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Administration Finance & Accountability

Kern County Superintendent of Schools

Gann Limit

WHAT IS “GANN” AND WHY DO WE HAVE TO DO THIS REPORT?

Source: California Department of Education

BACKGROUND

In November of 1979, the voters approved Proposition 4, an initiative that added Article XIII B to the California Constitution.  This constitutional amendment, popularly known as the Gann initiative, placed limits on the growth of expenditures for publicly funded programs.  In 1980, legislation was enacted to implement the limits on government appropriations established by Proposition 4.  Adding Division 9 of Title 1, beginning with Section 7900, of the Government Code, this legislation specified the calculation of state and local government appropriation limits and appropriations subject to limitation.  These limits were to take effect beginning with the 1980­-81 fiscal year.  The sections added by the constitutional and statutory amendments explain and define the appropriations limit and appropriations subject to limitation as they apply to state and local government and require that each entity of government formally “adopt” its appropriations limit for a given fiscal year.

Important Terms and Definitions

There are several key terms that are used in relation to Gann limits.  They are “appropriations limit”, “appropriations subject to limitation” (aka “appropriations subject to the limit”), “proceeds of taxes”, and “state subventions”.

The “Appropriations Limit”

Section 1 of Article XIII B of the California Constitution establishes the appropriations limit.  The appropriations limit of each entity of government for each fiscal year is defined as that amount which total annual appropriations subject to limitation may not exceed.  Although that definition may tempt you to give up in frustration, Article XIII B continues by stating that the appropriations limit is equal to the appropriations subject to limitation for each entity of government in the 1978‑79 fiscal year, adjusted annually for changes in the cost of living and population (Sections 8(h) and 1).

Cost of living and population are defined in subdivisions (e) and (f) of Section 8, respectively.  The change in the cost of living is defined as the change in the California per capita personal income.  The change in population for school districts is defined as the change in second period average daily attendance (ADA), excluding adults but including attendance in summer school and district or JPA operated ROC/Ps.  The change in population for county offices of education (COEs) is in two parts: (1) the change in the annual “program” ADA that is connected to COE revenue limits plus the ADA for county operated ROC/Ps, and (2) the change in the sum of the ADA used for district Gann calculations for all the districts in the county.

The Government Code requires the Department of Finance to annually notify the Department of Education of the percentage change in the cost of living for the purpose of adjusting appropriation limits for the effects of inflation.  The Department of Education must, in turn, notify each K‑12 school district and county superintendent of schools and collect information relative to the calculations of LEAs’ appropriations limits.

There are, in general, only three ways in which the appropriations limit of any entity of government may be changed (other than for inflation and population adjustments):

1.         To reflect transfers of financial responsibility among governmental entities.  If the financial responsibility for any service changes from one governmental entity to another, then the appropriations limit of the “losing” entity must be reduced, and the appropriations limit of the “gaining” entity must be increased.  There is no net change in the sum of the appropriation limits for all government when such a transaction occurs.

2.         In the event of an emergency, the appropriations limit may be exceeded.  However, it must be decreased over the next three years to prevent an aggregate increase in appropriations.  There is no net increase over time in the appropriations limit,

3.         By a vote of the electorate, the limit may be increased. This is the only action that can result in an actual net increase (exclusive of population and inflation adjustments) of the appropriations limit among governmental entities or over time.  Such a change cannot exceed a period of four years, at which time it must be re‑authorized by a vote of the electorate if the increase is to continue.

Chapter 1093, Statutes of 1981, added a fourth option for increasing appropriation limits (G.C. 7902.1) that applies only to K‑12 school districts, community college districts, and county superintendents of schools. If, in any year, the appropriations subject to limitation of a local educational agency (LEA) exceed the appropriations limit for that agency, then the governing board of the LEA can administratively increase its appropriations limit to equal the appropriations subject to limitation.  The LEA must, within 45 days of the action, notify the state Department of Finance of the amount of the change.  The state is then required to decrease its appropriations limit by an equal amount.

“Appropriations Subject to Limitation”

Appropriations subject to the appropriations limit for state and local government are defined in Section 8 of Article XIII B:

SEC. 8. (a)  “Appropriations subject to limitation” of the state shall mean any authorization to expend during a fiscal year the proceeds of taxes levied by or for the state, exclusive of state subventions for the use and operation of local government… and further exclusive of refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds; (underline added for emphasis.)

(b)  “Appropriations subject to limitation” of an entity of local government shall mean any authorization to expend during a fiscal year the proceeds of taxes levied by or for that entity and the proceeds of state subventions to that entity… exclusive of refunds of taxes; (underline added for emphasis.)

