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Ann Hollingshead

Budget and Policy Post
August 30, 2021

The 2021-22 California Spending Plan

The State Appropriations Limit


In the late 1970s, voters passed Proposition 4 (1979), which added Article XIIIB to the State Constitution. Article XIIIB established an appropriations limit on the state and most types of local governments, including school and community college districts. (These limits also are referred to as “Gann limits” in reference to one of the measure’s coauthors, Paul Gann.) The appropriations limits later were amended by Proposition 111, which was passed by voters in 1990. The purpose of the appropriations limits is to keep real (inflation adjusted) per-person government spending under 1978‑79 levels.

Under these constitutional requirements, each year the state must compare the appropriations limit to appropriations subject to the limit. If appropriations subject to the limit are less than the limit, there is “room” under the limit. If appropriations subject to the limit exceed the limit (on net) over any two-year period, there are excess revenues. The Legislature can use excess revenues in three ways: (1) appropriate more money for purposes excluded from the state appropriations limit (SAL), (2) split the excess between additional school and community college district spending and taxpayer rebates, or (3) lower tax revenues. For more information on how the SAL works, please see our April 2021 report: The State Appropriations Limit.

This post describes the legislative and administrative decisions regarding the SAL in the 2021‑22 budget process.

Estimates of the Appropriations Limit

The SAL has two important components: the appropriations limit itself and appropriations subject to the limit. Both of these components are subject to estimate error, particularly for the budget year, and therefore change throughout the budget process. For example, the limit itself is based on estimates of personal income and population growth, which change based on economic and other conditions. In addition, appropriations subject to the limit change throughout the year depending on legislative decisions, administrative proposals regarding revenues and spending, and actual expenditures.

As a result, the estimates of whether state revenues exceeded the limit in the 2021‑22 budget changed considerably over the course of the budget process. Figure 1 shows estimates of the appropriations limit, appropriations subject to the limit, and the resulting room under the limit at each point in the 2021‑22 budget process (for each of the three fiscal years in the “budget window”). (The figure also shows excess revenues, which are calculated over a two-year period.)

Figure 1

Estimates of Appropriations Limit in the 2021‑22 Budget Act

Governor’s Budget

May Revision

Final Budget Act

2019‑20

2020‑21

2021‑22

2019‑20

2020‑21

2021‑22

2019‑20

2020‑21

2021‑22

Appropriations limit

$112,102

$115,860

$117,626

$112,102

$115,860

$125,695

$112,102

$115,860

$125,695

Appropriations subject to the limit

110,337

118,143

113,464

105,808

142,093

115,710

105,807

129,508

95,181

Room

$1,765

‑$2,283

$4,162

$6,294

‑$26,233

$9,985

$6,295

‑$13,648

$30,514

Excess Revenues

‑16,248

Governor’s Budget. As the figure shows, at the time of the Governor’s budget, the state would not have had excess revenues. While, under these estimates, appropriations subject to the limit do exceed the limit across 2019‑20 and 2020‑21, under the administration’s interpretation of the SAL, excess revenues do not occur until the first year of “negative room” and the immediately proceeding fiscal year. (In this case, across 2020‑21 and 2021‑22.)

May Revision. By the time of the May Revision, estimates of total revenues across the budget window had increased dramatically. Under the administration’s estimates, the state had $16.2 billion in excess revenues across 2020‑21 and 2021‑22. The Governor proposed allocating half of the excess revenues ($8.1 billion) to taxpayers in the form of a second round of Golden State Stimulus payments. For the school payment portion, the Governor proposed allocating the payments in a future year, as allowed under the Constitution.

Final Budget Act. The final budget package does not reflect excess revenues in the 2021‑22 budget. There are three key reasons for this change. First, relative to the May Revision, the final budget reflected an additional technical adjustment to the SAL regarding how the state counts realignment revenues. We describe that change in more detail below. Second, the budget made the Golden State Stimulus payments an emergency expenditure, which is excluded from the SAL (described below). Third, the budget shifted some capital outlay spending from federal funds (specifically, American Rescue Plan fiscal relief funds) to General Fund, increasing room under the limit.

Exclusions

The budget package makes some discretionary choices that result in increases in SAL exclusions. These, effectively, reduce appropriations subject to the limit on a one-time basis.

Qualified Capital Outlay. The Constitution allows expenditures on capital outlay projects to be excluded from appropriations subject to the limit. The definition of capital outlay for SAL purposes is substantially more expansive than the budgetary definition of capital outlay outlined in Control Section 3.00. The budget defines capital outlay primarily as the “acquisition of land or other real property to be owned by the state.” In contrast, statute defines qualified capital outlay expenditures for the purposes of the SAL as: “an appropriation for a fixed asset (including land and construction) with a useful life of 10 or more years and a value which equals or exceeds one hundred thousand dollars ($100,000).” As a result, according to the statutory definition, the budget includes $18 billion ($16.4 billion General Fund) in qualified capital outlay expenditures, which reduce appropriations subject to the limit by this amount.

Emergency Expenditures. The Constitution also allows expenditures on emergencies to be excluded from appropriations subject to the limit. Those expenditures must meet three specific conditions to qualify. Specifically, the spending must be: (1) related to an emergency declaration by the Governor, (2) approved by a two-thirds vote of the Legislature, and (3) dedicated to an account for expenditures relating to that emergency. Trailer bill language, which received a two-thirds vote, clarifies the $8.1 billion in Golden State Stimulus payments are related to the state of emergency as a result of coronavirus disease 2019. These payments are therefore exempt from the SAL and reduce appropriations subject to the limit by this amount.

Technical Adjustments

The budget package makes two other major technical adjustments to the SAL, which both result in more room under the limit on an ongoing basis. The first change affects appropriations subject to the limit. The second change affects the limit itself.

Realignment Revenues. The Constitution allows subventions to local governments to be counted against that local government’s limit (instead of the state’s limit). The 2021‑22 budget package reflects the intent of the Legislature to count realignment revenues to local government against local governments’ limits, in accordance with changes in the state-local fiscal relationship that have occurred since 1980. This change results in an additional $12.2 billion in room in 2021‑22. In addition, Chapter 77 of 2021 (AB 137, Committee on Budget) prevents local governments from exceeding their appropriations limit as a result of state subventions. Counting realignment revenues toward local limits generally is consistent with an option outlined in our aforementioned SAL report.

School District Limits. For many years, the state has shifted some of its limit to school districts that would otherwise exceed their limits. However, that shift only occurred in one direction—from the state to districts. Chapter 44 of 2021 (AB 130, Committee on Budget) provides for shifts also to take place in the opposite direction. Specifically, the state will now require school and community college districts to reduce their limits by the amount of their unused room, and increase its own limit by a corresponding amount. This change is consistent with an option outlined in our aforementioned SAL report and results in an additional $4.3 billion in room in 2021‑22.