More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties.

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1 JOBS LAWSUITS More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties

2 Introduction As California continues its sluggish and unsteady recovery from the Great Recession, local and state government officials are applying the lessons learned from years of harsh, austere budgets. In response to the sudden and prolonged drought of revenue into public coffers, local and state governments alike have had to condense budgets year after year. Yet even as the state is finally looking at a balanced budget proposal, in part due to tax increases passed by voters in November 2012, the budgets of California s cities and counties continue to be troubled. Since January 2010, three cities in California have filed for bankruptcy, and several other cities and counties remain on the edge of solvency. Municipal bankruptcies are exceedingly rare. Only 13 of the nation s 38,917 municipalities declared bankruptcy in the last five years. 1 The recent uptick of bankruptcy filings in California, then, is a cause for concern. The media has reported extensively on the variety of factors leading to these these bankruptcies and the continuing economic turmoil of other cities, but one factor remains largely unexamined: the role of excessive litigation costs. There will always be legitimate lawsuits instigated by or filed against cities and counties, and, therefore, litigation costs will always be present in the public sector. Too often, however, unscrupulous attorneys and plaintiffs view public sector budgets as a coffer to be raided, and file abusive lawsuits against local governments seeking a quick payday. Several of these lawsuits have delivered large and unpredictable verdicts against local jurisdictions in California, throwing budgets out of balance and leading to cuts to public services. Here are some examples of lawsuits that have cost local governments considerable sums of money: In 2012, the City of Anaheim settled a lawsuit for $400,000 after a man was wrongfully arrested for killing an opossum - $100,000 for each hour he was detained. 2 1 How Rare Are Municipal Bankruptcies?, Governing.com, January 24, 2013, governing.com/blogs/by-the-numbers/municipalbankruptcy-rate-and-state-law-limitations.html 2 Opossum cruelty case costs Anaheim $400,000, Orange County Register, December 12, 2012, opossum-arrests-cost-anaheim /164539/ More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 1

3 In 2010, Orange County paid nearly $1.6 million to settle a police shooting case. Only $300,000 of that cost went to the victim, while $1.2 million went to attorney s fees and $80,000 went to litigation costs. 3 In October 2012, San Diego was ordered to pay $5.4 million in personal legal fees incurred by pension board officials. This amount is almost as much as what San Diego spent in total litigation costs in the entire preceding fiscal year. 4 This report examines the cost of verdicts, settlements and outside counsel to some of California s largest cities and counties. It does not take into account the cost of in-house counsel and other administrative costs associated with the enormous number of lawsuits facing cities and counties. While this report does not present an exhaustive accounting of the cost of litigation to cities and counties in California, the data it contains make one point exceedingly clear: it is unacceptable for cities and counties to continue paying out-of-control legal costs while vital social service and public safety programs face budget cuts. The legal system is intended to provide justice for those who have been injured, not to enrich a handful of plaintiffs and their attorneys. Methodology In order to examine the impact of litigation costs on municipal budgets, California Citizens Against Lawsuit Abuse (CALA) made inquiries to the following jurisdictions: San Francisco; the cities of Anaheim, Bakersfield, Fresno, Oakland, Los Angeles, Sacramento, San Diego, and San Jose; and the counties of Alameda, Fresno, Kern, Los Angeles, Orange, Sacramento, San Diego, and Santa Clara. Each municipality was asked for the amount the city or county spent on verdicts and settlements and outside counsel for fiscal year 2008 through fiscal year County to pay $1.6 million in deputy force case, Orange County Register, January 22, 2010, taxdollars.ocregister.com/2010/01/20/county-topay-16-million-in-deputy-force-case/49795/ 4 Judge: City must pay $5.4 million in legal fees, San Diego Union-Tribune, October 4, 2012, Once CALA received the litigation costs, it examined city and county budget documents published on the Internet to find line items for cost comparison purposes. The full sources for these items are noted throughout this report. More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 2