Article XIII B of the constitution contains additional sections that further define appropriations subject to limitation to include contributions made from the proceeds of taxes to any contingency, emergency, unemployment, reserve, retirement, sinking, trust, or similar fund; but excluding withdrawals, expenditures, authorizations to expend, and transfers from such funds.

Not included as appropriations subject to limitation are local agency loan funds or indebtedness funds, investment funds of the state, or of an entity of local government in accounts at banks or savings and loan associations or in liquid securities, appropriations for debt service, and appropriations for complying with qualifying mandates of the courts or federal government.   Additionally, certain appropriations relating to emergencies declared by the Governor (e. g., earthquakes, floods, etc.) and “approved by a two-thirds voted of the legislative body of an affected entity of government” are also excluded from appropriations subject to limitation as are appropriations for qualified capital outlay projects (as defined by the Legislature) and appropriations from certain fuel taxes and sales taxes on those fuel taxes.

A “qualifying” mandate is one that, without discretion, requires an expenditure for additional services or which unavoidably makes the providing of existing services more costly. Finally, funding provided from the state to entities of local government for state mandates counts in the state, not the local, appropriations subject to limitation (Sections 5, 6, 8(i), and 9).

“Proceeds of Taxes”

In general, appropriations subject to limitation are authorizations to expend the proceeds of taxes, including “all tax revenues and the proceeds to an entity of government, from (i) regulatory licenses, user charges, and user fees to the extent that such proceeds exceed the costs reasonably borne by such entity in providing the regulation, product, or service, and (ii) the investment of tax revenues.  With respect to any local government, “proceeds of taxes” shall include subventions received from the state… and, with respect to the state, proceeds of taxes shall exclude such subventions.” (from Section 8 (c) of Article XIII of the California Constitution)

“State Subventions”

The base year appropriations limit and the annual level of appropriations subject to limitation for school districts is dependent on the amount of state aid that is treated as a state subvention, and therefore counted toward the local, rather than the state, appropriations limit.  Government Code Section 7906 defines for LEAs the portion of state aid that would count as local proceeds of taxes for the purpose of determining LEA appropriations subject to limitation.

Please note that even though state subventions for the use and operation of local government are appropriations from the proceeds of state taxes, they count as appropriations subject to limitation for the local governmental entities receiving them, This is important because, in conjunction with the provisions of G.C. 7902.1 (described above), this allows the state and LEAs to “share” limit capacity between the two levels of government and thus avoid having to return money to taxpayers as happened in 1987.

Summary

In summary, Proposition 4 established an appropriations limit for each entity of government equal to total appropriations from the proceeds of taxes in the 1978‑79 fiscal year, adjusted annually by the percentage change in California per capita personal income, and adjusted for change in population.  Appropriations subject to limitation are defined as any authorization to expend the proceeds of taxes and state subventions, including appropriations to reserve or contingency funds and revenues from the investment of taxes.

Only some of the total funds available for expenditure by LEAs are subject to the LEA appropriations limit.  For example, the appropriation of federal funds is not subject to the appropriations limit because these revenues are not proceeds of taxes to the local entity of government, and they are not state subventions.  Fee revenues necessary to cover the cost of providing a service are not subject to the limit; expenditures from reserves are not subject to the limit; and funds received from the allocation of state aid other than that portion identified as a state subvention are subject to the state, not local, limit.

State subventions to LEAs are determined by a formula that uses the maximum amount of revenue limit and ROC/P state aid actually received that can fit within the LEAs appropriations limit.  That portion of state school apportionments that is equal to the subvention calculation is counted as a part of the LEA’s appropriations subject to limitation, rather than the state’s.  In no event is the state subvention less than an amount equal to $120 times district ADA (or $2400, whichever is greater).  If the appropriations subject to limitation in any year exceed the appropriations limit, LEAs may administratively increase their limit to equal their appropriations subject to limitation.  This prevents LEA’s from having to return money to local taxpayers when local property tax revenues grow faster than their limit.

The calculated appropriations limit and appropriations subject to limitation for any LEA are equal for the 1978‑79 fiscal year.  (Although calculated based upon 1978‑79 appropriations, the actual application of appropriation limits did not begin until 1980-­81.)  However, because of the way in which appropriations subject to limitation are calculated and because proceeds of taxes from some sources may not increase as fast as the appropriations limit, in subsequent years the appropriations subject to limitation of any LEA may be less than the appropriations limit.  Before this happens, however, the state aid counting in the LEA’s limit will be increased to take advantage of the extra capacity available at the local level.  Conversely, if a LEA’s proceeds of taxes grow faster than the limit, the LEA can shift capacity from the state’s limit and increase the LEA’s limit to equal its appropriations subject to the limit.

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