California's leaders last year cut Medi-Cal rates, which cover the state healthcare program's services for low-income residents, and the cuts were approved by U.S. Health and Human Services Secretary Kathleen Sebelius.

"Congress explicitly granted the secretary authority to determine whether a state's Medicaid plan complies with federal law," a three-judge panel of the U.S. 9th Circuit Court of Appeals said in its decision, overturning a lower court ruling that blocked the cuts last year.

Attorney Lynn Carman, who represents the Medicaid Defense Fund, said the court's decision was "totally without merit."

"If it's not set aside, it will totally destroy the Medi-Cal program," he said.

The decision came down weeks after voters approved Democratic Governor Jerry Brown's ballot measure to temporarily increase the state's sales tax and income tax rates on wealthy Californians.

Revenue from the tax increases are expected to help stabilize the state's finances in the near term and may help create state budget surpluses in coming years, according to the Legislative Analyst's Office, the state's budget watchdog.

A spokesman for Brown welcomed the ruling.

"Today's decision allows California to continue providing quality care for people on Medi-Cal while saving the state millions of dollars in unnecessary costs," spokesman Gareth Lacy said in a statement.

Carman said his non-profit group would ask for a review of the decision by the full 9th Circuit. If a review is denied, he said he expects to file an appeal to the U.S. Supreme Court.

(Editing by Cynthia Johnston and Lisa Shumaker)

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