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Lawsuits Over Spending Cuts Exacerbating California's Fiscal Woes

Leonard Gilroy
August 10, 2009, 4:09pm

Evan Halper at the Los Angeles Times reports today that the unintended consequences of California's spending addiction continue to emerge and create more fiscal problems the state doesn't need, this time via lawsuits to undo state spending cuts.

The basic gist is this: state policymakers expand spending this decade far faster than population and income growth warrant, leading it to resort to service cuts, accounting gimmicks, IOUs, debt-financed spending and tax hikes to balance budgets when the economy goes south. However, the limited spending cuts that have actually made it into recent budgets immediately become the target of one rent-seeking interest group or another that file lawsuits to challenge the cuts. When the courts inevitably shoot down the cuts, the state budget is immediately thrown into deficit. Rinse and repeat. From the L.A. Times article:

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. [...]

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.

It's bad enough that just one court ruling can throw the state budget off by $1-billion-plus dollars. What's even worse is that the state has to spend millions of tax dollars to fight each of these costly lawsuits, diverting resources away from other priorities. And what's even worse than that is that legislators sometimes invite such lawsuits through their poor budgeting practices and lack of any realistic way to fund the programs they create:

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. [...]

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."

Well that certainly wouldn't be new for California.

» Reason Foundation's California Budget Research and Commentary


Leonard Gilroy is Director of Government Reform


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