1.2.2 Purpose of Debt Limit

The purpose of the constitutional debt limit as described in an early California Supreme Court case,42 was to prevent “municipal extravagance” involving longterm financial commitments that exceed the current means of the public agency to repay. Each year’s income and revenue must pay each year’s indebtedness and liability,” the court said, and “no indebtedness or liability incurred in any one year shall be paid out of the income or revenue of any future year.” The debt limit provisions also serve as indirect limits on tax increases (by preventing obligations that would require them) and curb intergenerational transfers (current residents enjoying benefits paid for by future years’ taxpayers).

Determining whether a proposed issuance violates the constitutional debt limit based on the purpose of the issuance has had limited impact, and subsequent judicial determinations regarding “debt” and its compliance with Article XVI, Section 18 have relied on both the form and the substance of the transaction.