Legal Update

1 SUPERIOR COURT OF CALIFORNIA

2 COUNTY OF SACRAMENTO

3 HON. LLOYD G. CONNELLY, JUDGE, DEPARTMENT 33

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5 CALIFORNIA DISABILITY SERVICES )
ASSOCIATION, et al. )
6 )
Petitioners, )
7 )
vs. )
8 )
TERRI DELGADILLO, et al. )
9 )
Respondents. )
10 ______________________________________________)

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12 CASE NO: 34-2010-80000709

13 REPORTER'S TRANSCRIPT OF PROCEEDINGS

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15 FRIDAY, APRIL 15, 2011

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17 APPEARANCES

18
For the Petitioner:
19
LAW OFFICES OF CHAD CARLOCK
20 BY: CHAD CARLOCK,
260 Russell Boulevard, Suite D
21 Davis, California 95616-3839

22

23 The Respondent:

24 STATE OF CALIFORNIA
BY: NIROMI W. PFEIFFER
25 1300 I STREET, SUITE 1101
Sacramento, California 94244-2550
26

27

28

1 For the Respondent Regional Center Defendants:

2 BY: JUDITH ENRIGHT, Attorney at Law
Court call (310) 274-1830
3
For the Respondent Golden Gate Regional Center:
4
BY: RUFUS L. COLE, Attorney at Law
5 Court call (415) 956-8800

6

7

8

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10
JODEE H. WEINRICH, CSR NO. 3060
11

1 FRIDAY, APRIL 15, 2011

2 AFTERNOON SESSION 1:30

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4 The matter of California Disability Services

5 Association, et al., Plaintiffs, versus Terri Delgadillo,

6 et al., the Defendants, Case Number 34-2010-80000709, came

7 on regularly before the Honorable LLOYD G. CONNELLY, Judge

8 of the Superior Court of California, County of Sacramento,

9 sitting in Department 33.

10 The Plaintiffs, California Disability Services

11 Association, et al., was represented by Chad Carlock,

12 Attorney at Law.

13 The Respondents, Terri Delgadillo, et al., was

14 represented by Niromi W. Pfeiffer, Deputy Attorney General.

15 The Respondents, Golden Gate Regional Center Inc.,

16 Regional Center of the East Bay Inc., and San Andreas

17 Regional Center, was represented by Rufus L. Cole, Attorney

18 at Law, appearing by court call.

19 Attorney for respondents, 16 Regional Centers, was

20 represented by Judith Enright, Attorney at Law, appearing

21 by court call.

22 The following proceedings were then had:

23 THE COURT: This is California Disability Services

24 Association versus Ms. Delgadillo who is the Director of

25 the Department of Developmental Services.

26 It is case number 34-2010, last four digits are

27 0709. Let me get the presence of the parties here.

28 Yes, sir?

1 MR. CARLOCK: Good afternoon, your Honor, Chad

2 Carlock, C-a-r-l-o-c-k, appearing for the petitioners and

3 plaintiffs.

4 THE COURT: Mr. Carlock. Thank you.

5 MS. JUDITH Pfeiffer: Good afternoon, your Honor,

6 Niromi JUDITH Pfeiffer with the Office of the Attorney

7 General appearing here on behalf of Director Terry

8 Delgadillo and the Department of Developmental Services.

9 THE COURT: Okay. Thank you.

10 MS. Pfeiffer: Good afternoon, your Honor, Judith

11 Pfeiffer for 16 Regional Center defendants.

12 THE COURT: And what's your name, ma'am?

13 MS. Pfeiffer: Judith Pfeiffer.

14 THE COURT: Ms. Pfeiffer, I want to tell you

15 straight up, at the end I'll afford you an opportunity to

16 comment, but, you know, I conduct my hearings with

17 questions and answers, and it just does not work over court

18 call. And so I'm going to devote my questions and answers

19 with the people here in the room.

20 At the end of the hearing, I will afford you an

21 opportunity to speak.

22 MS. Pfeiffer: Thank you, your Honor.

23 MR. COLE: Good afternoon, your Honor, I am Rufus

24 Cole. I am appearing on behalf of Golden Gate Regional

25 Center, Regional Center of the East Bay, and San Andreas

26 Regional Center.

27 And I understand your comments would be likewise

28 apply to me as they apply to Ms. Pfeiffer.

1 THE COURT: Okay. Anybody else there? Anybody

2 else?

3 THE CLERK: No.

4 MS. Pfeiffer: No, your Honor.

5 THE COURT: Let me tell you what I am not going to

6 ask about, at the end of the hearing I will afford an

7 opportunity to speak briefly in these areas, but we spent

8 time before and the issue of legislative intent has been

9 exhaustively briefed, and so that's not a good use of my

10 time to ask questions.

11 I am not foreclosing you to speak to that briefly,

12 but that is not my -- where I'm focusing my attention.

13 Similarly, issues of due process, equal protection,

14 separation of powers and other related issues as pled by

15 the petitioner, I don't have questions on those. I don't

16 think it would be helpful or good use of my time.

17 I'm going to focus my time and my attention on the

18 issue of interference with contracts and whether or not

19 there's a proper exercise of a police power by the State in

20 an area where a substantial impairment has occurred.

21 So I won't foreclose you from briefly speaking to

22 the other areas, but that's my area of concern.

23 I wanted to just ask some simple questions about how

24 the budgeting process works for the regional centers.

25 For example, in the fiscal year in question there

26 was no budget approved on July 1, which of course is

27 typical, and the budget is ultimately approved in the early

28 part of October and the trailer bill is adopted in October

1 19th, 2010, in the form of 853.

2 How do -- how does the regional centers get and

3 spend their money prior to the adoption of a budget and

4 subsequent to the end of the fiscal year? Some school

5 districts, for example, I know now are taking out loans, is

6 that what the regional center does?

7 MR. CARLOCK: Your Honor, this is Chad Carlock

8 speaking for the petitioners. It's my understanding there

9 is some leeway for the Department to pay some funds out to

10 the regional centers in the absence of an enacted budget.

11 THE COURT: Right.

12 MR. CARLOCK: In some budget years however regional

13 centers have drawn on lines of credit. I know that's what

14 providers have done from time to time in protracted budget

15 situations.

16 THE COURT: When was the budget actually adopted?

17 The trailer bill was October 19th of 2010, when was the

18 budget actually adopted? Was it about a week earlier?

19 MR. CARLOCK: I believe it was the 12th, your Honor.

20 THE COURT: The 12th. And then do the regional

21 centers have a guarantee for any money prior to the

22 adoption of the budget?

23 I am talking about one dollar.

24 MR. CARLOCK: In the absence of the budget

25 allocations being passed, the -- my reading of the

26 statutes, the budget and Lanterman Act together, the

27 obligation to provide services continues, and it is written

28 into the contracts.

1 I think this is one of the provisions that

2 respondents have mentioned, that the -- it is subject to

3 the budget allocations by the legislature.

4 If the legislature choose in one year to allocate

5 zero dollars to the purchase of services, then I don't know

6 whether or not the regional centers would have an action on

7 that. I don't know there is guarantee.

8 THE COURT: If they similarly decided to fund them

9 at 50 percent, they would only be entitled to that 50

10 percent. They wouldn't be entitled to an amount equal to

11 the previous year's budgets, for example.

12 MR. CARLOCK: Under the Supreme Court's

13 interpretation and the ARC versus DDS case from 1985, they

14 still have an obligation to provide services until the

15 money runs out. At which time they are required to return

16 to the legislature that will either choose to change the

17 act or allocate additional money.

18 THE COURT: It would be a fair statement that they,

19 the regional centers and maybe even nonprofits not unlike

20 the providers of a variety of the service school districts,

21 some of the residential care facilities outside of the

22 developmentally disabled communities and the like assume to

23 take the risk and fund these services on their own through

24 loans with an expectation based on tradition, pattern,

25 intelligence from the legislature that funds will

26 ultimately be appropriated.

27 MR. CARLOCK: I think that's generally a fair

28 statement. However, all of these providers of services,

1 once services are provided, the State doesn't simply have

2 the option to choose now that services have been provided

3 and a value has been conferred on the state not to pay

4 those bills.

5 THE COURT: Well, that's my question. The State has

6 not adopted a budget. The State has not adopted a budget.

7 Services are provided. The State adopts a budget, but it

8 only adopts a budget for 50 percent of what existed

9 beforehand.

