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Governor Newsom’s proposed 2023-24 budget was just unveiled, and the Budget Center team is here to help you understand the details. How is the state managing an uncertain revenue landscape? What do we know about estimated dollar amounts and policy proposals? How do proposals address racial and economic inequities in our communities? And what are the missed opportunities in the proposal?

Join us as we kick off a new budget season and share the policies and budget investments needed to achieve an equity-focused budget and build healthy, thriving communities for all Californians. Don’t miss our first Empower event of the year!

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Every year, California’s governor and Legislature adopt a state budget that provides a framework and funding for critical public services and systems — from child care and health care to housing and transportation to colleges and K-12 schools.

But the state budget is about more than dollars and cents.

The budget expresses our values as well as our priorities for Californians and as a state. At its best, the budget should reflect our collective efforts to expand economic opportunities, promote well-being, and improve the lives of Californians who are denied the chance to share in our state’s wealth and who deserve the dignity and support to lead thriving lives.

State budget choices have an impact on all Californians and these decisions are particularly important for the nearly 6 million students in California’s K-12 public schools. Because the state budget provides
the majority of funding that K-12 public schools receive each year, it is critical for Californians to understand and participate in the annual budget process to ensure that state leaders are making the strategic choices needed to allow every K-12 student — from different races, backgrounds, and places — to thrive and share in our state’s economic and social life.

This guide sheds light on the state budget, the budget process, and why they matter for K-12 students and schools with the goal of giving Californians the tools needed to effectively engage decision makers and advocate for fair and just policy choices.

Key Takeaways

the bottom line

  1. The state spending plan is about more than dollars and cents.
    • Crafting the budget provides an opportunity for Californians to express our values and priorities as a state.
  2. The state Constitution establishes the rules of the budget process.
    • Among other things, these rules allow lawmakers to approve spending with a simple majority vote but require a two-thirds vote to increase taxes. Voters periodically revise the budget process by approving constitutional amendments.
  3. The governor has the lead role in the budget process
    • Proposing a state budget for the upcoming fiscal year gives the governor the first word in each year’s budget deliberations.
    • The May Revision gives the governor another opportunity to set the budget and policy agenda for the state.
    • Veto power generally gives the governor the last word.
  4. The Legislature reviews and revises the governor’s proposals.
    • Lawmakers can alter the governor’s proposals and advance their own initiatives as they craft their version of the budget prior to negotiating an agreement with the governor.
  5. Budget decisions are made throughout the year.
    • The public has various opportunities for input during the budget process.
    • This includes writing letters of support or opposition, testifying at legislative hearings, and meeting with officials from the governor’s administration as well as with legislators and their staffs.
    • In short, Californians have ample opportunity to stay engaged and involved in the budget process year-round.

California’s State Budget & Why It Matters for K-12 School Funding

The State Budget Consists of Three Types of State Funds

three types of state funds

  1. General Fund — The state General Fund accounts for revenues that are not designated for a specific purpose.
  2. Special Funds — Over 500 state special funds account for taxes, fees, and licenses that are designated for a specific purpose.
  3. Bond Funds — State bond funds account for the receipt and disbursement of general obligation (GO) bond proceeds.

The state General Fund provides more than 95% of state spending that supports K-12 education.

The Largest Share of State General Fund Spending Supports K-12 Education

Under the enacted 2022-23 state budget:

  • Nearly one-third of General Fund dollars (33.1%) supports K-12 education.
  • Almost 3 out of every 10 General Fund dollars (29.3%) pays for health and human services.
  • Roughly 1 out of every 10 General Fund dollars (10.1%) goes to higher education.
  • Less than 1 out of every 10 General Fund dollars (6.3%) supports corrections, primarily the state prison system.
  • More than 1 out of 5 General Fund dollars (21.3%) goes to other essential services and institutions, such as transportation, environmental protection, the state’s court system, and so-called “General Government,” which consists of a variety of statewide expenses such as emergency expenditures.
Happy mixed race schoolgirl writes something in a notebook while studying with friends in the school library. Other students are working in the background.

Most General Fund Revenues Come From Three State Taxes

More than 9 out of every 10 General Fund dollars (just over 94%) under the enacted
2022-23 state budget are projected to come from:

  • The personal income tax (61.8%),
  • The corporation tax (17.3%); and
  • Sales and use taxes (15.3%)

The remaining General Fund dollars in 2022-23 are projected to come from smaller state revenue sources (5.7%), such as insurance and cigarette taxes.

