Gann Spending Limit Hits State Government Hard for First Time

Some view it as a curse on government.

Others say it is just what the doctor ordered to curb the free-spending, program-happy appetite of the Legislature.

It is blamed when patients are turned away from hospitals. Its name is invoked when old and battered textbooks are distributed at public schools. Disapproving fingers are pointed at it when government is too slow to fill potholes in the streets.

The issue causing so much discussion is the spending limit that voters imposed on California state and local governments in 1979.

Called the “Gann limit” after anti-tax crusader Paul Gann, its author, the spending cap hit state government hard for the first time this year.

First, Gov. George Deukmejian and lawmakers struggled to fashion a budget that kept the state below the limit. Then they watched with frustration as an unexpected surge in tax revenues brought in more money than the state was allowed to spend.

Even though the fiscally conservative Deukmejian acknowledged that the state had unmet budget needs, his hands were tied.

The resulting surplus meant good news for many Californians, because under the Gann initiative, any money the state cannot legally spend must be returned to taxpayers. As a result, the state controller’s office over the next three months will send out rebate checks totaling $1.1 billion.

But for many others, the limit presented some harsh new realities.

Judging from this year’s results, the limit will have a far-reaching impact on government programs.

Despite what is expected to be a continued healthy inflow of tax revenues, many programs will shrink.

Education, health and welfare programs, already struggling to keep up with rising costs and increased demands for services, bore the brunt of the tight budgeting this year and likely will face the same fate in future years.

As a result of budget cuts, many school districts throughout the state had to put off the purchase of textbooks, eliminate non-teaching positions and scale back dropout prevention and other non-academic programs.

The purchasing power of county health programs was reduced, leading to predictions that indigent Californians face longer delays in getting treatment--or face the possibility of no treatment at all.

Some residential care facilities that provide homes for developmentally disabled may have to close their doors or turn away prospective residents because the state isn’t providing enough to keep up with rising costs.

Assemblyman John Vasconcellos (D-San Jose), chairman of the Assembly Ways and Means Committee, in his criticism of Deukmejian’s $592 million in budget cuts last July, said: “The cuts strike hardest at persons who live on the margins of our society: seniors, AIDS victims, minority children and poor Californians who depend on Medi-Cal (the state-funded medical services program).”

Because of the spending limit, state government this year basically was a zero-sum game--that is, in order for the budget to grow in one area, it had to be cut in another. The same pattern is expected to be repeated in future years.

Simply put, the limit, using 1979 as a base year, ties government spending to an inflation index and the growth of population. This year, the limit increased allowable state spending by 4.9%.

If all things were equal, the limit would allow state government spending to grow about as fast as the rate of inflation. But in government spending, all things are not equal.

Some of the fastest-growing portions of the state budget, such as costs of coping with a swelling prison population and the need to put more and more tax dollars into AIDS research and treatment, were not factors when voters approved the limit in 1979. And some costs, such as repairing or constructing state highways, cannot be measured against the U.S. Consumer Price Index, the inflation factor used to calculate the spending limit, because of the huge outlays of capital required to get such projects off the ground.

It is widely acknowledged that the limit is not elastic enough to anticipate and provide for growth in existing programs such as funding public schools and to meet new budget demands such as expanding the prison system.

While the initiative allows the governor and Legislature to raise the limit, such an action requires a two-thirds vote of the Legislature, a practical impossibility given the deep partisan divisions in the Assembly and Senate.

All of the program cuts cannot be laid entirely at the doorstep of the spending limit.

For one thing, there is the reality of a fiscally conservative Republican governor dealing with a Legislature controlled by Democrats and led by liberals. These powerful forces often are sharply split over spending priorities.

Many of the governor’s budget cuts are philosophical and would have been made with or without the limit. Deukmejian, for example, began cutting the budget of the Medi-Cal program almost from the beginning of his first term in 1983, long before the spending limit was a factor.