10 Do they have a claim for the other 50 percent that

11 they had the previous year?

12 MR. CARLOCK: I think at least arguably they do. If

13 there is a bill outstanding for the State for services that

14 were provided for ten dollars, and the State decides we

15 only feel like paying five, then that vendor, whoever they

16 may be, has provided ten dollars worth of services, and I

17 think they may have a claim for the ten dollars.

18 But I would also distinguish that from this case

19 because in our case, the ten dollars was in fact paid. And

20 now the State is saying we've decided that we want to take

21 back five dollars.

22 THE COURT: Let me just stick with my hypothetical.

23 The -- so it's your position that the State is obligated to

24 pay for the services that are provided at a basis of what

25 they paid the previous year?

26 MR. CARLOCK: Well, I think more generally, you

27 know, going with the general nature of any vendor in your

28 hypothetical, it would be some measure of the reasonable

1 value of those services.

2 Now, I think under most circumstances what had been

3 paid prior to the last year's budget is probably a pretty

4 good starting place.

5 THE COURT: You understand there is a lot of

6 entities in the State if the budget isn't adopted, they

7 don't provide the services.

8 MR. CARLOCK: That's correct.

9 THE COURT: Because they don't believe they are

10 going to get paid. They don't know they are going to get

11 paid, why are you different?

12 MR. CARLOCK: First of all, there is a statutory

13 obligation to continue to provide services. Even if money

14 was cutoff with the statement that you are not going to be

15 paid, providers have under the Lanterman Act 30 and in some

16 cases 60-day notice requirement to the consumer before they

17 can terminate services.

18 THE COURT: Right.

19 MR. CARLOCK: So even in a circumstance where the

20 State said right up front, we're not going to pay you at

21 all for this service. The vendor would continue to have to

22 provide services for at least 30-days for essentially at no

23 cost to the State.

24 THE COURT: Well, they are nonprofit, private

25 organization.

26 MR. CARLOCK: That is correct.

27 THE COURT: They are not the government. They are

28 not the State of California.

1 MR. CARLOCK: That's right.

2 THE COURT: So they have moral obligations and

3 contractual obligations that run to them, but that's

4 different.

5 MR. CARLOCK: Legal obligations under the Lanterman

6 Act. The regional centers who discipline a vendor who

7 terminated that consumer immediately, and the consumer

8 could file a complaint as well.

9 THE COURT: Um-um.

10 So it would be your position that the State of

11 California could not adopt a budget after 2010, with a ten

12 percent reduction?

13 MR. CARLOCK: If they -- no, I think that's

14 overstates it. They can enact a budget with whatever

15 percentage cut they agree on, but that -- in order to take

16 effect on July 1st, that has to be enacted before July 1st.

17 THE COURT: Right. And it's never enacted before

18 July 1st. So it's enacted October 12th. There is a ten

19 percent across the board reduction.

20 MR. CARLOCK: Perhaps, to capture that savings at

21 the risk of giving the State advice, what they would need

22 to do to do it properly will in our view would be to

23 capture the same amount of savings, you know, 15 percent

24 cut for nine months.

25 THE COURT: Um-um. So you couldn't -- they

26 couldn't -- they couldn't reduce their budget for the

27 fiscal year. They have to impose all of their reductions

28 timely, that is effective July 1, or delay them

1 proportionate to the time.

2 MR. CARLOCK: Right. Prospectively.

3 THE COURT: Can I just observe to you, they don't do

4 that for any State agency in the State of California now.

5 MR. CARLOCK: I think that's a fair observation.

6 And I think the declaration that was submitted from the

7 Department of Finance, without any authority for the

8 proposition just noted exactly that observation that in

9 practice most agencies just assume that whatever their

10 changes are going to be, they're going to be effective at

11 the start of the fiscal year.

12 THE COURT: Right.

13 MR. CARLOCK: Whether or not that has been and is

14 being challenged, I think doesn't, you know, the practice

15 doesn't necessarily mean that that's permissible.

16 THE COURT: The State, they get monthly updates from

17 the Department of Finance with regard to the revenue

18 sources. This isn't in the record, and I am not taking

19 judicial notice of it. But I'll just say it is common

20 knowledge that the reports during the summer of 2010, into

21 the fall were that the revenues were increasingly reduced

22 from earlier projections.

23 They May revised turned out to be wrong. The

24 legislature responds, and they reduce the budget in weird

25 ways in order to deal with the funds that are available.

26 Do they have the authority to do that or not?

27 MR. CARLOCK: They do. They have the authority, and

28 the May revision is often based on incorrect assumptions

1 and the changes that are made over the summer in response

2 to that are often turn out ultimately to be incorrect as

3 well.

4 In this case, the history of this particular cut

5 which started out as three percent and then in the May

6 revise was going to be increased to four and a quarter

7 percent, and then in August was going to be 3.65 percent.

8 The one and quarter had been reduced, and then again in

9 October back-up to one and a quarter.

10 Certainly in the political process, those sorts of

11 changes happen.

12 THE COURT: What's the significance of the language

13 in, for example, 4678, 4681, which reappears over and over

14 again, so forth and so on, Department shall establish

15 rates, so forth, state council. This is with regard to

16 your regional centers.

17 And then it says "Subject to the appropriation of

18 sufficient fund for such purpose." So that maybe I should

19 read the entire sentence.

20 (As Read) "By July 1, 1977, and each year

21 thereafter the Department," this is department here, "shall

22 establish rates which shall be reviewed by the state

23 council, such rates shall annually be proposed to the

24 legislature by March 1, and shall be operative on July 1 of

25 each year subject to the appropriation of sufficient funds

26 for such purpose in the Budget Act."

27 Doesn't that mean that the rates are subject to the

28 appropriation of sufficient funds?

1 MR. CARLOCK: No. Your Honor, the rates are set

2 separately by statute.

3 THE COURT: Um-um.

4 MR. CARLOCK: That provision specifically speaks to

5 the point that was the beginning of your hypothetical what

6 happens, how the regional centers get paid, how the

7 providers get paid if there is no budget.

8 The meaning of subject to the appropriation of

9 sufficient funds by the legislature is that the State would

10 be within its rights to not pay anybody after July 1st,

11 until there is a budget.

12 Now in practice because these services are so

13 essential, the State continues to pay the regional centers.

14 The regional centers continue to pay the vendors as long as

15 they can and services continue to be provided.

16 Subject to the appropriation of funds by the

17 legislature, we don't -- I don't think a reasonable

18 interpretation of that is subject to whatever amount of

19 funds the legislature feels like appropriating. To do that

20 would eliminate the entire rate structure.

21 There is no reason to set rates in statute if the

22 rates can be changed merely by changing the amount of money

23 that's --

24 THE COURT: Appropriated.

25 MR. CARLOCK: -- appropriated.

26 THE COURT: How about the language, this declaration

27 by Carlock. This is your declaration, I believe.

28 MR. CARLOCK: Yes.

1 THE COURT: But in the -- in the sample contracts

2 that are included in this exhibit over and over again you

3 find similar language.

4 Funding after the end of the current fiscal year

5 6/30 of each year contingent upon adequate State funding,

6 or later in the actual contract itself, payments for

7 services will be made dependent upon the availability of

8 State funding.

9 And so it seems to me they're acknowledging that a

10 condition precedent to payment and the amount of payment is

11 appropriate State funding.

12 MR. CARLOCK: Well, your Honor, in our view those

13 are two separate things.

14 The fact of payment and the amount of payment.

15 That, that contractual language refers to again to the

16 enactment of a budget and allocation of funding.

17 THE COURT: Um-um.

18 MR. CARLOCK: Not to -- the amount of funding that

19 we're going to pay you under this contract shall be

20 determined by whatever the legislature decides to

21 appropriate.

22 Going back again to the Supreme Court decision as

23 long as funds are available, then the contracts have to be

24 carried out, services have to be provided, and they have to

25 be paid for.

26 When the money runs out, then the solution is to go

27 back to the legislature who then either amends the act or

28 allocates additional money.

1 THE COURT: How do you explain the word "contingent

2 upon adequate State funding"? Doesn't that presuppose that

3 there will be years when they don't appropriate a

4 sufficient amount?

5 MR. CARLOCK: There is no definition in the contract

6 of what sufficient means or adequate either.

7 THE COURT: Um-um.

8 MR. CARLOCK: But our interpretation of that is the

9 situation where there is no budget. That's the

10 contingency.