4 City Litigation Costs From fiscal years to , the cities of Anaheim, Bakersfield, Fresno, Los Angeles, Oakland, Sacramento, San Diego, and San Jose combined spent more than $435.3 million on litigation, spending $126.4 million on outside counsel, and $308.8 million on verdicts and settlements. (See Table 1) These costs continue to be a burden on cities that in many cases are facing severe budget shortfalls. To illustrate the weight of these costs, the following are examples of city programs or initiatives that could be funded by what was spent on litigation: In Anaheim, the more than $5.8 million spent in on litigation was greater than the entire budget of the city s workforce department, which helps citizens of Anaheim find jobs. 5 In Bakersfield, the more than $3.1 million spent in was greater than the combined cost of the Hageman Flyover roadway in Centennial Corridor and the rehabilitation of five city playgrounds. 6 In Fresno, the more than $4.1 million spent in on litigation was greater than the cost of planned major street resurfacing. 7 In Oakland, the more than $7.7 million spent in was greater than the city s museum budget. 8 5 City of Anaheim Fiscal Year Adopted Budget, available at images/articles/467/c0a_bcip_1011.pdf 6 City of Bakersfield Fiscal Year Adopted Budget, available at bakersfieldcity.us/weblink7/0/doc/887315/ Electronic.aspx. 7 City of Fresno Fiscal Year 2012 Adopted Budget, available at NR/rdonlyres/E89BD84B-FF24-45C9-A17A- E63B1328A82E/24843/FY2012AdoptedBudget. pdf. 8 City of Oakland Fiscal Year Policy Budget, available at budgetoffice/fy07-09adoptedpolicybudget_ FINAL.pdf. 9 City of Sacramento Fiscal Year Approved Budget, available at cityofsacramento.org/finance/budget/fy cfm. 10 City of San Diego Fiscal Year 2011 Annual Budget, available at annual/fy11/index.shtml. 11 City of San Jose Fiscal Year Adopted Operating Budget, available at sanjoseca.gov/archives/151/00.entire adoptedoperating.pdf. In Sacramento, the more than $3.2 million spent on litigation in was greater than the combined budgets of the City Manager s office and the Discovery Museum Science Center. 9 In San Diego, the more than $11.1 million spent in was greater than the cost of all the citywide park maintenance and citywide dance and after school youth programs in the Park and Recreation budget. 10 In San Jose, the $2.7 million spent in on litigation was greater than the budgets of the Bascom Branch and Educational Park Branch of the San Jose City Library System. 11 More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 3

5 Table 1: City Litigation Costs City Total Anaheim Verdicts/Settlements $ 1,355, $1,465, $ 3,918, $2,714, $9,452, Outside Counsel $1,477, $1,410, $1,917, $2,080, $6,885, Bakersfield Verdicts /Settlements n/a $1,203, $1,110, $792, $3,106, Outside Counsel n/a $1,973, $2,091, $1,860, $5,925, Fresno Verdicts/Settlements n/a n/a n/a n/a n/a Outside Counsel $3,087, $2,249, $3,934, $4,113, $13,385, Los Angeles Verdicts/Settlements $36,800, $91,000, $45,000, $49,100, $221,900, Outside Counsel $25,000, $13,500, $8,300, $13,000, $59,800, Oakland Verdicts/Settlements $5,390, $8,370, $12,800, $6,050, $32,610, Outside Counsel $2,330, $4,050, $6,380, $3,860, $16,620, Sacramento Verdicts/Settlements $1,487, $1,001, $1,864, $3,184, $7,537, Outside Counsel $26, $1, n/a $37, $65, San Diego Verdicts/Settlements $8,708, $5,101, $8,545, $4,628, $26,983, Outside Counsel $9,939, $7,326, $2,591, $1,118, $20,976, San Jose Verdicts/Settlements $1,457, $2,015, $2,190, $1,603, $7,266, Outside Counsel $688, $478, $551, $1,069, $2,789, Total $97,748, $141,147, $101,195, $95,213, $435,305, Note n/a denotes that information was requested but was not yet available at the time of publication More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 4

6 County Litigation Costs Counties are not exempt from excessive litigation. In fact, from fiscal years to , the counties of Alameda, Fresno, Kern, Los Angeles, Orange, Sacramento, San Diego, Santa Clara, and the city and county of San Francisco spent a total of $660.7 million on litigation, spending $214.1 million on outside counsel, and $446.6 million on verdicts and settlements. (See Table 2) County school budgets have been reduced or cut and major community programs have been hit with reduced funding or have been discontinued altogether, yet litigation continues. The money spent in the counties mentioned above could have funded important county programs across the state, including: In Alameda County, the $8.2 million spent in by the county on litigation was greater than the cost of running the Camp Sweeney residential program for juvenile offenders and the cost of the Juvenile Justice Center. 12 In Fresno County, the $2.6 million spent on litigation could have paid for all of the overtime costs cut from the budget for the Fresno County Sheriff s Department. 13 In Los Angeles County, the $93.8 million spent in on litigation was greater than the cost of capital improvement projects at more than 18 fire stations or other fire department facilities County of Alameda Fiscal Year 2010 Approved Budget, available at government/documents/budgets/2010_final_ budget.pdf. 13 County of Fresno Fiscal Year Proposed Budget, available at ViewDocument.aspx?id= County of Los Angeles Fiscal Year Adopted Budget, available at gov/lac/cms1_ pdf 15 County of Sacramento Fiscal Year Adopted Budget, available at saccounty.net/fy200809budgetinformation/ Pages/default.aspx. 16 County of Sacramento Fiscal Year Adopted Budget, available at FiscalYear201011BudgetInformation.aspx. 17 County of San Francisco Fiscal Year Final Budget, available at sfcontroller.org/modules/showdocument. aspx?documentid= County of Santa Clara Fiscal Year 2011 Final Budget, available at scc/countygovernment/documents/county_ Budget_FY_2011_Final_Budget.pdf. In Sacramento County, the $9.6 million spent in on litigation costs was greater than the budget of the entire Golf Fund, which maintains county operated golf courses. 15 In Sacramento County, the $4.6 million spent in on litigation costs was greater than the amount budgeted for park construction. 16 In San Francisco, the $37 million spent in on paying jury awards and legal settlements was greater than the entire budget of the Children and Families Commission. 17 In Santa Clara County, the more than $3.7 million spent in on litigation costs was greater than the cost of the Cupertino Library Fund. 18 More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 5

