Privatization Goal Elusive for Wilson

SACRAMENTO — It was one of Gov. Pete Wilson’s most ambitious undertakings. The Republican governor embarked on an effort to turn many government functions over to private enterprise, and in the process weaken California’s Civil Service system.

To help wage that war, the Wilson administration, convinced that state lawyers could not adequately represent it, enlisted the Los Angeles law firm of Irell & Manella, one of the largest and most powerful in the state.

But when he leaves office in January, Wilson’s goal of privatizing many government functions will have largely eluded him--so much so that even the law firm that argued his position finds itself on the defensive, facing the prospect of having to repay $280,000 it received in legal fees for one of the cases.

“Truth be told, we weren’t successful, but certainly not for a lack of trying,” Wilson spokesman Sean Walsh said Wednesday.

The single biggest loss came in May 1997, when the state Supreme Court rebuked the Wilson administration, represented by Irell & Manella, and sided with California’s public employee unions by upholding the state Civil Service system, thus limiting the state’s ability to hire outside contractors.

Then last week, the administration, trying to wrap up work before Wilson leaves office, settled a second attack on the Civil Service system that Irell & Manella had been handling.

In the lawsuit settlement, the state agreed to significantly limit its use of outside engineers on the major rebuilding of the San Francisco-Oakland Bay Bridge and have the California Department of Transportation hire 1,000 new state engineers and others.

Now, as if to underscore the public employees’ victories, the Assn. of California State Attorneys and Administrative Law Judges, the union that represents state lawyers, is seeking to force Irell & Manella to forfeit to the state the full $280,000 it received for one of its contracts to represent the administration.

The case is likely to remain in the courts long after Wilson turns his office over to Gov.-elect Gray Davis. Davis, who won election with strong backing from public employee unions, is expected to pare back the practice of giving government work to private firms.

But although he might do so by, for example, hiring more state workers, a victory by public employee unions in the Irell & Manella case would go further still in restricting the already hobbled privatization movement in California.

“This case is going to put the departments on notice and the contractors on notice that the [law] means something,” said Steve Bassoff, a lawyer for the union seeking forfeiture of the $280,000. “Contractors will be aware that their contracts will be subject to review, and they may be liable.”

Attorney Gregory Smith of Irell & Manella said he hopes the union will drop the case now that it has either won or settled the lawsuits involving his firm, an idea that Bassoff called “wishful thinking.”

Like Smith, Wilson spokesman Walsh said he hopes the union will drop the case. “I caution them from taking the Gordon Gekko route,” he said, referring to a ruthless movie character. “They should graciously take their winnings. They brought a lot of benefits to their membership.”

However, if the union persists and the law firm loses in court, Smith warned, “legitimate contractors would be timid in accepting new work” from the state, for fear that they might be ordered to give back money paid after they’ve completed their work.

The concept of contracting out is an idea that several conservative think tanks had championed for years. Wilson took up the cause at the start of his second term, touting it as a way to cut government costs and boost private enterprise, while also burnishing his own credentials as a fiscal conservative.

With much fanfare, the governor issued a report just before the income tax deadline in April 1996 calling for privatizing state functions, ranging from the $7.3-billion workers’ compensation fund and road maintenance to repair of state vehicles and operation of state warehouses.

As it turned out, his administration managed to make only minor gains. Legislation he wanted stalled, and a ballot measure he proposed to unravel the Civil Service system never materialized.

Then, there were the court actions.

The administration was embroiled in a lawsuit with public employee unions over Caltrans’ desire to hire private engineers and contractors to speed up the rebuilding of hundreds of bridges and overpasses damaged by the 1992 Northridge earthquake, or those in danger in future quakes.

At first, the California attorney general’s office and Caltrans lawyers represented the state in its battle with the unions. In fact, the state won early rounds at the trial court level and before the state Court of Appeal.

But the administration decided to broaden its attack, appealing what already was a victory to the California Supreme Court in the hopes of significantly weakening the constitutional provision that established the state Civil Service system in the 1930s.

To argue its case, the administration tapped Irell & Manella, concluding that deputy attorneys general and other state lawyers would have a conflict of interest.

The conflict, the firm’s attorneys later argued in a brief, was this: “Had Irell & Manella succeeded on behalf of Caltrans before the Supreme Court, the result would have been far-reaching, affecting the job security of every Civil Service worker, including attorneys.”

The administration lost. In May 1997, the high court in a 5-2 ruling said the state could hire outside firms only in rare instances, such as when private companies could do work for less money, when state workers lacked special expertise or in an emergency.

As union lawyers fought the administration in the state high court, the Assn. of California State Attorneys filed a separate appeal with the State Personnel Board, challenging the legality of the decision to hire Irell & Manella in the Supreme Court case.

Personnel Board Rules Against the State

Under state law, the state can hire private law firms, but only for a few narrow reasons, among them that state lawyers have a clear conflict of interest.

The Personnel Board, composed largely of Wilson appointees, ruled in April 1997 that the state had failed to meet its burden. Caltrans, the board said, did not establish that “Civil Service attorneys have a conflict of interest that would prevent Caltrans from accomplishing its legal goals through representation by Civil Service attorneys.”

The union reacted by seeking to recoup for the state the $280,000 that Irell & Manella received for its work before the high court. A Superior Court judge in Sacramento refused to dismiss the case, prompting Irell & Manella to appeal to a state appellate court, where the case now sits.

Irell & Manella attorney Smith said the $280,000 is minor, accounting for perhaps “one tenth of 1% of our income” in a year. Still, the suit raises broader issues.

“A cause of action could be started at any time,” he said. “Contractors in every area would have to be concerned. It would be bad for California and would be bad law, and I believe the Court of Appeal would see it that way.”

Bassoff, the union’s lawyer, won a court order earlier this month directing Irell & Manella to turn over its billing records. The documents show that the firm has been paid about $680,000 for work on the two cases.

The state contract with Irell & Manella allows the firm to charge the state up to $350 an hour for its top partners. The state attorney general’s office charges agencies $98 an hour for its deputies’ legal work.

“Contracting out costs much more than it should,” said Bassoff. But he too believes that the point of the union’s lawsuit goes beyond the cost to taxpayers.

“We have a Civil Service system that has been approved by the voters three times” in ballot measures, Bassoff said. “If contracts can be entered into which are found to be illegal, but the money already has been paid, the Civil Service system can be circumvented. What do you do to get the money back?”