11 If there is a budget, if we get money from the

12 State, we are required to pay you. If we do not, you may

13 not get paid until there is a budget.

14 THE COURT: And what if you don't get enough money

15 from the State? Are you saying the State is required to

16 appropriate it?

17 MR. CARLOCK: I think under the -- without changing

18 the act, the services that are to be provided, the rates

19 that are set in statute or negotiated between the regional

20 centers and the providers are the rates that are to be

21 paid.

22 THE COURT: Is there a relationship in this actual

23 fiscal year between the amount of money that is in the

24 budget and the 4.25 -- excuse me, the figure slipped away

25 from me. Figure, in other words, the appropriated amount

26 in the budget would be consistent with a additional

27 reduction for the fiscal year of 1.25 percent; is that a

28 fair statement?

1 MR. CARLOCK: The idea was -- my understanding I

2 don't want to speak for the Department. My understanding

3 from their declarations as well, the idea of the additional

4 1.25 percent would be that they projected that would save

5 them an additional 25 or so million dollars of the general

6 fund which was the additional reduction that they were

7 looking to make in response to the May revision.

8 THE COURT: I see. And so they are married in a

9 way.

10 MR. CARLOCK: Assuming that projections were

11 accurate, I think was the purpose behind. Coming up with

12 that number as opposed to some other number.

13 THE COURT: Let me go to the other side of the room.

14 If the rates are in effect, the rates are set, and the

15 rates are not altered, does the State have the obligation

16 to pay for those consistent with those rates for the

17 services then provided?

18 MS. JUDITH Pfeiffer: Your Honor, I think that the

19 difference here is, it's not a rate per se because the way

20 the State pays is per individual based on that individual's

21 plan of care.

22 THE COURT: Um-um.

23 MS. JUDITH Pfeiffer: But clearly they either --

24 there is a recognition there are times when the moneys

25 can't be paid, and the State can't possibly lock themselves

26 into a situation of saying: We will guarantee you this

27 amount of money.

28 THE COURT: Talk to me about this, the rates and how

1 they work. I understand there is different character of

2 services that are provided and residential care facilities,

3 for example, nonresidential rates, what have you, day rates

4 and they are -- these rates are established by the regional

5 center with approval by the Department, or is it entirely

6 between the regional center and the individual nonprofit

7 provider? You can come up, if you want.

8 MS. JUDITH Pfeiffer: Your Honor, if I may. We have

9 my client here.

10 THE COURT: Is there any objection I can hear about

11 this process?

12 MR. CARLOCK: No objection.

13 MS. FRASER: Margaret Fraser.

14 THE COURT: Just have a seat, Ms. Fraser. How does

15 that work? Do you understand my question?

16 MS. FRASER: Yes.

17 THE COURT: Who sets the rates? Does the Department

18 approve it at some point, or is it entirely between the

19 regional entity and nonprofit?

20 MS. FRASER: It depends on the type of service, your

21 Honor. Residential rates for the most part under 4681.1

22 are established by the Department.

23 THE COURT: Okay.

24 MS. FRASER: But also residential rates can be

25 established through a negotiations process between the

26 regional center and provider.

27 THE COURT: And that would reflect a variation from

28 the Department established rate, is that a fair way to say

1 it?

2 MS. FRASER: Correct.

3 THE COURT: That might reflect variations in costs.

4 MS. FRASER: It is based on the individual

5 consumer's needs in terms of services, and is supposed to

6 be less than the amount that is identified annually by the

7 Department in its rate schedule.

8 THE COURT: Now, the rate schedule that is

9 identified annually, this is a rate schedule that includes,

10 for example, residential care, right?

11 MS. FRASER: Right. There is a rate schedule for

12 residential care, and for many nonresidential services.

13 THE COURT: Transportation, behavior training,

14 mobile day programs.

15 MS. FRASER: Respite, those things. Those in days

16 gone by were established based on a cost statement showing

17 allowable cost versus non-allowable cost. However, rates

18 have been basically frozen for a number of years, and any

19 type of adjustment in the rate was done annually if you

20 take a look, for example, at 4691.6.

21 THE COURT: Right.

22 MS. FRASER: You will see for a particular fiscal

23 year rates shall be adjusted. There may be a pass-through

24 based on an increase in the amount of the State's

25 supplemental payment, or the State's supplemental security

26 income payment, or there may be a cost of living

27 adjustment.

28 THE COURT: So let me take one of these. For

1 example, on a mobile day program, the State, the Department

2 has rates.

3 MS. FRASER: Correct.

4 THE COURT: That are promulgated. Are they

5 promulgated as regs, or just the letter, or how does that

6 happen?

7 MS. FRASER: Most of them are exempt from the

8 regulations process, or they are in statute.

9 THE COURT: They are promulgated.

10 MS. FRASER: Right.

11 THE COURT: And then individual regional centers

12 vis-a-vis individual providers can based on regional cost

13 differences vary those rates; is that a fair statement?

14 MS. FRASER: They are. There are certain

15 limitations. Once, again, there has been a rate freeze,

16 and it is also subject to the appropriation of sufficient

17 funds as part of the annual Budget Act.

18 THE COURT: Okay. And then the -- also the

19 individual regional care facility can negotiate a different

20 rate based on the individual needs of a client which can be

21 significantly higher or theoretically --

22 MS. FRASER: There are limitations if they want to

23 negotiate a higher rate then the Department does get

24 involved. Typically the higher rate would be based on some

25 type of health and safety exemption, your Honor.

26 THE COURT: Right.

27 Now, when we're talking about in this bill language

28 that the rate on or after February 1st, 2009, by 3 percent,

1 and then from July 1, 2010 to June 30th, 2011, inclusive

2 shall be reduced by 4.25 percent. It is each one of these

3 rates?

4 MS. FRASER: Correct.

5 THE COURT: So if, for example, on the mobile day

6 programs, the Department has promulgated a base rate, some

7 parameters on variation for regional changes.

8 MS. FRASER: Correct.

9 THE COURT: Those base rates would be reduced by 1.2

10 percent, 1.25 percent.

11 MS. FRASER: Correct. An additional, in addition to

12 the 3 percent that was in effect.

13 THE COURT: All right.

14 MS. FRASER: And the amount appropriated, the

15 allocation was based on that reduction as well.

16 THE COURT: Your position, and let me move over to

17 the attorney here, your position is it takes two to tango.

18 Your interpretation of 4681 is entirely different than the

19 defendants -- excuse me, the plaintiffs. Let me state the

20 plaintiff's position, you correct me if I am misstating it.

21 He is saying, "Judge, they can establish the rates.

22 They'll establish the rates, and those rates have to be

23 paid. Sooner or later they have got to be paid if the

24 service is provided. That's it.

25 'The subject to appropriation of sufficient funds

26 for such purposes in the Budget Act just means that you

27 might not get the money as fast as you want it;" is that a

28 fair statement?

1 MR. CARLOCK: That's fair, your Honor, yes.

2 THE COURT: Your interpretation, counsel, I take it,

3 is it takes two to dance here. It has got to be a rate

4 consistent with the rates promulgated pursuant to 4681, and

5 in order for them to get the money, there has to be the

6 appropriation.

7 MS. JUDITH Pfeiffer: That's correct, your Honor.

8 THE COURT: And the appropriation can actually in

9 effect reduce the -- reduce the amount of money that

10 otherwise would be paid, could translate into a lower rate.

11 MS. FRASER: May I, your Honor? Our rate schedule

12 would actually be adjusted, your Honor, if there was a

13 lesser appropriation.

14 THE COURT: So it just -- you would just do that

15 automatically.

16 MS. FRASER: Correct.

17 THE COURT: And when there's a reduction like this

18 of 1.25 percent, is it 1.25 percent across the board, or do

19 you make changes in a variety of different rates? Some

20 might have a larger reduction. Some might have a smaller

21 reduction of 1.25.

22 MS. FRASER: It was across the board 1.25 percent

23 reduction, your Honor.

24 THE COURT: You have the discretion to vary that, is

25 that your understanding, or that just the way -- or that's

26 the way it's always done?

27 MS. FRASER: It was intended to be in across the

28 board reduction, your Honor, with health and safety

1 exemption process built-in such that there could be a

2 request to waive the 1.25 percent reduction or 3 percent

3 reduction based on health and safety issues related to a

4 consumer.

