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Workshop Memorandum No. 17-075 Page 5 of 18

required public schools to receive a share of revenues exceeding the Gann limit. That share was
changed to a flat 50% by Proposition 111 (1990). Proposition 111 also added three exemptions
to the Gann limit: capital outlay spending, appropriations supported by increased gas taxes, and
appropriations resulting from national disasters. Most significantly, Proposition 111 changed the
formula used for calculating annual adjustments to the Gann limit. Under Proposition 111, the
population factor is based on a weighted average of population and K-14 school enrollment
growth (instead of population only), and the cost of living factor is based solely on California per-
capita personal income growth (and no longer takes into account the Consumer Price Index).

The changes to the Gann limit formula under Proposition 111 substantially raised the Gann limit,
making it less likely that the limit will be reached in the future. Many observers believe that in its
current weakened state the Gann limit has ceased to be a meaningful constraint on state
spending.

How the Appropriations Limit Works

Which Revenues Are Subject to Limit?

Article XIII B places a limit on appropriations from most, but not all, government revenue sources.
The limit applies to appropriations from proceeds of taxes from both the general fund and special
funds of government entities. Proceeds of taxes include tax revenues, interest earnings on
invested tax revenues, and any revenues collected by a regulatory license fee or user charge in
excess of the amount needed to cover the cost of providing the regulation, product, or service.

Which Appropriations Are Subject to Limit?

Appropriations for almost all government functions are subject to limitation under Article XIII B.
However, there are some important exceptions. The original Proposition 4 provided that the
following appropriations are not limited, even if made from proceeds of taxes:
 Subventions from the state to local governments and schools, the use of which is
unrestricted (these subventions are not subject to the state's limit, but instead are counted
as subject to the local entity's limit);
 Appropriations to pay for costs of complying with federal laws and court mandates;
 Payments for interest and redemption charges on pre-existing (i.e., pre-Proposition 4) or
voter-approved bonded indebtedness;
 Withdrawals from previously appropriated reserve funds; and
 Refunds of taxes.

Proposition 111 excluded capital outlay from the appropriations limit. This change reflects the
fact that while capital outlay appropriations are made during a single budget year, they reflect
long-term investments that are utilized over a number of years. Appropriations directly related to
an emergency, such as a fire, earthquake, or other natural disaster, were also excluded from the
limit by Proposition 111. No reduction in future limits is required for appropriations made for these
emergency purposes.

The "Base Year" Limit.

The first year that limits were in effect was FY 1980-81. The base year for determining the
appropriations limit in FY 1980-81 was FY 1978-79. Actual appropriations in the FY 1978-79

Yucaipa Valley Water District - May 30, 2017 - Page 84 of 138