California State Employees' Assn. v. Williams

• Decision Date: 13 April 1970
• Citation: 7 Cal.App.3d 390,86 Cal.Rptr. 305
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA STATE EMPLOYEES' ASSOCIATION, a nonprofit corporation, Sylvia Fineberg and Walter W. Taylor, on behalf of themselves and all other taxpayers of the State of California, Plaintiffs and Appellants, v. Spencer WILLIAMS, as Administrator of the Health and Welfare Agency of the State of California, Houston I. Flournoy, as State Controller of the State of California, California Physicians' Service, a corporation, Hospital Service of California, a corporation, and Hospital Service of Southern California, a corporation, Defendants and Respondents. Civ. 12059.

Page 305

86 Cal.Rptr. 305

7 Cal.App.3d 390

CALIFORNIA STATE EMPLOYEES' ASSOCIATION, a nonprofit corporation, Sylvia Fineberg and Walter W. Taylor, on behalf of themselves and all other taxpayers of the State of California, Plaintiffs and Appellants, v. Spencer WILLIAMS, as Administrator of the Health and Welfare Agency of the State of California, Houston I. Flournoy, as State Controller of the State of California, California Physicians' Service, a corporation, Hospital Service of California, a corporation, and Hospital Service of Southern California, a corporation, Defendants and Respondents.

Civ. 12059.

Court of Appeal, Third District, California.

April 13, 1970.

Rehearing Denied May 7, 1970.

Hearing Denied June 10, 1970.

[7 Cal.App.3d 392] Wilmer W. Morse, Sacramento, for plaintiffs-appellants.

Peart, Hassard, Smith & Bonnington, by David E. Willett, San Francisco, for defendant-respondent Calif. Physicians' Service.

Musick, Peeler & Garrett, by Thomas M. Collins, Los Angeles, for defendant-respondent Hosp. Service of So. Calif.

Evans, Jackson & Kennedy, Sacramento, for defendant-respondent Williams.

Huovinen & White, by Joseph T. White, Jr., Oakland, for defendant-respondent Hosp. Service of Calif.

Thomas C. Lynch, Atty. Gen., by Robert Burton, Deputy Atty. Gen., Sacramento, for defendant-respondent Flournoy.

FRIEDMAN, Acting Presiding Justice.

The issue here is whether statutes and a contract calling for the conduct of administrative tasks of the state's Medi-Cal program by private carriers violate article XXIV, the civil service amendment of the State Constitution.

Several California decisions hold that this provision inhibits 'contracting out' state activities or tasks to private firms or persons. (Burum v. State Compensation Ins. Fund (1947) 30 Cal.2d 575, 184 P.2d 505; State Comp. Ins. Fund v. Riley (1937) 9 Cal.2d 126, 69 P.2d 985; Stockburger v. Riley (1937) 21 Cal.App.2d 165, 68 P.2d 741.) Plaintiffs, the California State Employees' Association and two taxpayers, contend that the contract in question is thus illegal and entails illegal expenditures from the state treasury. They seek to enjoin these expenditures. They appeal from an adverse judgment after the trial court sustained defense demurrers.

Defendants are the administrator of the Medi-Cal agency, the State Controller and the three contracting carriers (California Physicians' Service, Hospital Service of California and Hospital Service of Southern California). At the inception of this lawsuit defendant Spencer Williams was the Administrator of the Health and Welfare Agency in the state government. The Medi-Cal program is presently administered by the Director and the Department of Health Care Services. (Welf. & Inst. Code, §§ 14061--14062, 14100.1.)

The Medi-Cal program, a system of medical aid to the needy, was instituted under the authority of 1965 legislation and first went into operation on March 1, 1966. The legislation (Welf. & Inst. Code, § 14000 et seq.) includes provisions looking to the partial conduct of the program's administrative tasks by nongovernmental carriers of health service programs, such as insurance companies or medical groups. ¹ Under these provisions the Medi-Cal agency in February 1966 entered into an agreement with the three corporate defendants, contracting jointly as a single contractor. In effect the agreement notes their qualifications as 'carriers;' calls upon the contractor to receive all invoices for health services dispensed under the program, to pay accepted invoices, to reject improper or fraudulent claims, to maintain liaison with health providers, to assist in the development of safeguards and procedures, to maintain records and furnish reports; calls upon the state to establish the eligibility of persons seeking medical care and to furnish these persons with identification; requires the state to provide funds for disbursement and to pay for the contractor's administrative services at a specified rate. The agreement was to expire at the end of December 1966 but could be renewed indefinitely, subject to termination upon notice.

The complaint for injunction incorporates a copy of the challenged contract. It alleges that the contract has been renewed and is currently in operation; that the contractor has employed on a permanent basis numerous clerical personnel, auditors, investigators and administrators to perform the agreed work; that these persons are not civil service employees of the state; that the tasks performed by them are permanent and of the same character as those performed by civil service employees; that the authorizing statutes and the contract violate article XXIV of the State Constitution.