5 THE COURT: Then there's language here unless the

6 regional center demonstrates that non-reduced payment is

7 necessary to protect the health and safety of the

8 individual for whom services are provided and the

9 Department of Developmental Services has granted approval.

10 I take it from the pleadings filed by the plaintiff

11 that no one has sought relief using that budget language.

12 MS. FRASER: There were 3 percent reduction, your

13 Honor. There were exemptions requested during the year

14 when the 3 percent reduction was in effect for individuals

15 who would be placed out of Agnew developmental centers

16 when -- during the closure process.

17 THE COURT: I see. There was some use of that

18 provision.

19 MS. FRASER: Correct, your Honor.

20 THE COURT: And there has not been under the 1.25?

21 MS. FRASER: Not that I am aware of, your Honor.

22 THE COURT: To the extent it has been used, and you

23 have to object if you object to this, counselor. I am

24 looking at the plaintiff's attorney.

25 To the extent it has been used, it sounds to me like

26 it was for a category of patients connected with the Agnew

27 Hospital as opposed to Joe, Joe has got a problem.

28 MS. FRASER: However, it could be for Joe. We do

1 have other health and safety exemptions throughout Welfare

2 and Institutions Code provisions in the Lanterman Act, for

3 example, regional centers are prohibited from purchasing

4 certain type of services, non-medical therapies, et cetera.

5 There is a health and safety exemption process that is

6 built-in there.

7 THE COURT: So when -- then the Department issued, I

8 think, was it a letter or regulation where essentially

9 said, you know, you can do this in a way that causes you

10 the least harm, was that a letter?

11 MS. FRASER: It was a letter, your Honor.

12 THE COURT: Right. Then the Department's position

13 is that the 1.25 percent doesn't have to come out of the

14 first four months of the year, that is the period between

15 July 1st, 2010, and October 19th, 2010, but it has to net

16 out at the 1.25 percent for the whole fiscal year; is that

17 true or not?

18 Do you understand my question? It was a cumbersome

19 questions.

20 MS. JUDITH Pfeiffer: I think so, your Honor. I

21 think the Department hasn't set -- if the question is, is

22 the Department flexible in how that money is recouped

23 versus the Department saying it has to be from the first

24 several months.

25 THE COURT: Well, and I can't remember whose

26 declaration this was, or whose pleadings. But my

27 understanding, a lot of folks have done it differently.

28 This is part of your equal protection claim.

1 Some folks have taken it all out right away, the

2 first -- send us a check. Some folks just make us whole by

3 the end of the year, and they have adjusted rates

4 accordingly. I assume, therefore, to do that some would

5 have to be higher than 1.25 percent reduction for the

6 remainder of the physical year, that would be October 19th,

7 2010, forward.

8 Different folks are doing it different ways based

9 upon what they think is appropriate, maybe working

10 relationships with providers, I don't know, fair statement?

11 MR. CARLOCK: Your Honor, it's my understanding --

12 everybody is talking about the same time periods worth of

13 money July 1st to October 19th.

14 THE COURT: Right.

15 MR. CARLOCK: And they look at the rates that were

16 actually paid for individual consumers for that time

17 period. Figure out what was actually paid, deduct, you

18 know, multiply that by 1.25 percent. That's the amount of

19 money that they are looking to recover from each provider.

20 And the way in which they are recovering that is

21 where the differences come in. Some are saying send us a

22 check. Some are saying we'll deduct it from what we are

23 paying you normally for the months going forward. Some are

24 doing it in one month, and some are going to do it over

25 multiple months.

26 THE COURT: And the Department is from October 19th,

27 2010, forward has made a reduction in the money that is

28 actually sent to the regional center in an amount

1 sufficient to recover 1.25 percent for the entire fiscal

2 year; is that a fair statement?

3 MS. JUDITH Pfeiffer: Yes, yes. That's correct.

4 THE COURT: And so the remedy sought here is strange

5 because in some instance the remedy would be to ask the

6 regional center to -- let's just take one regional center,

7 and let's assume they -- they have 250 thousand dollars.

8 Okay. That they have -- that is owed to them by their

9 providers, okay.

10 That regional center may have collected the money,

11 and then you want a court order that says you are ordered

12 to discard that money back to the providers; is that a fair

13 statement?

14 MR. CARLOCK: Yes.

15 THE COURT: Other regional centers have not asked

16 and have not received money, but are just giving a smaller

17 amount of money as the fiscal year moves forward reflecting

18 the cut consistent with the answer I've received here.

19 MR. CARLOCK: I think that's fair. The only

20 exception that some regional centers haven't done anything

21 for the first three months. But all of them from, my

22 understanding anyway, applied the 4.25 to the billings for

23 the month of October which is eighteen days of retroactive

24 application.

25 THE COURT: Right. And there may be folks who then

26 would be shorted as you move forward in time because they,

27 they would receive less money than they should receive.

28 These are regional centers on a monthly basis

1 because although they got the 1.25 percent reduction, they

2 would get actually less than that reflecting the

3 application of that 1.25 percent reduction from the July to

4 October period.

5 MR. CARLOCK: That's correct.

6 THE COURT: And in that situation you would want me

7 to order the Department and controller to increase the

8 amount of checks that they send to the regional directors.

9 MR. CARLOCK: No.

10 THE COURT: Regional centers.

11 MR. CARLOCK: Ah, I don't believe so.

12 In that case the, the funds -- the funds that we're

13 talking about here were all paid to the providers in July,

14 in August, in September.

15 THE COURT: Um-um.

16 MR. CARLOCK: Now, in October it's a little bit of a

17 different animal because we have the month. It was applied

18 to that month.

19 THE COURT: So who holds the bag here, the regional

20 centers or the Department?

21 MR. CARLOCK: Both. Well, the regional center, the

22 Department has taken the position that the implementation

23 of this is the regional centers, and the statute directs

24 the regional centers to reduce payments.

25 THE COURT: Well.

26 MR. CARLOCK: But.

27 THE COURT: Let me approach this another way.

28 MR. CARLOCK: Our basic point in the remedy is if

1 they haven't collected it already, they shouldn't collect

2 it. To the extent they have collected it already from the

3 veterans, they need to return it.

4 THE COURT: And if they are -- this is just as to

5 the regional center?

6 MR. CARLOCK: That's correct.

7 THE COURT: You not seeking anything with regard to

8 the Department?

9 MR. CARLOCK: Ah, only, only that they also abide by

10 the rule that it not being implemented retroactively. They

11 have taken the position they are not implementing it.

12 THE COURT: You got to slow down here.

13 MR. CARLOCK: Sure.

14 THE COURT: There is a net reduction on a fiscal,

15 annual fiscal year basis of about four-tenths of a percent,

16 maybe three-tenths, four-tenths of a percent less money.

17 Fair statement?

18 Right? It's a quarter -- 1 and a quarter percent.

19 There is no argument that the legislature can properly do

20 that for eight months out of the year. There are four

21 months where they are arguing it was done improperly.

22 The Department's position is hold it. We're going

23 to give a net amount for the fiscal year that reflects the

24 full 1.25 reduction, and that would include the portion of

25 that roughly four-tenths of a percent that would have --

26 and should not have been paid between July 1 and October 1.

27 Are you with me? Is that a fair statement?

28 MS. JUDITH Pfeiffer: Yes.

1 THE COURT: So the regional centers are going to get

2 less this fiscal year from the Department of Developmental

3 Services in the total amount of about six million dollars

4 than they would have otherwise, right?

5 MR. CARLOCK: No. The Department paid the regional

6 centers for July, August, and September according to a 3

7 percent reduction. They got the amount they should have

8 been getting. They paid that money out.

9 THE COURT: Yeah, but they're going to withhold and

10 increase amount for the remainder of the fiscal year to

11 equal the 4.25 reduction for the entire year.

12 MR. CARLOCK: I don't think they have the authority

13 to do that. I think under the prospective implementation

14 of this bill means that the State is not going to save 25

15 million dollars. It is going to save eighteen million.

16 THE COURT: I don't believe you sought that as

17 relief, but I could be wrong. I want to make sure I'm

18 right here.

19 You've reduced your monthly payments to the regional

20 centers to reflect a reduction of 4.25 percent for the full

21 fiscal year July 1, 2010 to June 30th, 2011?

22 MS. JUDITH Pfeiffer: That's correct.

23 THE COURT: They are getting less.

24 MR. CARLOCK: There is no evidence to that effect in

25 the record, but other than some head nodding here, I

26 suppose in court.

