Lawsuits latest budget hurdle Lawsuits derail state's budget

By Evan Halper

Aug. 10, 2009 12 AM PT

SACRAMENTO —

Well-connected lobbyists, political pressure and a good turnout at committee hearings used to be the special interest recipe for protecting turf in the state budget. Now, a potent new ingredient is being increasingly thrown into the mix: top-shelf litigators.

Lawyers are being drafted in droves to unravel spending plans passed by the Legislature and signed by the governor. The goal of these litigators is to get back money their clients lost in the budget process. They are having considerable success, winning one lawsuit after another, costing the state billions of dollars and throwing California’s budget process into further tumult.

In the last few months alone, the courts added more than a billion dollars to the state’s deficit by declaring illegal reductions in healthcare services, redevelopment agency funds and transportation spending. Another ruling threatens to deprive California of all its federal stimulus money if the state does not rescind a cut to the salaries of home healthcare workers.

Lawyers are scrambling to prepare additional suits related to the budget plan the governor signed last month. On Friday, Senate Leader Darrell Steinberg (D-Sacramento) -- who negotiated the budget -- announced that even he plans to sue. Steinberg said the governor illegally made more than $500 million worth of cuts in the budget plan passed by lawmakers.

“We are seeing more lawsuits and more victories by the groups filing them,” said Bob Hertzberg, a former Assembly speaker who now is chairman of California Forward, a think tank focused on reforming the budget process. “They don’t want to compromise. . . . It’s easier to hire lawyers than lobbyists, and you probably get better outcomes.”

The attorneys are seizing on state laws that were drafted in sunnier economic times, some of which were put in place by citizen initiative. They created new programs or expanded existing ones and contained language intended to solidify the place of those programs in state government. Now, the state is broke, and lawmakers and the governor are finding their attempts to take money from the programs rebuffed by the courts. Just the lawsuits themselves cost the state millions of dollars in attorney salaries and other legal fees.

“It’s the nature of trying to navigate a budget that has become more and more complicated and more and more difficult to make changes in,” said Michael Cohen, a budget expert at the nonpartisan Legislative Analyst’s Office, to which lawmakers look for advice on fiscal matters.

He said ironclad assurances that programs will be funded have been etched into the law by lawmakers and voters who “can’t always see the future in terms of changing priorities or different circumstances that might come along later.”

Lawsuits are one reason most in Sacramento expect a quick collapse of the spending plan the governor signed last month to wipe out a deficit of about $24 billion. There is talk of the governor needing to call an emergency session in the fall so lawmakers can get back to work keeping the state solvent.

Even before last month’s signing, multiple groups announced their intention to sue. No sooner was the ink on the budget dry than the California Redevelopment Assn. posted an alert on its website calling for members to sign on as plaintiffs in a lawsuit that was being drafted by the law firm of McDonough, Holland & Allen.

The suit would challenge, among other things, a shuffling of state funds away from redevelopment and into school districts. If the association’s litigation succeeded, it would throw the budget out of balance by as much as $2 billion.

That suit would join more than a dozen other big ones pending against the state.

Among them is one in which a court ruled in June that several past raids of public transit money were illegal. The decision did not force the state to return funds, but it blocked taking any more.

Josh Shaw, executive director of the nonprofit California Transit Assn. and a lead plaintiff, said the suit “strikes at the heart of the gimmicks that have been employed year after year in putting together the state budget.”

The ruling left lawmakers and the governor scrambling to find a replacement for up to $1 billion of the money they had hoped to use to wipe out the deficit.

The alternative they came up with was to take other transportation funds. But the new pot of money lawmakers wanted to raid was sacred to local governments. They use the funds for road maintenance, street sweeping and other services. The proposal died under the weight of city and county opposition during the all-night legislative session last month when lawmakers passed the budget, leaving a billion-dollar hole in their spending plan.

Medi-Cal doctors, meanwhile, this year have managed to roll back a $1.1-billion cut in their reimbursements. A federal appeals court declared illegal a 10% cut in what physicians are paid by Medi-Cal, the government healthcare program for the poor, that was implemented in July 2008. The court ruled the cut would drive doctors out of the program, endangering the ability of patients to get care and thereby violating minimum federal standards for the program.

Some analysts say that although interest groups have become savvier in their use of litigation, state officials have also invited the suits through their desperate and often sloppy budgeting.

The lawsuits are “a product of the desperation of the people trying to forge budget agreements,” said Jean Ross, executive director of the California Budget Project, a think tank that analyzes the effects of spending policies on low-income Californians. “All of the easy solutions are gone. The choices are hard, the gap is wide. People look to riskier and riskier options to come up with savings.”

It is hardly a secret in the Capitol that lawmakers sometimes approve budget measures despite their dubious legality because it buys them time. The hope is that by the time the appeals process is finally exhausted -- which can take years -- the economy will have rebounded, filling the gap with new revenue. It’s a kind of borrowing.

Such was the case with a plan a few years ago to put off some payments into the pension fund for government workers.

The plan was passed in 2004, on the tail end of the last budget crisis. It stayed on the books for several years. By the time it wound its way through the litigation process, state revenues were on the rebound and there was enough cash to take the plan off the books.

“These cases can go on for a while,” said Daniel J.B. Mitchell, a professor of public policy at UCLA. “It’s a way of pushing liabilities into the future.”

evan.halper@latimes.com

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Pending lawsuits

There are more than a dozen major budget-related lawsuits pending against the state; they could cost California billions of dollars. More are expected. Some of the big ones:

Plaintiffs: Redevelopment

agencies

Issue: Raiding of project funds

Amount at stake: $2.05 billion

Status: Complaint being prepared

Plaintiffs: Doctors

Issue: Cut in Medi-Cal reimbursement rates

Amount at stake: $1.1 billion

Status: U.S. 9th Circuit Court of Appeals ordered state to rescind cut

Plaintiff: Senate Leader Darrell Steinberg

Issue: Governor’s line-item vetoes last month of healthcare and other spending

Amount at stake: More than $500 million