‘Most Pressing Needs’

In fact, Deukmejian and Administration officials deny that there are any essential programs being denied funding because of the limit. Assemblyman Burt Margolin (D-Los Angeles), who has been unable to overcome Deukmejian’s opposition to provide special financial assistance for Los Angeles County’s struggling network of trauma care centers, said he thinks that the limit provided Deukmejian with a good excuse to veto or kill programs that he was philosophically opposed to.

“There is no question in my mind that because of the Gann limit we are unable to address some of the most pressing needs facing California, like reducing the class size in public schools. The health care system is badly in need of a dramatic infusion of new funds. But in the case of many of the small vetoes, like trauma centers, the governor is using the limit as a cover for a philosophical view,” Margolin said.

Another factor not tied to the limit is the shadow cast by the $1-billion budget reserve created by Deukmejian as insurance against unexpected costs resulting from such calamities as the Whittier earthquake.

Discretionary Money

Technically, this is discretionary money that can be used anywhere the governor chooses. Deukmejian vetoed $592 million from the current year’s budget. Had he been willing to risk going into the new budget year with a $400 million reserve, he could have financed all the programs. Thus, it is difficult to say that this or that cut was made because of the spending limit.

Still, the limit is perceived widely as either a curse or a blessing, and there is virtual unanimity among those involved with state government that it now is the major influence shaping state spending.

State Supt. of Public Instruction Bill Honig blames the limit for much of education’s current financial woes. For the first time since he became governor in 1983, Deukmejian’s budget this year decreases the amount that will be spent on students in public schools when adjusted for inflation.

Honig said that school districts across the state have delayed purchases of new textbooks, cut teachers’ aides, eliminated positions for librarians, counselors and psychologists and have done without badly needed maintenance.

Honig said even broader cuts were avoided because many school districts dipped into financial reserves just to maintain their current level of service, leaving them in financially risky positions.

“Schools were hit hard. When they dip into their reserves, it means they are spending more than they are taking in. They got by one year, but I don’t think they can get by two years in a row,” Honig said.

2 Initiative Drives

Honig is leading one of two initiative drives aimed at getting measures on the ballot next June that would amend the limit, which is part of the state Constitution.

The initiative supported by Honig would establish a new, more liberal index for calculating the limit that would allow substantially more state spending.

The second initiative is sponsored by Gann, the author of the original 1979 ballot measure.

Gann’s aim is to remove transportation programs from the limit’s restraints. And he would set aside gasoline sales tax revenues to be used solely for transportation projects, including highway construction and mass transit.

In deference to his critics, Gann’s initiative would allow the state to spend nearly $1 billion more than it is allowed under current law.

The anti-tax crusader, who complains that his critics have begun calling potholes “Gann holes,” said he drafted the initiative in a way to allow more spending and perhaps head off more Draconian changes in the limit. He still insists, however, that his limit provides enough money if political leaders were willing to set priorities.

‘Never Been Enough Money’

“There has never been enough money to satisfy a government bureaucracy. Without the limit, government will grow faster than the taxpayer can afford,” he said.

The Deukmejian Administration basically agrees with Gann.

The governor’s Cabinet-level budget adviser, state Finance Director Jesse Huff, said the limit has helped keep down spending and forced state officials to set priorities.

“We have a new tool in our arsenal to require the establishment of priorities. It’s the spending limit. And we use it--as a tool,” Huff said.

At least $400 million in state spending was cut this year because of the limit.

That happened when Deukmejian and the Legislature could not reach agreement on a compromise offered by the governor that called for a tax rebate of $700 million, rather than $1.1 billion. The governor proposed spending the other $400 million on education and local government programs, expenditures that were allowed under the law because funds can be transferred from the state to local governments.

Spending Cuts

Huff said that as a result of the failure to reach a compromise, the governor probably cut roughly $220 million in spending from education programs and $120 million from health programs.