27 THE COURT: Yes, I don't know whether it is evidence

28 or not, but maybe it's improper to consider, but I just

1 point out to you, you're -- you've asked just a minute ago

2 a remedy based upon that evidence that I order them to

3 increase the amount of their payment on a monthly basis

4 from this point forward to reflect the fact that four

5 months was --

6 MR. CARLOCK: Your Honor, it's not that I don't

7 think the Department failed to pay the regional centers for

8 those three months. I think they reduced it 3 percent. I

9 don't think they reduced payments to the regional centers

10 four and quarter percent. It wasn't until October that

11 anybody reduced anything.

12 THE COURT: Well, maybe you are not asking for this.

13 It doesn't matter. What they said here and which makes

14 sense to me is that from October forward, they are going to

15 increase the amount of reduction above 4.25 to an amount

16 sufficient to offset the reduction that they did not impose

17 in July, August and September.

18 MR. CARLOCK: I think they might need to do that if

19 the Court grants relief, and the State is not able to save

20 the full amount it intended to save originally. To do

21 that, to reduce the payments going forward anything other

22 than it's my interpretation that from October 19th, forward

23 the amount, the Department should be paying the regional

24 center should be reduced by four and a quarter. The

25 regional center shouldn't be harmed either.

26 THE COURT: I don't understand.

27 MR. CARLOCK: The State's reduced is now -- from

28 October forward is reducing the amount it is paying to

1 regional centers by four and a quarter percent. The

2 regional centers are passing that reduction along to the

3 providers by reducing their rates four and quarter percent.

4 If the State sought to recover additional money from the

5 three months from the regional centers, I think that that

6 would also be a retroactive implementation of the statute.

7 THE COURT: That's what I understand they were going

8 to do. Let me go back here. My questions were cumbersome.

9 My understanding is you are going to reduce them

10 more than 4.25 percent or have been since October forward

11 so that you end the year with a net 4.25 reduction. So it

12 might be 4.5 percent from, you know.

13 MS. JUDITH Pfeiffer: That's correct, your Honor.

14 THE COURT: And so I am not sure you sought that as

15 a remedy in your lawsuit.

16 MR. CARLOCK: I don't think there was any evidence

17 that is what was going to happen, your Honor. The -- if

18 the Department -- if relief is denied in this case, and the

19 4.25 percent is allowed to be recovered, then presumably, I

20 guess, that is passed along back to the State, and they

21 save all the money they plan to save.

22 There is no reason to reduce the payments to

23 regional centers by anything more than 4 and quarter

24 percent.

25 They save 4.25 percent from October going forward,

26 and they recover the four and quarter percent retroactively

27 back to July 1st.

28 THE COURT: Yeah, but they are not recovering it

1 from a lot of people. I am relying on information you've

2 provided me.

3 MR. CARLOCK: They have not yet recovered it.

4 THE COURT: Yeah.

5 MR. CARLOCK: Because most of the regional centers,

6 from my understanding, and based on our stipulation are

7 going to wait to see whether they are allowed to recover it

8 or not. If they are, then there is no additional harm to

9 the State, and if they are not, then the money should have

10 never been deducted in the first place.

11 THE COURT: Fair enough. Probably spent more time

12 on this than was needed.

13 Did you have anything else on that, I am sorry?

14 MS. JUDITH Pfeiffer: I don't think so, your Honor,

15 if the Court has anymore questions or requests

16 clarification from us.

17 THE COURT: It is fair to say -- I am not going to

18 say that because it's not helpful.

19 Okay. Let me hear you first just on the issue of

20 impairment of contract and whether or not it is significant

21 if it exists and whether or not it is a proper exercise of

22 police authority.

23 I will give you an opportunity to speak later to

24 other things, but obviously this is the issue that at least

25 in my mind I want to be particularly careful with and some

26 of the other issues are quite candidly much more direct.

27 Do you have anything else on this?

28 MR. CARLOCK: Yes, your Honor. I think you are

1 exactly right that the contract's clause issue is the crux

2 of the argument here and more than likely it is

3 determinative.

4 Certainly, it is our position, you know, as we've

5 explored a little bit the rate setting process. It is a

6 convoluted process, but each program has its own rates.

7 Some of them are set in statute. Some of them are set in

8 rate tables that are determined by the Department. Others

9 are set by negotiations, but all of them are rates.

10 All of them are established, and all of them are

11 contracts which we contend can be impaired.

12 Retroactively changing the amount of payment after

13 the payment has already been made is clearly in our view an

14 impairment. It is a substantial impairment.

15 The amount, the dollar amount will vary from one

16 provider to the other. Some of the larger --

17 THE COURT: What are we talking about here? We're

18 talking about on the fiscal year basis, we're talking about

19 six and a half million dollars that's roughly right; is

20 that right?

21 MR. CARLOCK: That's correct. I think, and that's

22 for the three month period.

23 THE COURT: That's three month period.

24 MR. CARLOCK: Yes.

25 THE COURT: What's the annual expenditure as a whole

26 for the contracts?

27 In other words, if, if three months at 1.25 percent

28 is six million dollars, then I assume we're talking

1 somewhere in the area of, what, you tell me.

2 MS. FRASER: It was about 25 million dollars that

3 was projected in terms of the 1.25 percent reduction.

4 THE COURT: For the whole year?

5 MS. FRASER: Yeah, for the annualized.

6 MR. CARLOCK: But for the purchase of services

7 across the board, the State budget for purchase of services

8 is in the ballpark of -- for two hundred twenty thousand

9 individuals about two billion dollars.

10 THE COURT: So, we're talking on a whole fiscal

11 year, we're talking 25 million out of two billion. And

12 we're talking in terms of the amount in dispute here which

13 falls within the context of your impairment of contract

14 theory, we're talking about 6.5 million out of two billion;

15 is that a fair statement?

16 MR. CARLOCK: Across the board, yes. 1.25 percent

17 is applied to every program, is applied to every provider,

18 is applied to every individual who receives these services.

19 The -- the community, the community based budget,

20 there are several different facets. Part of that is

21 developmental centers. Part of that is the purchase of

22 services in the community.

23 At the time these contracts were entered into, that

24 they were in effect in July, August and September, the law

25 of California was that there would be a 3 percent

26 reduction. That's what vendors relied on in providing

27 services.

28 Many vendors as the declaration spell out have been

1 having a lot of difficulty keeping their doors open and

2 attracting quality staff and providing services with the 3

3 percent reduction on top of all the other rate freezes and

4 other things that have been in effect.

5 This additional 1.25 percent reduction exacerbates

6 that. They were not able to plan ahead, that was an issue

7 I think that was addressed in here. They didn't know what

8 the amount of the cut would be, when it would be and

9 whether it would be retroactive.

10 So there was no way they would have assumed that it

11 would be, and that they knew it was going to be one and

12 quarter proactively laid off people. It was after services

13 were provided, after the regional centers sent them

14 invoices with a 3 percent reduction on it.

15 They filled in the days of service and returned them

16 to the regional centers, and the regional centers paid them

17 with the 3 percent reduction for those three months.

18 Those contracts were completed. They are monthly

19 invoices. These are fully executed contracts that now in

20 October the State wants to reopen and go back after

21 services were provided and reduce the amount, not even

22 reduce the amount of payment because the payment has

23 already been made. They want to take back part of the

24 payment that had been made for services that have been

25 provided.

26 Providers can't retroactively fire 1.25 percent of

27 their staff or cutback their hours, or benefits, or pay

28 less rent. They've already incurred all those costs, so it

1 is a substantial, it is a fundamental impairment of the

2 contract.

3 Changing the price for something after you've

4 already paid for it, it doesn't get much more fundamental

5 than that in our view.

6 And on -- so we do believe that is an impairment of

7 contracts, we believe the impairment is substantial because

8 it impairs every single one of those contracts across all

9 service categories, and 1.25 percent while taken in

10 isolation may seem to be a relatively small percentage on

11 top of frozen rates and existing 3 percent reduction, and

12 all the other strings on the system, the cuts to the other

13 services that these individuals are also getting, the

14 impacts on the providers as set forth in their declarations

15 are going to be substantial.

16 The range of the largest provider, I think, that was

17 a named plaintiff here said the retroactive recovery for

18 these three months alone would be about one hundred

19 thousand dollars that they've already been paid that they

20 would have to return.

21 THE COURT: Is there anything in the bill 850 that

22 eases responsibility for the provider reporting

23 requirements, such as that? I read some language to that

24 effect.

