The Legislative Analyst’s Office (LAO) is dropping from its revenue projections $1 billion from the sale of some of the assets of State Compensation Insurance Fund. The proposal, which passed as part of the budget in July, was roundly criticized by the industry and employers. LAO cites the “expected inability” of the state to make the sale. But the real story is quite amusing.

The various arms of state government are moving in conflicting directions, with the Governors’ office indicating one thing, the Department of Finance another, all while Insurance Commissioner Steve Poizner is suing to block the sale. State Fund, of course, while keeping its many faces out of the public eye, is in the middle of the political fray.

As reported by Workers’ Comp Executive during the budget negotiations, the sale itself was nothing but budget trickery that would provide no revenue to bolster the budget shortfall this year. Back in July Workers’ Comp Executive reported:

“Highly placed sources near the budget negotiations told Workers Comp Executive that the sale provision allows the legislature and governor to use the prospective $1B in revenue as income to balance the budget. It is as if the funds were real. But the funds are not real.” (For additional coverage see  The $1 Billion Lie … and  SCIF Sale …)

The LAO says the revenues are still falling “somewhat short” of the 2009-2010 budget assumptions projecting a $1.5 billion drop off in General Fund revenues. The proposed sale of State Fund is considered the biggest factor in the shortfall.

The LAO continues “The State Insurance Commissioner has opposed the sale in court, which makes it unlikely the sale will occur in the near term. Given the legal questions raised about the sale and the lack of a concrete sales plan todate, we do not include revenue from this proposal in our forecast.”

Insurance Commissioner Steve Poizner filed suit against the Department of Finance in August to halt the sale, citing constitutional violations. That legal battle in ongoing. And experts say he is on firm ground.

“As a practical matter as long as this lawsuit is pending the state cannot move forward with the sale. If the suit is not resolved in a reasonable amount of time, that’s a hit to the state’s bottom line of $1 billion,” says Department of Finance spokesman H.D. Palmer. “We will have an updated assessment in January on SCIF to let everyone know where we are, just like we always do.”

Without an official ruling to the contrary, however, the governor's office still won’t concede it’s a bad idea and considers the sale a viable option.

“We’re still in the process of looking for vendors," says Mike Naple, spokesman for Governor Arnold Schwarzenegger’s office. The plan calls for a vendor to be retained to handle the valuation and sale of SCIF's assets. "So it’s still going forward.”

Unfortunately for the Governor the legislature (apparently understanding the trickery) removed the $350,000 that was allocated to the Finance Department to retain vendors, and State Fund, despite political pressure, is aggressively declining the opportunity to pay for such an endeavor.

Commissioner Poizner‘s lawsuit and money for a vendor are only two of the hurdles standing between the Governor and a sale. Another is SCIF's own board of directors which voted unanimously earlier this year to oppose any such asset sale. Under the terms of the legislation authorizing the sale, their concurrence is a requirement.

"We just learned today that the LAO’s office has determined that the sale of State Fund assets is not a likely solution to the state’s budget crisis," says Jennifer Vargen, State Fund's spokeswoman. "Since the proposal surfaced many have spoken out against it because it is fraught with risk.”

Click here to see the LAO's discussion of the general fund revenue shortfall and the likely loss of the SCIF sale assets. 

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Filed in Sacramento by Bess Shapiro and Brad Cain in San Francisco.