Suits Over Budgets Pose $4-Billion Threat to State

SACRAMENTO — After four years of pasting together recession-strapped budgets with hopeful assumptions and controversial maneuvers, Gov. Pete Wilson and state legislators face several billion dollars in lawsuits from a variety of plaintiffs who contend that the spending plans were illegal.

In three cases with a potential liability of more than $4 billion, the state has already lost lower court decisions, prompting the state’s independent legislative analyst to warn that the suits represent one of the greatest threats to the ambitious and precariously balanced budget Wilson proposed last month.

Wilson’s budget recommends a 15% income tax cut, but it does not set aside money for the possibility of losing any of the lawsuits. Even if the potential damage awards are reduced and the state prevails in some cases, Capitol officials say, the impact could still be significant.

“That would be a pretty good string of luck to win them all,” one legislative staffer said. “From a fiduciary perspective, maybe we should have a reserve that would provide some kind of contingency for these things. But that’s probably not possible politically since we haven’t had reserves for a while. At least at face value, what the budget suggests is that either we win them or we deal with them when the decisions come down.”

There are about a dozen related lawsuits against the state. The plaintiffs who are charging violations in state budget decisions span a wide spectrum of state interests from teachers, bankers and welfare advocates to electricians, state employees and off-road enthusiasts.

But in almost every case, the allegations are similar--that state officials patched together fiscally austere budgets by ignoring laws that regulate the ways they can spend money in specific budget areas.

The biggest case involves allegations by a teachers union that in 1992 Wilson failed to maintain the education spending levels required by Proposition 98. Another case has been brought by state employees who say some of their pension money was taken. And in a major class-action suit, a variety of interests charge that the state diverted their license fees and other special funds.

State Sen. Daniel E. Boatwright (D-Concord), speaking about complaints in the class-action suit, said recently: “For all intents and purposes, these transfers were nothing more than stealing. What we are being shown now is that you can’t steal, even if you are the government.”

Most of the lawsuits blame the governor’s office, but in many, attorneys say the Legislature was also culpable. Plaintiffs’ attorneys acknowledge that the state was under extraordinary budget pressures, but they also contend that legislators erred by trying to avoid more difficult decisions.

“The last time you started seeing something like this happening was back in the Depression,” said Richard I. Fine, a Los Angeles attorney who has filed cases against the budgets passed each year since Wilson was elected in 1990. “They probably feel they can steal the money, thumb their nose at the public, get sued, and when push comes to shove, either pay the money back or fight the case into the Supreme Court.”

In an interview, Wilson noted that the decisions were made during extraordinarily difficult economic times. But he added that the plans were thoroughly evaluated and he believes the state acted correctly.

“I think we will win these lawsuits,” Wilson said. “And we may have to follow the appellate route all the way to the end. But you know--I will paraphrase--we will fight them not only on the beaches and in the fields, but in the courts and in the Congress.”

Wilson has a long history of chafing at the myriad restrictions on a governor’s ability to make budget decisions, particularly in times of economic stress.

And this year he has become a champion of the issue, taking his case to Washington, where the new Republican leadership in Congress has promised to help out by rolling back federal mandates and issuing money in block grants that allow states far more discretion in where the money is spent.

That may solve a few of Wilson’s concerns about federal restrictions in the future, but the new laws cannot be applied retroactively, state attorneys said. So Wilson has been left to fume about some of the injustices he believes the state has endured.

Recently, in a speech to business executives in Washington, the governor used colorful language to express his anger at a federal court decision last month that could cost the state $500 million.

“I am outraged,” Wilson said. “I blame the Congress for being such whores to the public employee unions that they can pass that kind of legislation.”

Wilson’s reference was to a complaint filed by state employees alleging that it had been illegal for the government to pay its workers with IOUs instead of salary checks during a 63-day period in 1992 when Wilson and the Legislature were unable to agree on a budget. Earlier this month, a federal judge indicated that he would rule against the state, but he said last week that he was giving the matter a second look.

So far, the state’s record is mixed regarding lawsuits against the budget decisions made since Wilson became governor in 1991. The state has won a couple of cases that could have been extremely costly, notably a U.S. Supreme Court decision last year about taxing foreign companies and another suit involving state employees’ pensions.

But on a number of other major pending cases, the state has lost decisions in lower courts and is fighting on appeal. It has also settled a few other cases by reversing its earlier budget decisions. And recently, a flurry of new lawsuits has begun piling up in lower courts.

In addition to the suit about IOU paychecks, these are some of the major cases pending against the state:

* The California Teachers Assn. says that in 1992 Wilson circumvented the education spending requirements in Proposition 98. Last year, a Superior Court judge ruled against the state and the case is being appealed. The potential damages are estimated at $3 billion.

* A Superior Court judge last year upheld a claim by state employees that their pension system was not fully funded in 1992. The case is on appeal and the potential liability is about $1 billion.

* Welfare advocates won a Superior Court decision last year challenging 1994 grant reductions in the Aid to Families With Dependent Children program. The case is on appeal with a potential liability of about $100 million.

* Health groups are awaiting a final Superior Court decision in a case alleging that the state improperly diverted $128 million in tobacco tax revenue that Proposition 99 mandated for education and research.

* Last year, the state settled three cases in which it was forced to return about $37.4 million that had been improperly transferred to the general fund. The three transfers came from funds intended for doctors, state employees and almond farmers.

* A series of cases recently brought against the state charges that a total of more than $1 billion was illegally diverted from special funds for a variety of interests between 1991 and 1994.

The transfer of money from the state’s special funds was a controversial subject within the Capitol even before the lawsuits.

H.D. Palmer, a spokesman for the state Finance Department, blamed many of the transfers on legislators, although the governor approved the budget with the controversial changes. He also said officials from the Finance Department warned the legislators against making the transfers during budget hearings.

At the time, Sen. Boatwright also told some of the angry special interests that they should sue the state over its actions.

A legislative aide, who asked not to be identified, said legislators examined the legality of the transfers. He said they determined that laws applying to different funds varied significantly and that some of the funds had surpluses.

“So folks were basically looking for whatever opportunities there were to transfer monies that were either unused or idle,” the aide said.

Earlier this year, Fine, the Los Angeles attorney, filed a series of lawsuits in state and federal court involving the special funds.

In one example, Fine said, about $121 million was taken from the Fair Employment Training program, which is supported by fees from employers and intended to retrain workers who have lost jobs because of automation, military base closings or other cutbacks. Fine alleges in the suit that the money was used to pay training expenses for welfare clients.

“They just put their hand in the cookie jar and just took,” he said.

Palmer responded: “In a time of unprecedented fiscal crisis in California, a number of measures were taken where there is not a lot of history of case law.”

* WELFARE CUTBACKS: Supreme Court dismisses Gov. Wilson’s welfare cutbacks. A3