Gann Limit: Mortgaging Our Future

This year’s state budget stalemate had an uncommon twist in what is otherwise a fairly common political event each June. The impasse was far more than a repetition of the political pyrotechnics that cynics have come to call the annual budget-ritual dance.

The discord reflects a progressive loss of fiscal responsibility in state government, for which the 1979 Gann Initiative amendment to the Constitution is a significant contributor.

Budget conflicts in the past have generally involved trying to decide which programs should be funded from revenue in short supply. This year, paradoxically, the issue was what to do with too much state revenue.

The Gann Initiative established a limit on the growth of state and local government expenditures. It did so because those governments were seen as inexorably taking an increasing share of the total income of California’s citizens. For reasons that have nothing to do with the Gann limit, that upward trend has actually been reversed. Nevertheless, there was at that time a growing perception that much of the government’s increasing share was being misspent. Gann was predicated on the belief that its principal impact would be merely to shrink the government’s appetite for new and unnecessary expenditures.

It may do that, to some extent. But unfortunately, it has other, far-reaching consequences.

The truth is that the Gann limit has little effect on the cost of major services, most of which are purchased by the state from the private sector. Nor can the state effectively reduce those services to offset price rises. Likewise, the most expensive services furnished by public employees are also critically needed and desired by the public--prisons, mental hospitals, firefighters, park rangers, public schools and colleges. Beyond these--and the relatively modest administrative staffs that make decisions, keep accounts and pay expenses--there is not a lot to eliminate. Most of these programs, like labor-intensive services in the private sector, have basic cost elements that climb faster than the population-consumer price index formula embodied in the Gann limit on expenditures.

As a result of these cost-growth pressures, the Gann limit is starting to be circumvented by a variety of means. One is a loophole that permits borrowing in ways that substantially increases final costs, shifts them illogically and unfairly to future taxpayers and achieves this result by avoiding political responsibility for the decision and the effect. In this respect, the Gann measure fosters bad government and bad taxpayer consequences. And this is not its only serious flaw.

Because of the Gann amendment, the state cannot deal with the growing costs of an increase in school or college enrollments that is greater than the increase in the general population, since population controls the expenditure limit. If school or college enrollments conversely take a dip and there is a surplus of revenue, the surplus must, by law, be returned. But no corresponding increase in expenditures is authorized when enrollments rise again. The controlling factors of population and inflation do not respond in that manner. The same illogical control applies to fluctuations in prison populations, unemployment and disease epidemics.

Apart from population factors in major programs, the rising cost of medical services and hospital care bought from the private sector for public patients exceeds the limiting factor of the Gann consumer-price-index formula. Anyone who pays for medical and hospital services knows well what has happened there. Similarly, the nature of prison costs guarantees that the increase will exceed the consumer price index.

In getting around the Gann limitation by borrowing through bond issues, the ultimate cost of projects funded by bonds, when interest is included, increases as much as threefold--and the bill will be paid by future generations. This is not lost on state legislators. They have historically been circumspect in creating debt, publicly lamenting this method but saying they have no other choice. In reality, state and local governments are being induced, if not forced, to follow the federal government’s current policy of borrow-as-you-go. The combined body of debt created promises to be a problem of great magnitude to all three levels of government in years to come.

Today there is an additional $3 billion of state general-obligation bond proposals coming up for final decision--despite the fact that at the end of last year, the state had more than $5 billion in authorized general bonds as yet unsold. New bond issues are being considered for programs that traditionally have not used credit. The governor has offered a proposal to sell general-obligation bonds for highway maintenance and construction.

The measure includes an indirect mandate on local communities to participate by raising local taxes. Unfortunately, this proposal would cost far more than the traditional pay-as-you-go method of financing highways by taxing motor-vehicle users in proportion to their use of the highways.

How did this deterioration in fiscal practice come about, and what should we do to correct it?

To begin, we should recognize that through initiatives, the elected representatives of both local and state government have been hamstrung. Proposition 13 moved government funding to the state and away from localities--schools, health services, welfare and other local activities became increasingly funded from state taxes and controlled from Sacramento. The state next found itself politically unable to raise the revenue to cover all the new costs.

Much of this has unquestionably been brought about by the dismal performance of elected officials, who spend inordinate time and effort raising inordinate amounts of campaign money--most of it coming from those who seek benefits. The consequences are unsavory, and undoubtedly lead to public lack of confidence.

What is clearly needed is campaign reform. We cannot expect voters to repeal restrictions like the Gann Initiative until confidence in representative government is re-established. Fortunately, a special state commission of distinguished citizens has formulated a reform package that will be on the ballot in 1988. It has broad public support.

With campaign reform, Californians should again be willing to place responsibility for making revenue and expenditure decisions back in the hands of the Legislature and governor, as our constitutional system intended. And voters should then hold those who make these decisions fully accountable at the polls, with campaigns that rise above the deplorable experience of recent years.