The Majority of K-12 Education Funding Comes From the State

In 2020-21, K-12 school districts and county offices of education received:

  • More than half of their dollars (nearly 56%) from the state;
  • Nearly one-quarter of their dollars (24.6%) from local property taxes;
  • More than 1 in 10 (13.1%) of their dollars from the federal government, which included funding to mitigate effects of the COVID-19 pandemic; and
  • Only 6.5% of their dollars from other local sources of revenue, such as parcel taxes and fees for the use of school buildings.
A teenage boy talks to his friend as they study for a test together.

Most K-12 Education Funding Is Allocated Through the Local Control Funding Formula

The Local Control Funding Formula (LCFF) is the primary funding formula for K-12 school districts and county offices of education.

  • State policymakers fundamentally restructured the state’s K-12 education finance system when they enacted the LCFF in 2013.
  • The LCFF is an equity-based formula that provides a base grant per K-12 student, adjusted to reflect the number of students at various grade levels, as well as additional grants for English learners, students from low-income families, and foster youth.
  • The Legislature determines LCFF grant levels in the annual state budget.

LCFF Dollars Come From the State and from Local Property Taxes

In 2020-21, nearly 2 out of every 3 dollars (66.2%) that K-12 school districts and county offices of education received were allocated through the LCFF.

  • Slightly less than two-thirds of LCFF dollars came from the state and slightly more than one-third came from local property taxes.

State Budget and Policy Choices Are Key to Determining the Allocation of K-12 School Funding

The state budget provides most of the funds that K-12 schools use to educate California’s 5.9 million K-12 students.

  • These funds go to more than 1,000 school districts, county offices of education, and charter schools.

The size of the state budget is a key factor that determines the total amount of annual funding K-12 schools receive.

  • However, the Legislature and governor decide how these state funds are allocated across the state.

Understanding the financial resources available to K-12 schools requires familiarity with the state budget and the state budget process.

Group of guys and girls doing class assignment in the library. Young university students reading reference books for study. Group of high school students studying for exam in classroom sitting in a row.

Terms and Definition

The Constitutional Framework

The governor and legislators craft the state’s annual spending plan according to rules outlined in the state Constitution.

California voters periodically revise these rules by approving constitutional amendments that appear on the statewide ballot.

  • Proposals to amend the state Constitution can be placed on the ballot through a citizens’ initiative or by the Legislature.
  • A constitutional amendment takes effect if approved by a simple majority of voters.

Three Key Budget Deadlines

Two in the State Constitution (January 10 and June 15), One in State Law (May 14)

The governor must propose a budget for the upcoming fiscal year on or before January 10. The budget must be balanced: Estimated revenues (as determined by the governor) must meet or exceed the governor’s proposed spending.

The governor must release the May Revision on or before May 14.

The Legislature must pass a budget bill for the upcoming fiscal year by midnight on June 15. The budget bill must be balanced: Estimated General Fund revenues (as set forth in the budget bill passed by the Legislature) must meet or exceed General Fund spending.

Proposition 25: Simple Majority Vote for Budget Bill and Most Budget-Related Bills

The budget package generally may be passed by a simple majority vote of each
house of the Legislature.

  • Prop. 25 of 2010 allows lawmakers to pass, by a simple majority vote, the budget bill as well as certain budget-related bills (“trailer bills”) that may take effect as soon as the governor signs them. Typically, the budget package consists entirely or primarily of such majority-vote bills.
  • To qualify as a budget-related bill under Prop. 25, a bill must (1) be listed in the budget bill and (2) contain an appropriation of any amount.
  • The budget package may include bills that require a two-thirds vote of each house, such as bills to raise taxes or to place constitutional amendments or general obligation bonds before the voters.
A multi ethnic group of teenagers hanging outdoors together. The focus of the photo is on an African American teenage girl who is smiling and happy to be with her friends.

Proposition 25: Penalties for a Late Budget

Lawmakers face penalties if they fail to pass the budget bill on or before June 15.

  • Prop. 25 requires lawmakers to permanently forfeit both their pay and their reimbursement for travel and living expenses for each day after June 15 that the budget bill is not passed and sent to the governor.
  • These penalties do not apply to budget-related bills, which do not have to be passed on or before June 15.

Proposition 26: Supermajority Vote for Tax Increases

Any tax increase requires a two-thirds vote of each house of the Legislature.