Among the lessons learned from this year’s experience with the limit is that while health and welfare programs have historically struggled for funding--in part because of the huge expense connected to them and also because the two political parties are deeply divided over their merits--the priority-setting requirements of the Gann limit era mean they may have even more difficulty in the years ahead.

Evidence of that came when Deukmejian signed legislation giving counties $110 million in unrestricted financial aid.

Democratic lawmakers, insisting that the $110 million represented funding that in normal years would have been spent on medical treatment, mental health care, social services and the fight against alcohol and drug abuse, sought to order counties to use their state windfall for those programs. Their fear was that the money would be used instead on programs serving much more powerful local government constituencies, such as sheriff’s departments and the courts.

Stymied in Effort

Deukmejian, who has long been stymied in his effort to transfer responsibility for state health and welfare programs to counties, vetoed the Democrats’ language, insisting that attempts to direct the money would violate provisions of the spending limit.

In his public pronouncements, Deukmejian carefully avoided tying individual budget cuts to the spending limit.

But lobbyists, lawmakers and others say the limit had a big influence on many budget decisions.

Assemblyman Richard Katz (D-Sepulveda) carried two bills that he is convinced would have been signed by the governor had it not been for the strain on the state budget caused by the spending limit.

Deukmejian vetoed a bill that would have provided $19.7 million to pay for a 5%-10% rate increase for community residential care facilities for the developmentally disabled.

Katz said it is widely agreed that these board-and-care homes receive at least 30% below what they need just to keep up with inflation. Many residential board-and-care operators, he said, cannot operate profitably and he predicted that the budget cut will force some to close.

‘Set Priorities’

Deukmejian, in vetoing the Katz bill, cited “demands” that “require all of us to set priorities.”

“Key officials in the Department of Health Services and the Department of Finance all recommended that the funding be increased,” Katz said.

Finance Director Huff, the governor’s adviser, agreed with Katz and said Deukmejian vetoed the bill solely because the state did not have the money, not because of philosophical or policy reasons.

In another cut, Deukmejian reduced by half the $25 million he himself had appropriated in his January budget to purchase new computers for classrooms in public schools, Katz said.

Deukmejian’s cuts in health programs included a $1-million veto of money to provide a 3% increase for senior citizens’ nutrition programs sponsored by the state Department of Aging.

He also cut a $6.6-million appropriation to expand the number of Adult Day Health Care centers administered by the department.

And he vetoed $9.9 million from the Legislature’s plan to expand the state’s Alzheimer’s Diagnostic and Treatment Centers program.

Extra Funding Dropped

Another big cut was $69 million the Legislature approved in extra funding for counties to help defray the costs of providing medical treatment for indigent Californians.

Deukmejian also vetoed appropriations that would have provided a 1% budget increase to programs providing foster care, adoption, child abuse prevention, mental health and other health and welfare services.

The governor now is in court battling the California Medical Assn. over his proposed 10% cut in fees to doctors and other Medi-Cal providers to save $18 million.

These and other cuts have left the Medi-Cal program reeling.

Doctors say they now receive only about 50 cents from the state for each $1 they spend providing treatment to Medi-Cal patients. “Access for Medi-Cal mothers for prenatal care is severely restricted and the situation is getting worse because physicians can’t afford to cover the costs of treating them,” said George F. Cate, a lobbyist for the medical association.

Individual Cuts

Clifford L. Allenby, a member of the Deukmejian Cabinet and secretary of the state Health and Welfare Agency, said he could not attribute individual cuts to the spending limit.

“There are so many different factors influencing these decisions that I couldn’t say the spending limit affects program A or program B directly. It’s a competition thing. We are competing for the money, education is competing, prisons are competing,” he said.

Allenby said some of the budget cuts in health programs would have been made anyway, not for fiscal reasons but because of the governor’s policy. But he conceded that more money would have been spent if it were not for the Gann limit.