Lt. Gov. Leo McCarthy said the Gann spending limit must be modified if California is to meet its most pressing needs. In Los Angeles appearances before the California Teachers Assn. and the California State Employees Assn., McCarthy, who is seeking the Democratic nomination for the U.S. Senate seat held by Republican Pete Wilson, said the state's ability to improve its transportation system, care for the elderly, combat AIDS, expand the prison system and achieve excellence in the classroom all depend upon bringing the formula in line with current economic realities. "Keeping the spending limit tied to population growth and cost of living," he said, "ignores the reality that education and prison spending have increased faster than anticipated."