7 Table 2: County Litigation Costs County Total Alameda Verdicts/Settlements $8,562, $5,024, $3,209, $2,580, $19,377, Outside Counsel $2,802, $3,200, $2,479, $3,131, $11,613, Fresno Verdicts/Settlements $252, $70, $743, $228, $1,294, Outside Counsel $1,374, $1,554, $1,911, $1,539, $6,381, Kern Verdicts/Settlements $1,893, $1,312, $1,754, $710, $5,671, Outside Counsel $1,522, $966, $946, $1,171, $4,606, Los Angeles Verdicts/Settlements $54,551, $42,307, $56,534, $59,900,000 $213,293, Outside Counsel $35,903, $32,000, $37,300, $40,900,000 $146,103, Orange Verdicts/Settlements $6,939, $17,682, $11,326, $9,225, $45,174, Outside Counsel $3,873, $2,873, $2,267, $2,523, $11,538, Sacramento Verdicts/Settlements $4,884, $5,154, $962, $441, $11,443, Outside Counsel $4,767, $5,592, $3,727, $5,347, $19,436, San Diego Verdicts/Settlements $3,966, $1,014, $9,042, $7,412, $21,437, Outside Counsel $2,353, $1,770, $1,010, $897, $6,031, San Francisco Verdicts/Settlements n/a $37,019, $48,072, $32,429, $117,520, Outside Counsel n/a $569, $2,298, $3,798, $6,666, Santa Clara Verdicts/Settlements n/a $4,056, $3,387, $3,944, $11,388, Outside Counsel* n/a $954, $331, $450, $1,736, Total $133,649, $163,125, $187,307, $176,633, $660,716, Note n/a denotes that information was requested but was not yet available at the time of publication * The outside counsel numbers shown in Table 2 reflect only what Santa Clara County categorizes as Outside Counsel Payment for Civil Litigation Filed Against the County. Not included in this chart are monies spent by Santa Clara County on outside counsel for Workers Compensation Claims, Transactional Advice and Services, Labor & Employment Services, and Collection Account Services. The amount spent on all outside counsel by Santa Clara County for the fiscal years reviewed is as follows: Total $2,598, $1,110, $922, $4,630, More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 6

8 Discussion Lawsuits Push Cities to the Brink Mammoth Lakes files for bankruptcy over $43-million judgment In July 2012, the town of Mammoth Lakes was forced to file for bankruptcy because it could not afford to pay a $43-million breach-of-contract judgment in a lawsuit brought against it by a developer. 24 Yuba City pays man not to file any more disability suits In October 2012, Yuba City agreed to pay $15,000 to George Louie in exchange for a pledge from him to not file any more lawsuits alleging violation of the Americans with Disabilities Act (ADA) against the city and its businesses. The lawsuits targeted minor violations, such as the absence of a handicapped parking sign after it was stolen, and settlements cost the city and businesses approximately $4,000 each. The city already spends approximately $300,000 per year on upgrading its facilities to meet ADA guidelines. A Yuba City property manager who had two tenants sued by Louie called his legal actions extortion lawsuits Suits could force L.A. to spend huge sums on sidewalk repair, Los Angeles Times, January 30, 2012, local/la-me-sidewalks Update on U.S. Tort Cost Trends, Towers Watson, research/6282 Cities and counties expenditures of public funds on litigation rarely grab headlines, but the $1.09 billion spent on litigation by just a few of California s 482 cities and 58 counties demonstrates that litigation costs place an enormous burden on local government budgets. Recent lawsuits against the City of Los Angeles, a city struggling to close a gaping budget deficit, are a case in point. Facing a $72-million budget shortfall in early 2012, the city was the target of a series of civil rights lawsuits alleging that broken sidewalks and missing curb ramps violate the Americans with Disabilities Act. The city had already settled two cases for about $85 million and found itself the target of four additional lawsuits with potential liabilities reaching into the hundreds of millions of dollars. 19 Even though taxpayers may be unaware that a portion of their tax dollars are going toward litigation costs, the additional tax burden these costs place on them is substantial. According to a study released by Towers Watson, the overall cost of the U.S. tort system was $264.6 billion in 2011, which translates to $857 per person, or more than $3,400 for a family of four. 20 Citizens pay this annual lawsuit tax in the form of increased premiums for insurance, higher prices for products and services on a daily basis and increased tax revenue. With study after study showing California has one of the least fair legal systems in the country, it is likely that citizens in California pay even more. California is known nationwide for its unfair courts. In December 2012, the American Tort Reform Association identified California as the nation s worst Judicial Hellhole, and it is not alone in making that distinction. The U.S. Chamber Institute for Legal Reform also ranked California among the worst states in the nation for its legal climate. Unfortunately for a state still struggling to emerge from the Great Recession, California s poor legal climate hurts its ability to grow its economy and create jobs. In its annual survey of business leaders, CEO Magazine found that California was considered the worst state in the nation for doing business. There can be no doubt that businesses factor the cost of lawsuits into their decisions to locate or expand in California. In fact, when Andrew Puzder, CEO of CKE Restaurants, which owns Carl s Jr., announced that the chain was halting its expansion plans in California, More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 7

