Calif. Workers’ Comp Fund Sale Faces Many Hurdles

In a move that was not completely unexpected, California Insurance Commissioner Steve Poizner will file a lawsuit to have the $1 billion sale of State Compensation Insurance Fund (SCIF) assets declared unconstitutional.

Poizner said the transaction could lead to skyrocketing workers’ compensation insurance costs for California’s construction firms, agricultural industry and other small businesses.

“In these tough economic times, the state should be doing everything possible to create jobs, not use budget gimmickry to hurt the economy,” Poizner said. He said Gov. Schwarzenegger “got it wrong” with this proposal and the “Legislature failed to adequately scrutinize the consequences.”

The sale of part of the fund came about as part of an effort to pass a state budget that was seriously late and in the red. The budget, which was passed last month, authorizes the state Department of Finance to sell or otherwise dispose of assets and liabilities belonging to SCIF with the intent of raising $1 billion in general fund revenue.

Selling SCIF’s assets for the purpose of benefiting the General Fund is not “appropriate legislation” and violates the constitution, according to Poizner.

Gov. Arnold Schwarzenegger’s office told newspapers the sale was legal and appropriate.

But others support Poizner’s action.

“Selling SCIF at fire-sale prices could further destabilize the workers’ comp market in California, and Commissioner Poizner is right to demand a halt to the governor’s plans,” said the group Consumer Watchdog, in a statement.

Michael D’Arelli, executive director of the Alliance of Insurance Agents and Brokers, Sacramento, said the sale would be “devastating” and called the plan “ludicrous.”

“A lot of our members write business with SCIF and thank god it is there,” he said. “We want SCIF around and we want it healthy.”

SCIF is often the insurer of last resort. Many employers who hire workers in dangerous occupations have difficulty in finding insurance in the private market and are forced to purchase insurance from SCIF. Construction and agricultural workers are SCIF’s two largest industries, representing 27 percent of their business.

In addition, many newer small businesses that have yet to establish a safety track record also purchase from SCIF. Of SCIF’s 200,000 policyholders, nearly 75 percent are small businesses with premiums of less than $5,000.

Others warns that a sale of its best policies would leave the fund with only the high-risk policies. The fund might then have to raise its rates, which would hurt small business.

Overall, SCIF sells nearly one out of every five policies in the state.

Experts at the Department of Insurance predict that the sale of SCIF assets could incur the risk of not having enough funds left to pay the remaining liabilities and as a result cost its 200,000 policyholders thousands of dollars in additional premiums, Poizner said.

Unlikely to Happen?

Even before Poizner’s announcement, a growing number of officials and experts said they thought the sale is unlikely to happen.

“It is not really imminent,” said Patricia Lombard, a communications consultant for Insurance Brokers and Agents of the West. “It is one of those things that has taken on a life of its own. But that doesn’t mean it is likely to take place.”

Even directors on the board of SCIF have voiced opposition. The bill that authorizes the sale requires that the board review the assets to determine if they are appropriate to sell. There is a debate over whether the board’s opinions are binding or just advisory.

Some experts have noted another reason the sale might never take place. The sale would probably take two to three years, and by that time its contribution to this current state budget would be meaningless. That has happened before. In 2007, the state authorized sale of EdFund, an entity that guarantees student loans. The sale has never taken place.