25 MR. CARLOCK: There is language in there that was

26 included in the bill that allows a regional center to relax

27 requirements on a provider who has been subjected to the

28 additional, to the additional request.

1 This was originally, I think, proposed as something

2 called provider relief. But rather -- the language turned

3 out was rather than allowing the provider to request relief

4 if they were having trouble, it would be something that

5 would be within the discretion of the regional center

6 whether or not they wanted to grant that.

7 THE COURT: Do you have that language? Do you have

8 that language? Let me just read that.

9 MR. CARLOCK: Also, your Honor, in the

10 documentation.

11 THE COURT: Let's not move away from that. I want

12 to read that language. I need a 30 second break. This

13 will give me a chance to find it. I just want to look at

14 that language again.

15 (Brief pause.)

16 THE COURT: Thank you for your patience.

17 Yes, sir, did you find that? Why don't you bring it

18 up. Let me take a look at it whoever has it.

19 (Brief pause.)

20 THE COURT: Just so we're on the same page, this was

21 a provision I was referencing. It is 4791 of W and I. And

22 I think you said what you wanted to say about that, but I

23 don't want to cut you off.

24 MR. CARLOCK: Couple things on that, your Honor,

25 first of all, the administrative relief language, as I

26 said, is something that the regional center can choose or

27 not to implement.

28 In our brief, actually attached to my declaration is

1 Exhibit 4 was minutes from a meeting between DDS and the

2 regional centers in which I believe DDS asked and regional

3 centers responded that no regional centers have, in fact,

4 granted any providers any relief under this section.

5 I know it's fairly new, maybe that's to be

6 understood. But certainly during the period we're talking

7 about July 1st, to October 18th, nobody, no providers were

8 given relief.

9 Now, that we're here, obviously and this goes with

10 the health and safety exception in section 164 as well.

11 There is no way to retroactively give administrative

12 relief. The providers have already written the reports.

13 They've already met the staffing ratios, so in July and

14 August and September.

15 So there is no way now that the regional centers

16 could be back and relieve them from that, or grant a

17 retroactive health and safety exception when services have

18 already been provided and the staff has already been paid.

19 THE COURT: Some of these reliefs are not contingent

20 upon the regions, however, they don't have to provide the

21 reports however in D and E.

22 MR. CARLOCK: Those are just categories of things

23 that the regional center can exempt them from doing.

24 THE COURT: Right.

25 MR. CARLOCK: It's not in the discretion of the

26 provider whether or not they feel like submitting the

27 report.

28 And furthermore, your Honor, I think the only other

1 thing --

2 THE COURT: Let me have just a second.

3 MR. CARLOCK: Sure.

4 THE COURT: D and E are stand-alone provisions.

5 They are not conditional on 4791. Anyway, go ahead.

6 MR. CARLOCK: I think the only thing I want to say

7 that I still want to say about that, your Honor, the fact

8 that they did include some language that, the health and

9 safety exception and the administrative relief possibility

10 is no indication, certainly no greater indication that

11 there was an intent for this to be retroactive.

12 I think they may have a point that there might have

13 been some intent to mitigate the consequences of the

14 reduction. I see that. But I don't think they were added

15 for the purpose of compensating for the fact that they were

16 going to apply it retroactively.

17 THE COURT: Fair enough. Did you have anything

18 else?

19 MR. CARLOCK: On the police power issue, I think

20 that the cases we've cited are pretty clear that saving

21 money which is the only assertive justification for this

22 impairment of contracts is not a valid -- cannot support an

23 exercise of the police power by itself.

24 The bill itself, they mention several times, the

25 budget crisis, and fiscal energy and those sorts of things,

26 none of that is anywhere in the bill.

27 There is no assertion of any crisis let alone the

28 crisis as a justification for retroactive application other

1 than the date there is no mention of retroactivity. There

2 is no factual findings that are relied upon in the bill to

3 justify a retroactive application. To the extent that

4 there is any invocation of the public health and safety and

5 welfare, if there's an urgency clause at the end of the

6 statute that says it is necessary for this bill to take

7 immediate effect. There is no other factual findings at

8 all.

9 THE COURT: It's a trailer bill. It includes the

10 language in order to make the necessary statutory changes

11 to implement the Budget Act of 2010, you, yourself observed

12 in your pleadings it was a dire economic year.

13 I suppose the Court could take judicial notice of

14 the Budget Act of 2010, and the cuts that were made across

15 the State budget to reach a similar inference.

16 MR. CARLOCK: I think it is true there was one. But

17 that was not until the opposition brief in this case,

18 that's never been asserted as the justification for the

19 retroactive application. And, in fact --

20 THE COURT: Excuse me. It's included in the

21 language here. It says (As Read) "This act is an urgency

22 statute necessary for the immediate preservation of public

23 peace," so forth and so on. And it says "The facts

24 constituting the necessity are in order to make the

25 necessary statutory changes to implement the Budget Act of

26 2010," which is the Budget Act of 2010.

27 MR. CARLOCK: That's correct.

28 THE COURT: And what more would you say?

1 MR. CARLOCK: In order -- they don't say anything

2 more, that's exactly my point. There is no statement that

3 there is a budget crisis.

4 That the budget of 2010, needs to be retroactive in

5 order to meet some crisis, that isn't stated. Even if they

6 had stated this is a budget crisis, the cases are clear

7 that budget -- even the Supreme Court case that we cited,

8 but budgetary considerations alone are not sufficient to

9 support the State abrogating its own contracts in

10 particular. The State reducing its own obligation is

11 subject to scrutiny.

12 THE COURT: It's not the State's own contract. This

13 is a contract between the regional center and private

14 providers. They are nonprofit. The State does not sign

15 these contracts.

16 MR. CARLOCK: The State sets the rates which it now

17 does not wish to pay.

18 THE COURT: I understand they establish these rates,

19 but they are not -- this is not their contract. As a

20 matter of fact, the 1984, case I am familiar with because I

21 was in that side of the street at that time, made it very

22 clear that this authority for establishing individual

23 programs is with the regional centers. It is not with

24 them. By "them" I mean the State of California or the

25 services to be provided.

26 Anyway, go ahead.

27 MR. CARLOCK: So, your Honor, under strict scrutiny

28 since it is the State's obligations here that we're talking

1 about there is -- this is not a case where the State is

2 making a policy choice that we're going to take money from

3 X and give it to Y.

4 The only justification is we're looking to save 25

5 million dollars. So there is no -- in our view, there is

6 no legitimate State interest. It is certainly not a

7 compelling State interest, and retroactive application is

8 not the least restrictive means to serve that interest.

9 Prospective application would serve that interest just as

10 well.

11 If you are going to allow retroactive application,

12 you know, a reduction to zero would save the State the most

13 money. A retroactive application back to the rates as they

14 were three years ago would save the State more money.

15 In this case the reductions, in fact, don't protect

16 the public health, safety and welfare. They endanger

17 health, safety and welfare of the two hundred thousand

18 people that are served by these providers.

19 THE COURT: Fair enough. Now, I want to listen

20 briefly. I want to emphasize that briefly just because of

21 the length of the hearing and the length of the pleadings,

22 those who are here by telephone, if you want to speak and I

23 urge you to be brief.

24 If you not brief, I'll be compelled to cut you off.

25 I am sorry. I have another matter yet this afternoon that

26 is equally as difficult as this.

27 Now, on the phone, yes?

28 MS. Pfeiffer: Your Honor, this is Judith Pfeiffer,

1 and I would ask nothing to add except to point out that

2 only one regional center has collected the retroactive

3 funding, and beyond that I would submit on the papers.

4 THE COURT: Hmm. So the net effect of the lawsuit

5 then from the petitioner's point of view is only as to one

6 regional center to order them to discard the funds?

7 MS. Pfeiffer: That's correct.

8 THE COURT: I am asking --

9 MR. CARLOCK: No, your Honor, the one regional

10 center that collected three months retroactive would be

11 compelled to return it.

12 The other regional centers would be enjoined from

13 collecting it, and all the regional centers did apply it to

14 October. There is eighteen days of October that all the

15 regional centers would have to refund.

16 THE COURT: Fair enough. And I think there is

17 another person by phone.

18 MR. COLE: Yes, Rufus Cole, your Honor,

19 unfortunately the end of the argument I was cutoff, so I

20 just rejoined the conference call. Has the Court made a

21 ruling?

