The 2000 Legislature adopted important changes to the expenditure limit which affected the development of the General Fund-State (GF-S) budget for the 2001-03 Biennium. These changes, which were included in HB 3169, also affected non-general fund budgets.
The principal changes to the spending limit specified in Initiative 601 include:
- Five Percent Spillover Threshold for the Education Construction Fund
- State Expenditure Limit Committee
- Definition of Money Transfer
- "Two Way Street" Provision
5% Spillover Threshold for the Education Construction Fund
I-601 originally established an Emergency Reserve Fund, which captures revenues in excess of the spending limit. Under prior law, when revenues in the Emergency Reserve Fund reached five percent of biennial general fund revenues (or approximately $1 billion), any excess was to spill over into an Education Construction Fund.
Due to a series of general fund tax reductions adopted by the 1994 through 1999 Legislatures, the Emergency Reserve Fund had never reached $1 billion. As a consequence, no money had flowed into the education construction fund.
HB 3169 changed the threshold for the spillover of money from the Emergency Reserve Fund to the Education Construction Fund, from five percent of biennial revenues (approximately $1 billion) to five percent of annual revenues (approximately $500 million).
As a result of lowering the threshold, about $220 million is expected to be deposited in the Education Construction Fund by the end of the 1999-01 Biennium, while maintaining an Emergency Reserve Fund balance of over $500 million.
State Expenditure Limit Committee
Under prior law, OFM was solely responsible for calculating and adjusting the spending limit.
HB 3169 established a state expenditure limit committee for the purpose of calculating and adjusting the state expenditure limit.
Members of the committee include the director of OFM, the chairs of Senate Ways & Means and House Appropriations, and the Attorney General (or the AG's designee).
All actions of the Committee require an affirmative vote of at least three members. The Attorney General's decision prevails if at least three members cannot agree.
Definition of Money Transfer
HB 3169 clarifies the meaning of "money transfer" under I-601. It says that any measure which has the effect of reducing revenues flowing into the general fund while increasing revenues flowing into another state or local government account is considered a "money transfer" under I-601, thus requiring a reduction to the state expenditure limit.
This clarification means that certain measures, such as the local option tax credits used to help fund the sports stadiums, convention centers, and rural infrastructure projects, will likely result in a reduction to the expenditure limit in the future.
Since the change is applied prospectively, the expenditure limit does not need to be reduced for tax credits already on the books.
"Two Way Street" Provision
Under prior law, the expenditure limit was reduced when program costs or revenues were shifted from the General Fund to other state accounts; but the limit could not be raised when such program costs or revenues were shifted back to the general fund.
A new provision adopted in HB 3169 allows adjustments in both directions. It establishes that the state expenditure limit can be adjusted upward when program costs or revenues are transferred to the General Fund from another state fund or account.
Basic Components of the Expenditure Limit Calculation
The expenditure limit applies to General Fund-State (GF-S) expenditures only.
Each November, the Expenditure Limit Committee is charged with adjusting the expenditure limit for the previous year and projecting an expenditure limit for the following two years.
The "baseline" expenditure limit is calculated by multiplying the previous year's limit by the "fiscal growth factor."
The fiscal growth factor is a three year average of inflation plus population growth.
The baseline expenditure limit is adjusted for actual expenditures in the previous fiscal year (called "re-basing").
The baseline expenditure limit is also adjusted for money transfers to and from the General Fund and program cost shifts to and from the General Fund.
In November 2000:
The expenditure limit for FY 2000 must be re-based to actual expenditures for purposes of calculating future expenditure limits.
The expenditure limit for FY 2001 must be re-calculated to reflect actual FY 2000 expenditures and adjusted for money transfers and program costs shifts adopted in the 2000 Supplemental Budget.
The expenditure limits for FY 2002 and FY 2003 must be updated to reflect adjustments to the FY 2001 limit and changes to the fiscal growth factors (inflation and population growth).