districts, and community college districts measures the cost of living
as equal to the change in per capita (that is, per person) personal
income in California. The state government’s existing limit measures
population growth based on a blended average of
(1) the growth in the state’s population and (2) the change in
enrollment of the state’s school and community college districts (known
as “K-14 schools”). The Constitution provides for different population
and cost-of-living factors for other governmental entities.
Both the base year and these growth factors are important elements in
a governmental spending limit. The base year effectively can “lock in” a
relatively high or low amount of allowed spending, and the growth
factors can allow either limited or expansive growth thereafter.
Appropriations Subject to the Limit. In
general, government spending subject to the spending limit is equal to
all appropriations funded from the “proceeds of taxes,” except for the
types of spending that are specifically exempted. Proceeds of taxes
include taxes and the portion of fee revenues that are in excess of the
cost of providing fee-based services. Some of the specific exemptions to
the spending limit include:
- Principal and interest payments (debt-service payments) on bonds
issued by a governmental entity.
- Spending resulting from natural disasters, such as fires,
floods, droughts, and earthquakes.
- Retirement benefit payments.
- Unemployment and disability insurance payments.
- Certain court-mandated or federally mandated expenses.
- For the state limit, certain state payments known as
“subventions” to local governments (this exemption covers most state
payments to school districts).
- Spending from the increased tobacco taxes approved by voters in
Proposition 99 (1988) and Proposition 10 (1998).
- Qualified capital outlay spending—defined in state law as funds
spent on fixed assets (such as land or construction projects) with
an expected life of ten or more years and a value over $100,000.
- Transportation expenditures from the portion of gas taxes and
commercial vehicle weight fees above the levels that were in place
in January 1990 (prior to the passage of Proposition 111, which
raised those taxes and fees).
In addition to the specific exemptions from the spending limit, the
Constitution also allows the spending limit to be changed by voters in a
particular jurisdiction. The duration of any such change cannot exceed
State statutes contain various guidelines for administration of state
and local spending limits. One such statute, for example, specifies that
state subventions to a school district above a certain level shall
not be considered as proceeds of taxes for that district. When the
state calculates its spending limit each year, it effectively counts
this portion of school district funding as state spending subject to the
spending limit (unlike most other such subventions to school
districts)—thereby reducing the capacity for other state spending within
Disposition of Excess Revenues. Revenues
are defined as “excess” if they exceed the spending limit over a
two-year period. For the state government, such excess revenues are to
be divided equally between taxpayer rebates (to be made within two
years) and one-time appropriations to K-14 schools. For local
governments, excess revenues are to be refunded to taxpayers within two
Current State Spending Compared to the Spending Limit.
In recent years, state spending subject to the spending limit generally
has been far below that limit. Accordingly, the spending limit typically
has not been a factor when the Legislature and the Governor have
determined the size of the state budget each year. In 2000‑01, for
example, the state’s appropriations subject to the existing spending
limit were $52.2 billion ($1.8 billion below the limit). (Total state
appropriations were much higher, but tens of billions of dollars of
state spending are exempted from the limit, as described above.) In
2007‑08, appropriations subject to the limit were $59.2 billion
($16.9 billion below that year’s limit). By 2009‑10, as state revenues
were affected by the recession, appropriations subject to the limit had
declined to $56 billion ($25 billion below that year’s limit), and in
2010‑11, appropriations subject to the limit were $61.7 billion
($17.4 billion below that year’s limit).
Based on recent estimates by the Department of Finance, state
appropriations subject to the spending limit in 2011‑12 (the current
fiscal year) are $64.6 billion, or $17.2 billion below the current
limit. Given current economic and revenue projections, the spending
limit—unless changed by voters—is not likely to be a major factor in
state budget decisions for many years to come. Similarly, we understand
that most cities, counties, and special districts are below their
Legislative Vote Requirements for Increasing Taxes
State Tax Increases. The Constitution
describes what constitutes a tax. State tax increases require approval
either by the voters through the initiative process or by a two-thirds
vote of each house of the Legislature. In 2010, voters approved
Proposition 26, a constitutional amendment that broadened the definition
of state and local taxes. Among other things, Proposition 26 specified
that laws passed by the Legislature that result in any taxpayer
paying a higher tax must be approved by two-thirds of each house of the
State Legislative Approval for Local Taxes.