22 THE COURT: No, I haven't. Why don't you sit tight,

23 I may or may not. I want to hear the last of the arguments

24 here. Let me hear then from the respondent.

25 I am obviously going to give the petitioner the last

26 word here. Is there anything else you have?

27 MS. JUDITH Pfeiffer: Your Honor, other than to

28 comment on some of the sort of the inaccuracies in terms of

1 analysis that petitioners state we don't have anything.

2 THE COURT: If you have comments to make, you ought

3 to make them now. I'm here.

4 MS. JUDITH Pfeiffer: Your Honor, I think what is

5 important to note in -- when a budget is passed as this

6 Court recognized as well, it does provide for retroactive

7 application. Now, this would be true even if the rates

8 were to increase.

9 If the State had a lot more money and they were to

10 get more money, that too would then be applied

11 retroactively not necessarily prospectively. So -- other

12 than saying it's sort of a known fact and that's how the

13 budget works.

14 Now, the Department didn't necessarily have the

15 funds to even pay for these services during that time

16 frame, and sort of going along with this analysis, then it

17 would be that the Department does not have an obligation

18 then to pay for that time frame until the budget has

19 passed.

20 But we did make arrangements and did pay for those

21 using funds from other services other than what has already

22 been allocated through the budget through the general fund.

23 So it's implied that that's how the budget works.

24 Not everything comes to a standstill and we make all

25 efforts to make -- to make sure that services are provided.

26 Going along with that is the statutory provisions

27 and the regulations provides for this very type of

28 situation. And we've cited to that, and so I don't want to

1 keep repeating it.

2 We did cite in the regulations again the fact that a

3 lot of these are contingent upon appropriation from the

4 Budget Act and that the payments, we ask the regional

5 centers to make sure they include in their contracts with

6 these service providers that payments under the contracts

7 are dependent on the availability of State finding.

8 Availability that exactly confirms the fact that

9 those moneys may not always be available. Those moneys

10 can't necessarily be guaranteed depending on the next

11 year's budget. And it is within the State's larger

12 responsibility to make sure that they take care of all of

13 their stabilizing the State finances, you know. That's

14 part of the process.

15 And the Court accurately noted too, it is really a

16 contract between the regional centers and service

17 providers. It is a voluntary one. I am not going to

18 discuss Medicaid issue that was raised in the reply brief

19 as a new argument by petitioners, unless the Court would

20 like us to address those issues.

21 But the fact that this is one of those where the

22 State is not directly contracting the provider. It is a

23 voluntary basis with the understanding there is going to

24 need to be some flexibility.

25 And I am not going into the due process argument, or

26 equal protection argument, or the statutory clarity of the

27 statute, statute interpretation so-to-speak. The actual

28 impairment is as this Court noted would be something along

1 the lines of 6.5 million of the two billion dollar fund

2 appropriation.

3 THE COURT: Thank you, ma'am.

4 Yes, sir, last word.

5 MR. CARLOCK: Yes, your Honor. I think as you

6 recognized, we've thoroughly briefed the issue of intent

7 and the language of the statute.

8 The Court will either find intent for it to be

9 retroactive or not. Our position is of course is that

10 there is not sufficient and certainly not explicit intent.

11 Statement of intent, but that being said even

12 assuming the Court somehow designs an intent for it to be

13 retroactive, our position is that it is unconstitutional

14 under the contract clause of the State and Federal

15 Constitution and that the budget considerations are not

16 sufficient justification for the State's exercise of police

17 power.

18 I think the due process and equal protection claims

19 sort of trailed from that and are contingent on their being

20 interference with the contract.

21 For the State to claim that this is going to address

22 severe budget shortfall that necessarily entails that they

23 plan to save a significant amount of money. So if there is

24 an impairment, then by definition if the act is doing what

25 they want it to do, it's going to be a substantial

26 impairment.

27 In terms of the remedy, I think the exact mix of how

28 it would be put together is obviously within the Court's

1 discretion. As you recognize, because we have State

2 parties here, we have providers and we have regional

3 centers, you know, nongovernmental, nonprofit and entities

4 we believe that in addition to the mandamus relief that

5 declaratory and/or injunctive relief would be needed so

6 that all the parties understand how it is to be implemented

7 and not to be implemented.

8 Also, just so we have a clean record, we would

9 request a written Statement of Decision under section 632

10 of the Code of Civil Procedure.

11 And if the Court is inclined to grant relief, we

12 would ask the Court to retain continuing jurisdiction.

13 Obviously, we hope that we can implement it all, whatever

14 the Court's ruling is on our own. However, there are a lot

15 of moving parts here and at lot of parties across the State

16 that are going to be affected one way or the other by this.

17 We would ask the Court to retain jurisdiction.

18 THE COURT: Very well. And let me talk to my

19 people. I'll be right with you.

20 (Brief pause.)

21 THE COURT: I am going to rule at this time. I will

22 rule from the bench and this fulfills of course the

23 requirements of a statement of decision.

24 I am going to speak very briefly to a number of the

25 petitioners' theories, and then I'll speak at some length

26 with regard to his theories surrounding the issue of

27 impairment of contract.

28 First, I am only going to speak to the issue of

1 intent briefly. One, because the Court in the context of

2 the hearing on the TRO preliminary injunction already

3 addressed this issue, and although there has been

4 substantial additional pleadings and information,

5 background information provided, fundamentally the facts

6 don't change with regard to the wording of SB 853.

7 By its terms, it clearly applies retroactively from

8 the period July 2010 to June 30th, 2011, at a rate of 4.25

9 percent reduction that represents the increase reduction of

10 1.25 percent.

11 The statutory language is clear. It is acceded even

12 in the argument here today that the statutory language is

13 married to and consistent with the actual budget funds

14 appropriated in the budget on October 12th, 2010, which

15 corroborates even though corroboration isn't needed, the

16 statutory terms making it clear that it is retroactive.

17 This situation has no connection with the American

18 National Bank case or other similar cases that are cited at

19 some length by the petitioner because there is no evidence

20 of mistake. In these other cases, most notably the one the

21 petitioner relies upon American National Bank; there is

22 evidence of mistake. There is none here.

23 The trailer bill was passed in the normal process of

24 the legislative cycle. There was all the background that

25 both sides direct my attention to that really don't control

26 my determination.

27 The trailer language is consistent with the budget

28 bill as adopted, and it specifically sets forth the time

1 frame of the reduction.

2 There are a variety of other theories that the

3 petitioner raises, which I am not going to address because

4 quite candidly they are addressed adequately in the

5 responsive pleadings filed by the respondent here, most

6 notably, equal protection, due process, and the like.

7 There are a number of alleged constitutional infirmities,

8 and they're essentially without merit. One could even

9 argue frivolous.

10 The claim with regard to the impairment of contracts

11 however is more substantive, and obviously that's where I

12 devoted my time today with questions to assist me in the

13 evaluation.

14 The initial question, the fundamental question of

15 course is whether there is an impairment of contract. I

16 would note, not controlling, but at least of import

17 distinguished from a variety of cases cited by the

18 defendant, most recent decision by Judge Damrell involving

19 853, for example, and private contracts between the State

20 of California and hospitals, that this is not a situation

21 where privity of contract exists between the State of

22 California and these individual entities.

23 The regional centers which are private entities unto

24 themselves who by law have the authority to control

25 individual plans for the disabled individual, and by that I

26 mean control the type of care that that person receives, is

27 not a governmental entity.

28 The Department of Disabilities does not have that

1 authority. The regional plans then to meet the needs of

2 the individual clients enter into contracts with other

3 private entities to provide services in the manner that

4 they determine to be appropriate with necessary approval

5 from the regional center.

6 The role of the State Department of Disabilities is

7 an oversight role, a monitoring role in terms of compliance

8 with State laws. It fundamentally has a different

9 character.

10 It's because of that, that the language with regards

11 to the appropriations takes on a different form that you

12 see both in the statute and in the contract. And by that I

13 mean, yes, there is a mechanism where the fundamental rates

14 are promulgated as has been discussed at this hearing by

15 the Department of Disabilities.

16 But those rates are promulgated pursuant to 4681

17 that requires that those rates will be subject to the

18 appropriation of sufficient funds for the purpose -- for

19 such purpose in the Budget Act.

20 The logical reading and reasoning from that is that

21 in the failure to appropriate sufficient funds there has to

22 be an appropriate reduction in the rates. For the private

23 entity to receive the funds they need or want, they have to

24 have two things. The contract between the regional center

25 and the private entity and the appropriation of sufficient

26 fund as called for in 4681.