9 Lawsuits Delay Stockton s Bankruptcy In June 2012, Stockton became the largest city in the United States to declare bankruptcy. The bankruptcy process quickly became embroiled in litigation, costing the city almost $5 million in attorney s fees, exceeding the $1 million the city had set aside. At the time of writing, the city has endured nine months of litigation, and is still facing private lawsuits while legal arguments about the bankruptcy process are ongoing. 26 Half Moon Bay Hit Hard by Lawsuit In 2007, the City of Half Moon Bay agreed to an $18 million settlement twice its annual budget of $9 million to end a dispute with a developer. To avoid bankruptcy, the city issued more than $16 million in bonds, which it will be paying off until The city almost disincorporated due to the lawsuit, but a recent arbitration decision ruled that the city s insurance company at the time failed the city. The city will receive $10 million from the ruling, helping put it back on stable financial footing Steven Greenhut: Carl s Jr. chewed up by California, Orange County Register, March 20, 2011, people-state.html 24 Mammoth Lakes files for bankruptcy over $43-million judgment, Los Angeles Times, July 2, 2012, la-me-mammoth-lakes Yuba City pays man not to fine any disability suits, Sacramento Bee, October 13, 2012, Bankruptcy rulings favor Stockton, Stockton Record, January 31, 2013, com/apps/pbcs.dll/article?aid=/ /a_ NEWS/ /-1/A_SPECIAL In Half Moon Bay, arbitration victory sparks debate on how to spend millions, Peninsula Press, October 20, 2012, com/2012/10/20/in-half-moon-bay-arbitrationvictory-sparks-debate-on-how-to-spend-millions/ accelerating its plans for expansion in Texas and considering re-locating its headquarters from California to Texas when its lease ends in 2015, he specifically mentioned legal costs as a reason for his decision. 21 Leaders of other states highlight the unpredictable costs of California s legal system in an effort to attract companies to move out of the state. In February 2013, Texas Governor Rick Perry specifically cited the legal reforms that have lowered business costs in his state in his effort to convince California companies to move to Texas. 22 There are some cities and counties that are fighting back against abusive lawsuits, and saving taxpayer dollars as a result. The County of Los Angeles, for instance, adopted a Risk Management Information System in 2009 that allows the county to isolate active, high priority cases for review and monitoring and provides city administrators with an understanding of claim types, associated costs and the progress of claims against the county toward resolution. The City of San Diego has also taken aggressive steps to reduce its legal costs. The city renegotiated hourly rates for outside counsel and rebuilt its City Attorney s office to reduce its dependence on outside legal counsel. 23 Although these programs are still in their infancy and their long-term impact remains to be seen, the municipalities should be applauded for their efforts to be more transparent about municipal litigation costs and attempts to reduce them. As the state continues its slow economic recovery, city and county governments are likely to continue to face several more years of budget shortfalls. Controlling legal costs through methods such as aggressive risk management will help cities and counties ensure that every dollar is spent wisely. Citizens must hold their elected officials accountable to see that city and county budgets fund taxpayer priorities, not line the pockets of attorneys. These reactive measures are a positive development, but will only address one side of the litigation problem facing California s cities and counties. To truly address the issue of abusive litigation against local governments, California needs more than a patchwork of litigation cost control measures. California s legislature must pass meaningful legal reforms that create balance in our courts and remove the incentives that encourage lawsuit abuse in the first place. Until this happens, high litigation costs will likely continue to plague California s city and county budgets. More Lawyers, Less Public Services: The Cost of Litigation to California s Cities and Counties 8

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