In some instances, the Legislature considers and acts upon
legislation that authorizes local governments to impose new or increased
taxes in their jurisdictions. Under the Constitution, these state
measures may be approved by a majority of each house’s members. Local
governments may not impose the new or increased taxes, however, unless
they are approved by local voters.
This measure makes changes to the state’s constitutional spending
limit and legislative vote requirements for certain tax increases.
State and Local Spending Limit Changes
Changes Base Year for State Spending Limit.
Effective in 2013‑14, this measure changes the base year for
the state government’s spending limit to 2010‑11. The state’s spending
limit would be its spending subject to limitation (that is, proceeds of
taxes less exempted spending) in 2010‑11—estimated to be about
$62 billion—adjusted in each fiscal year thereafter for cost-of-living
and population growth.
Changes How State Excess Revenues Are to Be Used.
This measure changes the Constitution’s requirements for how
any state government excess revenues are to be used. The uses of excess
revenues under this measure would depend on the amount of the annual
excess and the proportion of the state government budget spent on
voter-authorized bond debt service, as described below:
- When Annual Debt-Service Costs Are Under 5 Percent
of the Limit. In any fiscal year when the state’s
excess revenues total less than $2 billion and the state’s total
amount of bond debt service is less than 5 percent of the spending
limit, excess revenues are to be divided equally between one-time
appropriations to K-14 schools and a state budget reserve fund. If,
however, the excess revenues total more than $2 billion and the
state’s debt service is less than 5 percent of the limit, excess
revenues are to be refunded to taxpayers by a reduction of tax rates
or fees within the next two fiscal years.
- When Annual Debt-Service Costs Are More Than
5 Percent of the Limit. Under this measure, in any
fiscal year when the state has excess revenues and its debt-service
costs are more than 5 percent of the limit, the excess revenue is to
be spent to reduce the total amount of the state’s outstanding
voter-approved bond debt, including interest and redemption charges.
Changes How Local Excess Revenues Are to Be Used.
This measure also changes the requirements for how any local
government excess revenues are to be used. Similar to the proposed
requirements for state excess revenues, the local government would be
required to use excess revenues in any fiscal year to reduce bond debt
when its annual debt-service costs exceed 5 percent of its local
spending limit. When such debt-service costs are less than 5 percent of
the local limit, excess revenue would be required to be returned to
taxpayers by a reduction of tax rates or fees within the next two fiscal
Changes Other Spending Limit Provisions.
The measure changes certain other provisions related to the calculation
of California’s constitutional spending limits, including the following
- Capital Outlay. As described above,
qualified capital outlay projects are exempt from spending limits.
State statutes currently include a definition of qualified capital
outlay projects. This measure inserts the same definition into the
- Definition of Population Change. For
local governments (not including schools or community college
districts), the Constitution specifies that the change of population
included in local spending limits shall be determined by a method
prescribed by the Legislature. The Legislature has prescribed such a
method in state statutes. This measure amends the Constitution to
require that these local government population calculations be
revised every ten years to reflect the results of the U.S. Census.
- Explicitly Prohibits Statutory Exemptions.
This measure amends the Constitution to explicitly prohibit
statutes enacted through the initiative process or by the
Legislature from exempting any appropriations or proceeds of taxes
from state or local spending limit calculations.
Legislative and Initiative Measures
Requirements for Two-Thirds Votes of the Senate and
Assembly. This measure changes the Constitution to require
the votes of two-thirds of the members of each house of the Legislature
to approve bills that authorize local governments to impose new or
increased taxes in their jurisdictions. Local governments still would
not be able to impose the new or increased taxes, however, unless they
are approved by local voters. The measure also specifies that certain
other additions, amendments, or repeals of state law that result in the
imposition of increased taxes require the votes of two-thirds of the
members of each legislative house.