  • Under the state Constitution, “any change in state statute which results in any taxpayer paying a higher tax” requires a two-thirds vote of each house.
  • This standard was imposed by Prop. 26 of 2010. This measure expanded the definition of a tax increase and thus the scope of the two-thirds vote requirement, which was originally imposed by Prop. 13 of 1978.
  • Prior to Prop. 26, only bills changing state taxes “for the purpose of increasing revenues” required a two-thirds vote. Bills that increased some taxes but reduced others by an equal or larger amount could be passed by a simple majority vote of each house.

Proposition 26: More Charges Are Classified as Taxes

Prop. 26 of 2010 also expanded the definition of a tax to include some fees.

  • Prior to Prop. 26, lawmakers could create or increase fees by a simple majority vote. These majority-vote fees included regulatory fees intended to address health, environmental, or other problems caused by various products, such as alcohol, oil, or hazardous materials.
  • Prop. 26 reclassified regulatory and certain other fees as taxes. As a result, a two-thirds vote of each house of the Legislature is now required for many charges that previously were considered fees and could be passed by a simple majority vote.

Additional Supermajority Vote Requirements

The state Constitution requires a two-thirds vote of each house of the Legislature in order to:

  • Appropriate money from the General Fund, except for appropriations that are for public schools or that are included in the budget bill or in budget-related bills that meet the requirements of Prop. 25.
  • Pass bills that take effect immediately (urgency statutes), except for the budget bill and Prop. 25 budget-related bills.
  • Place constitutional amendments or general obligation bond measures before the voters.
  • Override the governor’s veto of a bill or an item of appropriation.

A Bill Must Be Published for at Least 72 Hours Before the Legislature Can Act on It

Proposition 54 of 2016 requires bills to be distributed to legislators and published on the Internet, in their final form, at least 72 hours before being passed by the Legislature.

This rule applies to all bills, including the budget bill and other legislation included in the budget package.

This mandatory review period can be waived for a bill if:

  • The governor declares an emergency in response to a disaster or extreme peril, and
  • Two-thirds of legislators in the house considering the bill vote to waive the review period.

Proposition 98: A Funding Guarantee for K-12 Schools and Community Colleges

Prop. 98 of 1988 guarantees a minimum annual level of funding for K-14 education.

  • The amount of the guarantee is calculated each year based on one of three tests that apply under varying fiscal and economic conditions. Two of these tests include adjustments for changes in statewide K-12 attendance. Prop. 98 funding comes from the state General Fund and local property tax revenues.
  • The Legislature can suspend the guarantee for a single year by a two-thirds vote of each house and provide less funding. Following a suspension, the state must increase Prop. 98 funding over time to the level that it would have reached absent the suspension.
  • While the Legislature can provide more funding than Prop. 98 requires the guarantee has generally served as a maximum funding level.

Proposition 2: Saving for a Rainy Day, Paying Down Debt

Prop. 2 of 2014 revised the rules that apply to the Budget Stabilization Account (BSA) — the state’s constitutional rainy day fund — and also established a new requirement to pay down state budgetary debt.

  • The state is required to set aside 1.5% of General Fund revenues each year, plus additional dollars in years when tax revenues from capital gains are particularly strong.
  • Until 2029-30, half of the revenues go into the BSA and the other half must be used to pay down state budgetary debt, which includes unfunded pension liabilities. Starting in 2030-31, the entire annual transfer goes into the BSA.
  • State policymakers may suspend or reduce the BSA deposit and withdraw funds from the reserve, but only under limited circumstances that qualify as a “budget emergency.”

Proposition 2: A Budget Reserve for K-14 Education

Prop. 2 of 2014 also created a state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA).

  • Deposits come from state capital gains tax revenues in years when those revenues are particularly strong.
  • However, various conditions must be met before these dollars could be transferred to the PSSSA. For example, transfers could occur only in so-called “Test 1” years under Prop. 98, which have been rare.

Proposition 55: Potential New Funding for Medi-Cal from a Tax on the Wealthiest Californians

Prop. 55 of 2016 extends, through 2030, personal income tax rate increases on very high-income Californians and establishes a formula to boost funding for Medi-Cal, which provides health care services to Californians with low incomes.

