Q&A: Why Hitting Gann Limit Threatens Ongoing Investments in Californians

Spending cap. Constitutional spending limit. Gann Limit. Known by many names, state leaders and Californians are taking a hard look at the constraints imposed by the 1979 measure this year, and asking if the archaic spending limit meets the ongoing needs of Californians and the state’s budget and policy priorities now. 

Our Q & A addresses top questions on the spending cap, and why California leaders and voters will need to grapple with the disco-era measure to create an equitable state and healthy, thriving local communities that move us forward.

1. What is the Gann Limit?

The State Appropriations Limit, often referred to as the Gann Limit, is a measure approved by California voters in 1979 that created a constitutional spending limit. The limit is tied to California’s 1978-79 spending level, adjusted for changes in population and per capita personal income even as we know the needs of our state and Californians have dramatically changed since the disco era.

If this limit is exceeded, policymakers must spend revenue over that limit in specific ways — returning money to taxpayers and spending more on K-14 education — so they lose the flexibility to spend those funds in ways that might address other ongoing needs of Californians, including health care, child care, and affordable housing. For an in-depth explanation of how the Gann Limit works, see the recent report released by the Legislative Analyst’s Office (LAO).

2. Why does this spending limit matter today?

While the state has exceeded the limit only once in the four decades since it was put into place, this spending cap is important now for policymakers and Californians because the state’s strong revenue growth from high-income earners, corporations, and stronger-than-expected economic conditions driven in large part by public sector stimulus and relief efforts, has pushed revenues over the allowable limit. And the LAO estimates that the state will continue to exceed the limit by large amounts in future years.

The state’s recent revenue growth has been driven by high-income Californians and corporations doing very well this last year, while Californians with low and middle incomes and Californians of color have suffered the greatest job and income losses in the pandemic.  And this is on top of Californians of color having been blocked from economic and health opportunities for generations. 

A Budget Center job report shows there are still 1.5 million fewer jobs than there were at the start of the pandemic a number still larger than the jobs lost during the Great Recession. Black and Latinx Californians are disproportionately represented among the state’s unemployed. At the current pace of job growth it would take the state 18 months to gain back those jobs.

3. Can state leaders make changes to avoid hitting the Gann Limit?

There are several options available to the governor and the Legislature, as identified in the LAO’s report, that may prevent the state from exceeding the limit in the near term. For example, certain types of spending are excluded from being counted toward the limit, such as certain types of emergency spending and transfers of state funds to local governments. The Newsom administration could exclude some of the spending to address COVID-19 and recent wildfires and buy itself some more space under the limit. The Legislature could also make changes to the laws implementing the spending cap to create even more space, such as broadening the types of transfers to local governments that could be excluded from the limit.

However, if revenues continue to outpace population growth and per capita personal income growth in the longer term, state leaders would likely need to ask California voters to approve a change to the state Constitution to modify or eliminate the spending cap in order to both support the rising costs of current services and leave room for significant new investments to address the critical needs of Californians, particularly given that the needs of Californians today are vastly different than those of 1979.

4. Many Californians who have suffered before and during the pandemic will get cash payments because of the Gann Limit — should taxpayers get a payment this year?

Providing direct cash assistance to Californians with low and middle incomes, including immigrants who are undocumented and have been excluded from thousands of dollars in federal assistance, is good policy and a wise investment to help the millions of Californians particularly people of color who are struggling to pay the rent, put food on the table, and weather unexpected expenses amid an unprecedented global pandemic. 

That’s not at question. 

It is important for policymakers to properly target cash payments to the individuals and families who have been most harmed by the pandemic and faced significant economic barriers even before the public health crisis. The governor’s proposal could be even more effectively targeted to ensure it reaches the low- and middle-income Californians economically harmed by the pandemic. The Gann Limit does not prohibit state leaders from doing this.

But the 1979 spending cap is an issue state leaders and Californians will have to grapple with for many years to come when it threatens the state’s ability to pay for current services and blocks other types of investments the state could make to address long-standing challenges facing Californians.

5. Should state leaders change the Gann Limit — even as the measure makes it possible for Californians to get refunds this year?

While cash payments will provide Californians with low and middle incomes with critical relief in a year of unprecedented challenges, the real issue is that voters in 1979 tied policymakers and Californians today to the budget priorities of the late 1970s. State policymakers and Californians  should ask if those decades-old priorities are what we want now for our families, neighbors, and communities.

Keeping the spending cap at the 1978-79 level is not sustainable. The cost of many public services from health care to support for seniors and people with disabilities can typically be expected to outpace population growth and the cost of living. 

If we don’t allow revenue to rise to meet the cost of basic services, the constraints imposed by the Gann Limit mean we’ll soon find ourselves in a vise grip where we can’t meet our basic needs as Californians. This could force policymakers to make major cuts to non-education spending priorities, like health care, child care, and housing assistance.

In addition to challenging the state’s ability to support current service levels, the spending cap, if left unchanged, will likely make it impossible to fund significant new investments to help all Californians thrive, such as health care for all Californians or significant ongoing investments to address the homelessness and affordable housing crises.

6. When will Californians know if they will receive cash payments this year?

Governor Newsom has proposed to send stimulus checks to Californians with dependents who have incomes up to $75,000 and to Californians without dependents with incomes between $30,000 and $75,000. Individuals and families without dependents who received payments through the first “Golden State Stimulus” enacted in February would not be eligible for these payments.

Between now and June 15, the deadline for the Legislature to pass the budget, the governor and lawmakers will finalize the details of the budget, including the plan to respond to the Gann Limit and provide cash payments to Californians.