How the Gann Limit Threatens Ongoing Investments for Californians

This Gann Limit Q&A addresses top questions on the spending cap and why California leaders and voters need to rethink the disco-era measure to create healthy, thriving communities for all Californians.

1. What are the origins of the Gann Limit?

The Gann Limit is a constitutional spending cap approved by voters via Proposition 4 in a 1979 special election. Prop. 4 emerged from California’s anti-tax movement of the 1970s. The measure’s key proponent, Paul Gann, also co-authored Prop. 13 — the 1978 initiative that severely restricted property taxes and drastically limited the ability of local jurisdictions to raise revenues for education and community services such as libraries, parks, and fire protection.

Prop. 4 and Prop. 13 were approved by a majority-white electorate during a time when the state’s population was becoming more diverse and white Californians’ support for robust public services was in decline.

2. How does the Gann Limit work?

The Gann Limit applies to both state spending and, as explained in question #5, spending by local governments and school districts. At the state level, the limit is based on California’s 1978-79 spending level, which is then adjusted each year for changes in population and per capita personal income. In essence, the Gann Limit enshrined into the state’s Constitution the budget priorities of the late 1970s — even though the needs of Californians have dramatically changed since the disco era.

If revenues exceed the limit over a two-year period, state policymakers must provide half of the revenue over that limit to taxpayers and the other half to K-14 education. Policymakers have some discretion over how to distribute the portion going to taxpayers. In contrast, the portion going to K-14 education must be distributed on a per-pupil basis, which is an inequitable approach that treats all schools the same regardless of their students’ needs.

Alternatively, policymakers have limited options to structure budgets to avoid going over the limit, as explained in question #6. In either case, state leaders lose the flexibility to spend revenues in ways that address critical ongoing needs of Californians, including health care, child care, and housing assistance. For an in-depth explanation of how the Gann Limit works, see this April 2021 report by the Legislative Analyst’s Office.

3. Why does this spending limit matter today?

For most of the last two decades, state revenues were far enough below the Gann Limit that it did not have a significant impact on budgeting decisions. However, when the state’s revenues grow faster than population and personal income, as they have in recent years, the Gann Limit comes into play and dictates how a large share of the budget can be spent.

Big revenue gains primarily come from personal income taxes paid by high-income households, who experience much faster income growth than the typical Californian, and who pay higher tax rates under the state’s progressive income tax system. While there will be years when the Gann Limit is less of a factor in state budget decisions, over the long run the spending cap will likely continue to impose budget constraints to the extent that state revenues grow faster than the limit itself, as has been the case historically.

4. How does the Gann Limit threaten ongoing investments to help Californians thrive?

The Gann Limit challenges California’s ability to maintain current service levels and to raise revenues to make bold new investments to help more Californians prosper.

The Gann Limit is just one of several budget formulas in the state Constitution that dictate how revenues can be spent. Prop. 98, approved by voters in 1988, creates a guaranteed annual minimum funding level for K-14 education. Prop. 2, approved by voters in 2014, requires the state to direct some revenues to paying down debts and adding to the state’s main budget reserve (the Budget Stabilization Account). When revenues exceed the Gann Limit, each dollar above the limit must meet all three requirements: Gann, Prop. 98, and Prop. 2. This means that each $1 of “excess” revenue results in more than $1 in state budget obligations.  Addressing all three obligations could force state leaders to cut public services outside of K-14 education, such as health care, child care, and cash assistance as well as the state university systems.

In addition to undercutting the state’s ability to support current service levels, the spending cap, if left unchanged, will undermine efforts to raise enough revenue to fund significant new ongoing investments to help all Californians thrive. These include investments to expand affordable child care, increase pay for child care providers, and adequately address the homelessness and affordable housing crises.

Cutting critical services and failing to address the biggest challenges facing the state would significantly harm Californians with low incomes who may not be able to make ends meet without the help of public supports. Many Californians of color are at particular risk because of historical and ongoing discrimination that has often limited them to low-paying, undervalued jobs and blocked them from opportunities to build wealth.

5. Does the Gann Limit affect local governments and school districts?

The Gann Limit generally applies to local governments — cities, counties, and special districts — as well as to K-12 and community college districts, all of which could be impacted in the years to come. Many school districts regularly exceed their spending caps, although the state is currently able to provide relief to these districts by counting certain district expenditures toward the state’s own limit. In general, few cities or counties are currently at risk of exceeding their limits.

However, in future years, the Gann Limit could put pressure on local budgets, particularly for cities and counties that seek revenue increases to bolster local services like affordable housing, health care, parks, and libraries.

6. What can state leaders do about the Gann Limit?

State leaders have some ability to structure budgets to avoid exceeding the limit in the near term. For example, they can spend more on things that are excluded from the limit, such as:

• infrastructure projects, including housing;
• emergency response; 
• tax refunds;
• some transfers of state funds to local governments; and
• spending to comply with court and federal mandates.

Policymakers can also reduce revenues to avoid going over the limit, such as by expanding tax credits like the California Earned Income Tax Credit and Young Child Tax Credit.

Finally, some of the Gann Limit rules are spelled out in state statute rather than in the state Constitution. In these cases, lawmakers have limited opportunities to change the law to ease some Gann Limit pressures. For example, state leaders made some changes in the 2021-22 and 2022-23 state budgets to avoid exceeding the limit, including allowing more flexibility in deciding whether to count state funding for local governments under the state or local limits.

However, in the long run, the Gann Limit’s restrictive rules may jeopardize existing services and many kinds of ongoing expenditures, such as big new investments in affordable child care or health care.

Even though a period of weak revenue growth may temporarily keep the state under the spending cap, the Gann Limit will roar back to life when revenues pick up again. In order to address the long-run threats posed by the limit, state leaders should ask California voters to change the state Constitution to modify or eliminate the spending cap. This would allow the state to both support the rising costs of current services and leave room for significant new ongoing investments to address the critical needs of Californians.