Repeals Unspecified Laws. This measure
repeals any state statutory changes passed by the Legislature between
December 1, 2011, and the effective date of this initiative (the day
after it is approved by the state’s voters) that conflict with this
Covers Taxes Adopted on Same Ballot. The
measure specifies that the use of proceeds of any taxes adopted on the
same statewide election ballot as this measure would be covered by this
initiative’s spending limit.
Change in Base Year. Currently, there is a
significant gap between the state’s spending limit and the amount of its
annual spending subject to the limit. This measure would “reset” the
state’s spending limit base year to 2010‑11, essentially eliminating the
gap between the limit and spending subject to the limit. Accordingly,
the spending limit would be much more likely to restrain the amount of
state appropriations subject to limitation.
If so restrained, the state would have to reduce the funding provided
for programs covered under the limit. Alternatively, the state could
redirect spending to exempt items (such as eligible subventions or debt
service), reduce state revenues, and/or implement the excess revenue
provisions under the revised spending limit. The constraints of this
measure’s new base year may be more pronounced when state revenues grow
substantially due, for example, to “spikes” in revenue from stock
market-related increases in capital gains income or tax rate increases.
Change in Excess Revenue Requirements. The
state is likely to spend nearly $7 billion on voter-approved bond debt
service in 2013‑14, which would equal around 10 percent of the revised
spending limit. Accordingly, in the near term, if excess revenues emerge
for the state, they are likely to be used to reduce state indebtedness
under this measure. Over the longer run, excess revenues also could
result in additional one-time funding for schools and community
colleges, the state’s budget reserve, and taxpayer refunds. To the
extent that such excess revenues emerge, therefore, these changes could
affect the overall level, composition, and stability of the state budget
The requirements to use excess revenues for these one-time purposes
means that they would not be available for ongoing state programs. There
are many scenarios that could occur in the event that excess revenues
emerge. In one scenario, for instance, required funding for schools and
community colleges under Proposition 98 could equal a growing portion of
revenues able to be spent on ongoing state programs under the revised
limit. This scenario could result in less ongoing state spending than
otherwise would be the case for purposes funded with tax proceeds
outside of Proposition 98, including health, social services,
corrections, and university programs (funding for which generally is
constrained by the spending limit). In another scenario, the Legislature
could suspend the Proposition 98 minimum funding guarantee to continue
other spending. In other scenarios, the revised limit could be more
constraining based on relationships between state subventions and school
spending limits in some circumstances when tax revenue growth causes
state school funding requirements under Proposition 98 to rise. The
exact amounts of these funding changes would depend on whether excess
revenues emerge, how much, when, and decisions of the Legislature and
Governor in each fiscal year to allocate allowable spending to various
Because this measure does not change local government base years
under the constitutional spending limit, its fiscal effects may be less
significant for local governments.
Changes in Excess Revenue Requirements. To
the extent that local governments receive excess revenues in the future,
this measure would direct them to reduce bond debt in certain instances.
Funding for Schools and Community Colleges.
The changes in the state spending limit described above would
make it somewhat more likely that schools and community colleges would
receive one-time funding from excess state revenues in the future.
Other effects on budgets of local governments, including school
districts, are possible, but difficult to project at this time.
This measure’s changes to legislative vote requirements for certain
tax measures would decrease the likelihood that certain tax increases
would be authorized or imposed. Because it is unknown which tax measures
would be approved in the future—either with or without this change—the
exact fiscal effect of these changes cannot be determined.
Summary of Fiscal Effects
This measure would result in the following major fiscal effects:
- For state government, a much greater likelihood that spending
will be constrained by the constitutional spending limit.
Consequently, state spending for ongoing programs—such as schools,
community colleges, universities, health and social services, and
corrections—may have to be reduced in certain years, potentially by
billions of dollars. In addition, the measure could result in more
state funding for reduction of bond debt, particularly in the near
term, and in the future, more one-time funding for schools and
community colleges, budget reserves, and taxpayer refunds.
Return to Propositions
Return to Legislative Analyst's Office Home Page