An investigation conducted by Workers' Comp Executive has found that California's State Compensation Insurance Fund's zeal to build its new regional office in Redding came at a big price. The quasi-governmental California workers' compensation insurance company paid about $5 million for an 11-acre plot of land that had been purchased a year earlier by the seller for $1.4 million and was valued by the county assessor at the time of the sale at $2.9 million. The office will replace a 30,000-square-foot claims and underwriting operation that employs 180 employees.
The decision to build a 75,000-square-foot regional office in Redding on the 11-acre plot of land came after Kent Dagg, former State Fund board member and CEO of Shasta Builders Exchange, admittedly pushed for the insurer to build an office in Redding.
Yet, while State Fund apparently overpaid for the land, it also managed to secure nearly $700,000 in Redding city funds or rebates in the process. In exchange for the incentives, State Fund promised the Northern California burg nestled next to the Trinity Alps and Mount Shasta that it would open the facility by January 2008 and hire an additional 100 employees at an average salary of $35,000 a year.
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Whether it was appropriate for Dagg, while sitting on State Fund's board, to push for the project in the city from which he operates may be questionable. So may be the fact that a company, the vice president of which is a former chairman of the Shasta Builders Exchange board (remember: Dagg is CEO), received the apparently no-bid contract to build the project.
Moreover, questions exist as to why State Fund's board of directors, steered by chairwoman Jeanne Cain, voted to approve the project as the insurer's cash flow was thinning.
The Land Deal
State Fund in April 2006 closed escrow on 11 acres at the northeast intersection of Highway 44 and Shasta View Drive in Redding. It paid around $5 million to the Sacramento-based developer Lewis-Pipgras and its equity partner, Granite Land Company, says Ken Miller, with Coldwell Banker Commercial C&C Properties in Redding. Miller brokered the deal on behalf of Lewis-Pipgras, which only in April 2005 had purchased the land for $1.4 million, he says. According to the assessor's office in Redding, at the time of the sale to State Fund, the land was valued at $2.9 million.
"The [$2.9 million] is a reflection of the value. They paid a premium for the property because of the urgency of the project," Miller says, adding that State Fund wanted the property quickly so that it could commence construction.
Miller did not know what other urgency there might have been.
State Fund's plans, as submitted to the city, call for not only the office building but also four retail pads. The 75,000-square-foot, three-story building is being built to replace a 30,000-square-foot office the insurer leases on Redding's Knollcrest Drive. That office employs some 180 claims adjusters, fraud investigators and other employees. The project is worth $13 million, according to the Economic Development Corporation of Shasta County.
Dagg is an ex-board member of State Fund. In October 2006, Dagg and Frank Del Re, another board member and administrator of State Fund's largest safety group administrator, Western Insurance Administrators, voluntarily resigned from the board at the behest of Gov. Schwarzenegger.
That was just weeks after Workers' Comp Executive reported the two had – potentially in conflict with their outside interests – voted for State Fund to implement a 20 percent commission increase on group business. Board president Jeanne Cain later told other media that Del Re and Dagg had recused themselves from the vote.
Workers' Comp Executive has been unable to verify that because it has been unable to obtain or even look at board meeting minutes. Del Re's relationship with State Fund groups has been recently terminated.
State Fund then-president Jim Tudor and vice president Renee Koren were fired in March of this year.
Now as the California Department of Insurance and the California Highway Patrol conduct investigations into State Fund's operations and former officers, the Redding land deal and related contracts could be one of the stones that's been left unturned by investigators.
Meanwhile, Patrick Andersen, a spokesman for State Fund, tells Workers' Comp Executive that the development is not a rush project, but that there is some urgency because the lease on State Fund's current digs in Redding is about to expire. One can only ponder how long they've known about the lease expiration.
According to State Fund's real estate department, Andersen says, the $1.4 million Lewis-Pipgras paid for the project in 2005 was actually a price agreed on a whole year earlier and that escrow took a year to close.
"That was done before the real estate prices started increasing dramatically in Redding," he says.
Nevertheless, a 257 percent increase over the 18 months from when Lewis-Pipgras made its deal to purchase the property to when State Fund offered $5 million seems a little questionable even with the Redding's market value increase.
Incentives for the New Office
The project has received substantial incentives from the city. Redding Electric Utility "will provide a $500,000 grant to State Fund in consideration of State Fund's commitment to design and install an agreed upon state of the art mechanical cooling system with ice chilling features," according to an Aug. 21, 2006 report to the Redding City Council prepared by city manager Kurt Starman. The energy-efficient system, according to the report, will help reduce strains on the electrical utility during peak usage hours.