  • Starting in 2018-19, General Fund revenues — including those raised by Prop. 55 — must first be used to fund (1) the annual Prop. 98 guarantee for K-12 schools and community colleges and (2) the cost of other services that were authorized as of January 1, 2016, as adjusted for population changes, federal mandates, and other factors.
  • If any Prop. 55 revenues remain after meeting these required expenditures, Medi-Cal would receive 50% of this excess, up to a maximum of $2 billion in any fiscal year.
  • Prop. 55 has not yet resulted in any additional funding for Medi-Cal.
Asian female doctor use stethoscope to listen heartbeat of little girl child sit with her father in living room while doctor visit at home. Home health care delivery and doctor visiting concept.

State Appropriations Limit (SAL): A Cap on Spending

Appropriations are subject to a limit established by Prop. 4 of 1979, as modified by later initiatives. This spending cap is often called the Gann Limit.

  • The SAL limits the amount of state tax proceeds that can be appropriated each year. This limit is adjusted annually for changes in population and per capita personal income.
  • Some appropriations from tax proceeds do not count toward the limit, including debt service and spending that is needed to comply with court or federal mandates.
  • Revenues that exceed the SAL over a two-year period are divided equally between Prop. 98 spending and taxpayer rebates. The state last exceeded the SAL in 2020-21 (but did not do so in the prior year).

State Mandates: Pay for Them or Suspend Them

The state is required to pay for or suspend mandates that it imposes on local governments.

  • Prop. 4 of 1979 requires the state to reimburse local governments for costs related to a new program or a higher level of service that is mandated by the state.
  • Prop. 1A of 2004 expanded the definition of a mandate to include the transfer of financial responsibility from the state to local governments.
  • Prop. 1A also requires the state to suspend a mandate in any year in which local governments’ costs are not fully reimbursed.

What do the Governor and the Legislature Do?

the governor

Approves, modifies, or rejects spending proposals prepared by state departments and agencies through an internal process coordinated by the DOF.

Proposes a spending plan for the state each January, which is introduced as the budget bill in the Legislature.

Updates and revises the proposed budget each May (the “May Revision”).

Signs or vetoes the bills included in the budget package.

Can veto all or part of individual appropriations (line items), but cannot increase any appropriations above the level approved by the Legislature.

the legislature

Approves, modifies, or rejects the governor’s proposals.

Can add new spending or make other changes that substantially revise the governor’s proposals.

Needs a simple majority vote of each house to pass the budget bill and Prop. 25 budget-related bills.

Needs a two-thirds vote to pass certain other bills that may be part of the budget package, such as bills that increase taxes or propose constitutional amendments.

Needs a two-thirds vote of each house to override the governor’s veto of a bill or an appropriation.

What Happens When?

The state budget process is cyclical. Decisions are made throughout the year.

State Budget Resources

  • Department of Finance: The governor’s budget proposals and related documents.
  • Legislative Analyst’s Office: Budget and policy analyses, budget recommendations, and historical budget data.
  • Legislative Counsel: Bills and bill analyses, a free bill-tracking service, the state codes, and the state Constitution.
  • State Assembly and Senate: Committee agendas and other publications, floor session and committee schedules, the annual legislative calendar, and live audio streaming of legislative proceedings.

Support for this report was provided by the Sobrato Family Foundation and the Stuart Foundation.

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Building a just and equitable California for every person no matter their race, ethnicity, gender, age, or zip code requires investments to create health, housing, economic, and educational opportunities. But an archaic spending limit approved by some California voters under a 1979 ballot measure challenges our state’s ability to meet the ongoing needs of Californians. Known by many names — the spending cap, appropriations limit, or Gann Limit — this convoluted budget constraint blocks the state’s ability to build a better and more equitable future.

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.

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About this event

Our premier “Dollar and Democracy” state budget training is here to prepare you for an effective budget season in 2023 and beyond.

Whether this is your first cycle or you are a seasoned pro, you’ll learn something new as our budget expert, Adriana Ramos-Yamamoto, walks you through California’s budget process, including key deadlines and the roles of the governor, the Legislature, and advocates in making investments in our communities. Plus, learn insider tips on effective advocacy tools and what to expect in 2023 from our discussion panel of budget mavens.

Watch the Recording


Budget Trainer:

Dollars and Democracy training, approx. 20 minutes

  • Adriana Ramos-Yamamoto, Policy Analyst, California Budget & Policy Center

Discussion Panel:

Looking ahead and what to expect in 2023, approx. 40 minutes

  • Kristina Bas Hamilton, Principal, KBH Advocacy
  • Scott Graves, Director of Research, California Budget & Policy Center
  • Christopher Sanchez, Policy Advocate, Western Center on Law & Poverty

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