The Prop 4 Limit and the UC Budget

Back in 1978, voters enacted Proposition 13 which drastically cut local property taxes and limited the ability of state and local governments in California to raise taxes. The taxpayer revolt of that era led to a second proposition a year later, Prop 4, which effectively put a ceiling on revenues state and local governments could retain, The limit was essentially based on per capita income and population growth. Under Prop 4, excess revenues had to be refunded to taxpayers.

As it turned out, shortly after Prop 4 was enacted, the state (and nation) had two back-to-back recessions which cut tax receipts so the impact of Prop 4 was not immediately felt. But in the late 1980s, the Prop 4 ceiling (known as the Gann Limit or State Appropriations Limit) was hit and the state rebated some revenue. 

Thanks to Prop 13, the K-14 system - which had been traditionally heavily dependent on local property taxes - had subsequently become heavily dependent on the state. The K-14 establishment preferred not to see its state revenue base eroded and effectively modified school finance and the Gann Limit through Prop 98 (1988) and Prop 111 (1990). The net effect was protection of K-14 revenue and spending and a loosening of the Gann Limit in ways favorable to K-14. Given the change, the Gann Limit was not a potential factor until the peak of the dot-com boom. But that boom turned into the dot-com bust, cutting revenues. We didn't start hearing about the Gann Limit until the boom shortly before the coronavirus crisis. 

As it turned out, the recent virus-related downturn didn't have the expected downward shift in revenue that was projected when the current state budget was enacted. And now the economy and revenues are in an upward trend.

All of this history is a prelude to the fact that current projections indicate that the Gann Limit will become a factor in state budgetary decisions going forward. The Legislative Analyst's Office (LAO) has just published an alert to that fact.* The chart in this post comes from that publication.

In theory, something might be put on the ballot adjusting the Limit in some way. LAO points out that there are also some legislative maneuvers that can relax the limit at the margin. However, UC depends on the state for its "core" educational funding. And unlike K-14, UC doesn't have preferential status in the budget.

If you didn't know about Gann before, now you do. You are likely to hear more about it when the governor releases his May Revise budget proposal next month.

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*https://lao.ca.gov/reports/2021/4416/SAL-042121.pdf