California has massive budget surplus, Democrats are pondering ways to spend it

California is heading into 2022 with a massive budget surplus projected to reach $31 billion, and that has the Democrat-controlled legislature pondering how to spend much of it without running afoul of a legally binding spending cap.

The Gann Limit, passed by voters in 1979, capped state and local government spending at 1978-1979 levels and adjusts for inflation. If state tax revenue exceeds the Gann Limit, lawmakers must find ways to allocate the excess funding, either through tax rebates or allowed state spending, like infrastructure projects.

Earlier this month, state Senate Democrats released their key values for the upcoming fiscal year budget, which includes about $51 billion available for discretionary spending.

One of those values is to “strengthen equity while meeting Gann Limit requirements,” and Democrats said they aim to do this by increasing infrastructure investments and strengthening tax relief programs.

“The Senate is committed to putting the state’s wealth to work to benefit those who need it most – the middle class and families struggling to get by,” Senate Pro Tem Toni Atkins, D-San Diego, said in a statement. “California is in good fiscal health – thanks to a revenue system approved by voters and responsible budgeting by the Legislature – and it’s time to build on the progress we’ve made: more access to education and health care, strong reserves to protect us in down times, and more investments that grow the economy and create equity.”

In addition to investments for infrastructure and tax relief, Democrats also indicated a desire to “consider future reforms to modernize the Gann Limit while respecting original intent” within its budget key values.

While specifics about what reform could look like were not further explained, there are a few paths lawmakers could take if they choose to make changes to the decades-old law.

What can be done to reform the Gann Limit?

Heading into the next fiscal year, the state is eyeing an estimated $31 billion surplus, according to the Legislative Analyst’s Office (LAO). With this, the state is on track to exceed the Gann Limit within the 2022-2023 fiscal year, the LAO predicts.

As the state nears the limit, there are a few options for the legislature to consider.

According to the LAO, to avoid exceeding the limit, legislators could choose to issue tax refunds, allocate excess revenue to schools or increase spending on “excluded purposes,” like infrastructure. These are all immediate actions the legislature could take to avoid exceeding the limit.

Making temporary or long-term changes to the Gann Limit, however, is a bit of a different story.

To make statutory changes to the State Appropriations Limit, the LAO said the legislature has a few options to consider. One option is to introduce legislation requiring districts to reduce their spending limits by the amount of any unused revenue, which would allow the state to increase its limit by a corresponding amount.

The legislature would have to introduce trailer legislation to do this, which the LAO said could be done over the 2021-2022 budget year.

Another option to reform the limit is to take the initiative back to the voters and request changes, according to the LAO.

Under the California Constitution, voters can opt to temporarily change the appropriations limit for up to four years. With this rule in mind, the state legislature could ask voters to allow for a temporary increase to the appropriations limit, which could give the state adequate time to “​​pursue longer-term and more structural changes to the state’s budget,” according to the LAO.

According to the LAO, sending the initiative back to the voters via a ballot measure would take more than a year.

Proponents of changing the Gann Limit say asking the voters to modify existing law could allow for additional spending and investments that would benefit Californians.

“Modifying the Gann Limit 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,” Sarah Jimenez, the director of strategic communications for the California Budget & Policy Center, told The Center Square.

“Even if policymakers are able to manage within the spending cap over the next couple of years, the Gann Limit’s restrictive rules mean that many kinds of ongoing expenditures would be off the table, such as big new investments in affordable child care or health care.”

Some legislators, however, are not in favor of making reforms to the Gann Limit, saying changes are not in the interest of taxpayers.

Sen. Jim Nielsen, a Republican and vice-chair of the Senate Budget Committee, told The Center Square that he is not in favor of reforms to the Gann Limit, noting that he would openly campaign against changes.

“The only changes that people would be wanting to propose would be to water down the Gann Limit even more,” Nielsen, R-Red Bluff, said. “To strengthen it or to maintain it – they will have no interest.

“Let's think about the people. Let's think about the taxpayers. Let's think about the citizens. Let's think about the budget of California. That's what was intended. And it is all the more needed now.”

Nielsen, alongside several other Republican legislators, said he favors using some of the state’s surplus for infrastructure investments, particularly investments in state water projects. He and other Republicans recently penned a letter to Gov. Gavin Newsom earlier this month asking for funding to boost the state’s water infrastructure, writing that this is the most “prudent” option to meet Gann Limit requirements.

Further information regarding the Senate’s spending priorities heading into the next budget year is anticipated in January.