The trial court erroneously sustained general and jurisdictional demurrers on the ground that plaintiffs had failed to exhaust administrative remedies before suit. Of course, the general rule denies jurisdiction to grant judicial relief where Section 18670 is one of several laws which invest the State Personnel Board with investigatory and enforcement powers. ² These provisions empower the board to review and rectify the actions of employee-appointing powers which conflict with the civil service laws. (Ferdig v. State Personnel Board (1969) 71 A.C. 104, 114--115, 77 Cal.Rptr. 224, 453 P.2d 728.) They do not empower the board to adjudicate the contractual status of the defendant carriers or to intercept their payments from the state treasury. Plaintiff taxpayers have standing to maintain an equity suit to enjoin allegedly illegal expenditures. (Ahlgren v. Carr (1962) 209 Cal.App.2d 248, 252--254, 25 Cal.Rptr. 887.) The real target of such a suit is the State Controller, who is constitutionally designated to draw warrants on the state treasury. (Cal.Const., art. XIII, § 21.) The taxpayers' standing is not impaired by a concurrent power of the State Personnel Board to investigate the same charge of illegality. The board's supervisory and investigative power does not rise to the level of an 'administrative remedy' for solution of the taxpayers' grievance. (Rosenfield v. Malcolm (1967) 65 Cal.2d 559, 566--567, 55 Cal.Rptr. 505, 421 P.2d 697.)

the applicant has failed to exhaust an administrative remedy provided by law. The trial court viewed Government Code, section 18670, as the source of an administrative remedy which plaintiffs had bypassed.

Despite the trial court's erroneous ruling, the judgment will not be reversed if the demurrer should have been sustained upon any of the grounds urged. (Stowe v. Fritzie Hotels, Inc. (1955) 44 Cal.2d 416, 424, 282 P.2d 890.) Absence of any collision with the constitutional civil service provision was a separate ground urged in support of defendants' general demurrers. We turn to that issue.

Article XXIV of the State Constitution, adopted in 1934, provides for permanent appointments and promotions in the state civil service 'based upon merit, efficiency and fitness as ascertained by competitive examination;' delegates administration to the State Personnel Board and declares that the state civil service shall embrace 'every officer and employee of (the) State,' subject to 16 specified exemptions. The constitutional provision is implemented by the State Civil Service Act. (Gov.Code, § 18500 et seq.)

Civil service coverage restricts but does not prohibit the performance of government work by independent contractors. In measuring the space left for service contracts, the California Supreme Court has evolved two separate formulae or tests. In cases involving contracts of state agencies the court has articulated the following test: "There undoubtedly is a field in which state agencies may ienter into contracts with independent contractors. But the true test is, not whether the person is an 'independent contractor' or an 'employee,' but whether the services contracted for, whether temporary or permanent, are of such a nature that they could be performed by one selected under the provisions of civil service. If the services could be so performed, then in our opinion it is mandatory upon such appointing power to proceed in accordance with the provisions of the Constitution and statute above summarized. * * *" (Burum v. State Comp. Ins. Fund, supra, 30 Cal.2d at p. 580, 184 P.2d at p. 507, quoting from State Comp. Ins. Fund v. Riley, supra, 9 Cal.2d at p. 135, 69 P.2d 985.)

Both the State Compensation Insurance Fund decisions left room for contract services which cannot be 'adequately or competently or satisfactorily' performed by civil service personnel. (Burum v. State Comp. Ins. Fund, supra, 30 Cal.2d at p. 582, 184 P.2d 505.) In both cases the stage agency was performing its ongoing function when it hired a contractor to perform a task or exercise an occupational skill within the scope of that function. Thus the 'nature of the services' test was conceived in terms of job task or skill. The test involves an inquiry whether persons performing tasks or exercising skills under the contract are or can be employed through civil service methods. ³

The charter of San Francisco imposes civil service coverage comparable to that of article XXIV. In City and County of San Francisco v. Boyd (1941) 17 Cal.2d 606, 110 P.2d 1036, and Kennedy v. Ross (1946) 28 Cal.2d 569, 170 P.2d 904, the court held that contracts retaining expert engineering consultants did not impair that coverage. Each consultant was to hire his own staff. Significantly, the Kennedy case declares (28 Cal.2d at p. 573, 170 P.2d at p. 907):

'* * * Here the conclusion must be that the petitioner and his assistants do not by the contract become city employees in either permanent or temporary positions in the sense intended by the charter provisions. They are therefore not subject to classified civil service * * *.

'The foregoing conclusion is based on the assumption that the engagement outside the list of eligibles otherwise is legal and that the services for which the petitioner was engaged...