In 1992, after he stopped wearing clothes to his UC Berkeley classes, Andrew Martinez was something of a walking only-in-Bezerkeley joke as the campus' own Naked Guy. But his life was no laughing matter.

Around 1997, he was diagnosed with schizophrenia. In 2003, he was arrested for assaulting a staff member at a halfway house where he was a resident. He spent the next two-and-a-half years in Santa Clara County jail, its acute psychiatric unit, Napa State Hospital, and Atascadero State Hospital -- until at age 33, he killed himself by suffocating himself with a plastic bag in a jail cell on May 18, 2006.

Last week, Santa Clara County announced that it settled a wrongful death lawsuit and would pay $1 million to his mother, Esther Krenn. The county also agreed to notify families when inmates try to kill themselves or have a breakdown, which the county's lead Deputy County Counsel John Winchester told The Chronicle's Henry K. Lee it already had been doing informally.

On Tuesday, California voters rejected five budget measures on the special election ballot. Yet this settlement demonstrates how impossible it is to expect state and local governments to deliver leaner, smarter services. The incentives in government reward spending, not saving.

To start, $1 million seemed an awfully large sum to award a mother for a son with little to no earning power. Granted, the system fails whenever a mentally ill person kills himself in jail. But if you agree with Krenn's complaint that county staff "were deliberately indifferent" to Martinez's safety, violated his civil rights and wrongfully caused his death, it's still hard to understand what value there is for mentally-ill inmates in seeing $1 million go to Krenn's and attorney Geri Lynn Green's bank accounts.

"The value is the idea of the value of a schizophrenic's life. There are 18 million people in this country who suffer" from serious mental illness, Green told me. "They can work. They can become productive members of society. They can become taxpayers."

Sorry, but Martinez didn't even last in a halfway house. Winchester told me that the county settled because, "The cost to pursue the case through trial may have exceeded the county's insurance deductible" of $500,000. The insurance covered the other $500,000.

In her suit, Krenn had named the county, various local agencies and 11 staffers in their individual and official capacities -- which meant huge legal bills for the county. And you never know if a kooky jury might award an even larger bonanza to the Naked Guy's mom.

Walter Olson of www.overlawyered.com noted that "as soon as you sue people personally, the atmosphere changes. There is fear in the office. Everyone is more grateful to the lawyers for getting that off the plate. That translates into higher settlement values, and the lawyers count on that."

It's not clear if the family-notification policy that was part of the settlement will save a single life -- because the inmate has to consent to treatment, and many mentally ill inmates may not want their families to know they need treatment.

There is another effect, however, of policy by litigation, Olson noted: It adds up. With excessive litigation, law-school clinics and government bodies choosing to settle because it's "near-term" cheaper, jail policies constantly are rewritten until you see "a way of running jails and prisons that very few people would have designed from scratch," Olson noted. "Outside management by litigators" amounts to "management by no one at all."

Let us not forget the other laws at play in this saga. Specifically, Martinez had the right to refuse a plea bargain and the legal ability to fight attempts to treat his mental illness.

Green railed against "incarcerating mentally ill folks" and "criminalizing a health care problem" when an individual really needs help. Treatment, she said, was "just what he wanted; it just wasn't available to him."

That's not what prosecutor Dana Overstreet told me. "The rest of us all recognized that this is someone who was insane at the time he committed his crime" and that he "did not belong in prison" and needed to be in a mental health facility. Her office was working on a "not guilty by reason of insanity" plea with Martinez's public defender, she added, but "the missing piece is getting him on board."

(By the way, the county did not even call Overstreet before settling with Martinez's mother.)

A mentally ill person can use the system to fight needed treatment -- and if he harms himself in the process, it's a jackpot for mom. This is the same mother who on Monday told Chronicle columnist Chip Johnson, "The Naked Guy thing didn't bother me because I knew there was a lot of thought behind it and he meant well."

Because Martinez killed himself in jail, she gets $1 million. Attorney Peggy Doyle, who has represented municipalities, noted, "Some tragedies seem inevitable, the only question being when and where they finally happen. The unpredictability doesn't make them any less tragic. It does make them more prone to litigation. For the defendant, there can be a luck-of-the-draw factor."

For the taxpayers, for the mental health workers and criminal justice officials caught in this snare, the cards were losers. Taxpayers can be squeezed and county workers can be accused, but they cannot win.