27 The Court when it looks at the declaration as

28 prepared by Pamela Jensen. I think I said Chad Carlock

1 during the hearing which is just an error and submitted by

2 the petition.

3 We can see this concept of the statutory language

4 carried forward with the use of such terms in the contract

5 itself, or in the billing documents itself funding after

6 the end of the current fiscal years contingent upon

7 adequate State funding, or in the contract itself, payments

8 where services will be made dependent upon the availability

9 of State funding.

10 In the facts before me as is now true every year

11 with the State budget, unfortunately, but true, the budget

12 was adopted post July 1 of 2010, post the beginning of the

13 new fiscal year.

14 The State incurs no obligation absent a budget

15 document to pay funds to any contract entered into between

16 the regional board and the private entities. As a matter

17 of custom and practice based upon information garnered at

18 this hearing, the State pays money.

19 The Department assumes through the State Controller

20 in some instances, in other instances the regional centers

21 borrow money, but there is no legal obligation that the

22 State has or that the legislature -- or the Court can

23 impose upon the legislature to appropriate money to satisfy

24 an existing contract.

25 In the instance at hand, the legislature choose to,

26 as I ruled earlier, to reduce the funds that otherwise

27 would be available by 1.5 percent. In so doing, they did

28 not interfere with a contract that they entered into.

1 They exercised authority that they are obviously

2 entitled to do, and they did so within the constraints of

3 4681 with regard to their action being necessary before

4 funds would actually be made available to the regional

5 center to pay for the contracts in question.

6 So the Court -- I recognize that this is not without

7 doubt because of the existence of the rate structure, but I

8 believe the weight of evidence here supports the conclusion

9 that there was not the interference with contracts, the

10 impairment of contracts that is consistent with other cases

11 cited where there are direct existing private contracts,

12 for example, between the State and a private entity.

13 I want to go forward because there is a question

14 even if there were an impairment of contracts whether or

15 not it was substantial, and the quantification alone is

16 not, not controlling, but in this instance it is

17 appropriate. There is a 6.5 million dollar reduction for

18 the time period involved, that's July 1, 2010, until

19 October 19th, 2010. That would be the theory when it's

20 applied retroactively to impair the contract.

21 That represents 6.5 million out of a two billion

22 dollar expenditure directed at this very needy clientele.

23 Now, I would not vote for this reduction, but I am not a

24 legislator. I'm a judge, and in evaluating whether or not

25 it's a substantial impairment, you have to begin with

26 looking at the amount of the reduction versus the

27 expenditure as a whole, and in that context it's not

28 substantial.

1 The argument made that there have been previous

2 reductions is an argument that has merit. Death by a

3 thousand cuts is an argument that is not without merit here

4 particularly to this highly needful population;

5 But it doesn't unto itself certainly negate the

6 amount of money spent as a whole versus this comparatively

7 small additional reduction.

8 Moreover, you have to look at the actions that the

9 State took concurrently with this. Actions which contrary

10 to the argument of the petitioner would be available and

11 could be applied retroactively as well.

12 One, for example, is the language that affords the

13 opportunity that the regional center can avoid the reduced

14 payments to protect the health and safety of an individual

15 from the reduction of services in support that otherwise

16 would be implemented by this reduction of 1.25. This has

17 to be done with the approval of the State Department of

18 Services.

19 This can be applied retroactively just as a remedy

20 of this court would be applied retroactively if granted in

21 this case, and that optional remedy and relief can be

22 considered in evaluating the significance of the reduction.

23 Additionally, there are reductions set forth in

24 4791, a panoply of them, some trivial, some of more value

25 ranging from the reduction of elimination of the

26 requirements to file some reports and to various staffing

27 exemptions for requirements.

28 These two, although, not directly applicable to the

1 four-month period necessarily or would concurrently or

2 prospectively, I guess, would be a better word, provide

3 financial relief which would benefit the fiscal year as a

4 whole and to that extent certainly the impact from the

5 first four months.

6 Finally, the Department itself, the implemented

7 regulations that gave a lot of flexibility as to when the

8 1.25 percent reduction is to take hold, I assume, although

9 it wasn't stated, this was in recognition that roughly four

10 months of the fiscal year had already passed; indeed, there

11 is information presented by the petitioner in this hearing

12 that one of the -- only one of the -- I think there are 22

13 or 23, I can't remember, how many are there now regional

14 center?

15 MS. FRASER: Twenty-one regional centers, your

16 Honor.

17 THE COURT: My memory is not good. Twenty-one

18 regional centers actually demanded or received this 1.25

19 percent payback for the first four months, the others have

20 not.

21 The Department in their letter -- it wasn't a

22 regulation, excuse me, set forth language that gave them

23 flexibility, that is, the regional centers flexibility to

24 implement the 1.25 percent net reduction in the fiscal year

25 throughout the course of the year if they so choose in a

26 manner that minimized the impact on the regional centers

27 and thereby the service providers.

28 Finally, this argument actually is the one I think

1 is hardest for the petitioner. There can be arguments with

2 regard to whether or not there was an impairment. I found

3 there was not for the reasons stated. There can be

4 arguments that it was substantial. I found that it was not

5 for the reasons stated.

6 But from the Court's perspective, the arguments that

7 this is a proper use of the police power even if it is an

8 interference with contract and impairment of contract, and

9 even if it is substantial, it is very strong.

10 And by that, I mean, this is from the Court's

11 perspective properly within the power of the State

12 legislature to make this type of a budget decision.

13 The petitioner is correct in pointing out that they

14 don't use the word "fiscal emergency" in adopting 853,

15 particularly in this one section.

16 They do use the urgency statute language,

17 preservation of the public peace health or safety. They

18 point out that this was to implement the Budget Act of

19 2010.

20 The Court, I think, and the petitioner acceded here

21 in the oral argument can effectively take notice that the

22 Budget Act of 2010, reflected a dire economic condition for

23 the State of California, and they were inferentially and

24 logically compelled to make cuts that they otherwise would

25 certainly not want to make and this was one of them.

26 They should adopt the budget in a more timely

27 fashion. They don't. They didn't. But this is part of a

28 package to adopt a balanced budget as balanced as it could

1 be which addresses a spectrum of State services ranging

2 from public safety to health, to social services as we have

3 here and a variety of others.

4 The Court is required to give some deference to the

5 legislature in this type of a decision, and I believe in

6 this context -- in the context of the whole given the size

7 of the reduction, the mitigation measures that were

8 specific that were included with it even if it's an

9 impairment of a contract, which I don't believe it is, if

10 it is, it does not exceed the bounds of authority the State

11 has under its police powers.

12 The relief sought by the petitioner is therefore

13 denied.

14 I will ask the respondent to prepare a pleading --

15 strike that, judgment consistent with my ruling.

16 MS. JUDITH Pfeiffer: Yes, your Honor, I will.

17 THE COURT: Thank you.

18 MR. COLE: Thank you.

19 MR. CARLOCK: Thank you, your Honor.

20 THE COURT: Okay. We're shutdown for Jodee here.

21 (Hearings concluded.)

22 --o0o--

1 CERTIFICATE OF CERTIFIED SHORTHAND REPORTER

2
STATE OF CALIFORNIA )
3 ) ss.
COUNTY OF SACRAMENTO )
4

5 I, Jodee H. Weinrich, hereby certify that I am an

6 Official Certified Shorthand Reporter, and that at the

7 times and places shown, I recorded verbatim in shorthand

8 writing all the proceedings in the following described

9 action completely and correctly, to the best of my ability:

10 Court: Superior Court of California,
County of Sacramento
11
Judge: HON. LLOYD G. CONNELLY
12
Case: The California Disability Services
13 Association, et al., petitioners
vs. Terri Delgadillo, et al., Defendants.
14
Case No.: 34-2010-80000709
15
Dates: Friday, April 19, 2011
16

17 I further certify that my said shorthand notes

18 have been transcribed into typewriting, and that the

19 foregoing pages 1 to 53, inclusive, constitute an accurate

20 and complete transcript of all of my shorthand writing for

21 the dates and matter specified.

22 I further certify that I have complied with CCP

23 237(a)(2) in that all personal juror identifying

24 information have been redacted, if applicable.

25 Dated: April 19, 2011

26 ___________________________________

27 JODEE H. WEINRICH RPR, CSR NO. 3060