Also, State Fund will receive a $150,000 refund on the traffic impact fees it paid in exchange for "State Fund fulfilling commitments to retain and create high quality jobs in Redding over the next eight years," the report reads. Redding gave similar treatment to Blue Shield, which received a $450,000 benefit incentive when it decided to build an 80,000-square-foot facility that employs 400 people in 2004, according to City Council meeting minutes.
State Fund signed a "development incentive agreement" with the city that stipulates construction must be completed by Jan. 1, 2008. It also states that the average salary for jobs at the office must be $35,000 a year.
Andersen says that State Fund anticipates adding the 100 employees over the next five years as part of a new efficiency drive called "Claims Process Center."
"The program expands the efficiency of our claims operation in Northern California," he says.
State Fund chose Redding-based Gifford Construction as master contractor on the project, and Workers' Comp Executive found no evidence that the quasi-state agency put the construction project out for bid. Gifford Construction's senior vice president, Brent Day, is a past chairman of Shasta Builders Exchange.
Wayne Gungl of the City of Redding's permit center tells Workers' Comp Executive that the building is on paper valued at $6.8 million, but that's based on "an arbitrary number of $90 a square foot" that the city uses to establish building permit fees. He admitted the value of the building is likely much more than that.
He did not indicate if there would be an adjustment to the permit fees as the project costs became clearer.
The city's economic development office values the entire project at $13 million, while State Fund's building technical designer, Judy van Soldt of San Francisco, states in one of her newsletters that the building, "a fast track" project as she describes it, has a budget of $16 million.
Jim Wildauer, senior planner for Redding, says that State Fund submitted plans during the environmental-impact review for the office as well as four additional buildings comprising 23,500 square feet of retail space, including a drive-through pharmacy. But to date, State Fund has pulled permits only for the office building, according to Wildauer.
"They only filed conceptual footprints and if they want to build [the additional buildings] they would have to come back and get a site development permit," Wildauer says.
Construction of the new offices began in May 2006, with an expected completion in January 2008, according to the Shasta Economic Development Corporation. Writes the Development Corporation: "State Fund's decision to expand the Redding office was largely due to the availability of a large productive workforce and the lower operating costs associated with the Redding area."
Dagg's Influence
Dagg has increased his political power base over the years in Redding and beyond, according to Redding insiders, during his tenure as chief executive at Shasta Builders Exchange, an organization with 850 members. Before taking the job in Redding in 1987, he'd worked in the Legislature for 10 years as a staff member to then-Assemblyman Stan Statham.
In 1995, he spearheaded the formation of Golden State Builders Exchanges, a 20,000-strong construction safety group that obtains group coverage and a 6 percent discount from State Fund. GSBE is an amalgam of some 30 smaller builders' exchanges in California, all pooling their workers' comp experience for the preferential rates and discounts with State Fund. Dagg has run that operation since its inception.
In 2004, GSBE safety group accounted for more than $500 million in premium with State Fund, compared to just $49 million when it was formed in 1998. GSBE counts Shasta Builders Exchange among its members.
State Fund safety groups with that kind of premium are paid an annual "administrative fee" of 3 percent of premium – or $15 million. In addition, State Fund in the past often paid special bonus dividends to groups that had good safety records over and above dividends paid to individual employers. These bonus dividends were supposed to be disbursed by the group administrators to the members of the group.
Dagg was appointed to State Fund's board of directors in June 2004 along with current chairwoman Cain and Vincent Mudd, president and chief executive of San Diego Office Interiors, a commercial design-and-build office interiors firm.
State Fund announced plans to build the Redding facility in December 2005, some 18 months after Dagg and Cain were added to the board. State Fund's board voted to approve the project, according to Andersen.
The news release quoted Dagg as saying: "Our new Redding District Office will enhance services to policyholders in the region and is a good investment because of the ever-escalating real estate costs throughout California. We are very pleased to acquire this site which is conveniently located near Highway 44 and is close to public transportation as well as Redding's major commercial business hub."
At the time State Fund made the announcement, management and the board must have been keenly aware that premium and policy counts were plunging. In 2005, State Fund's written premium swooped to $6.14 billion (with 42 percent market share), down 25 percent from $8.2 billion in 2004. Last year, State Fund's written premiums fell even further to $3.5 billion, with market share at 31 percent, compared to 42 percent in 2005 and 51 percent in 2004.
It should be noted, though, that the premium drop is the result of a combination of falling premiums, shrinking costs and shedding accounts to private carriers. The Workers' Compensation Insurance Rating Bureau estimates that aggregate permanent disability benefits payments have dropped 50 percent following implementation of the new rating schedule Jan. 1, 2005. State Fund has traditionally held a market share between 20 percent and 25 percent except in times of stressful market conditions.
Although Dagg has denied any allegations of conflicts of interest as a member of State Fund's board, he told Cain in his resignation letter, according to the Redding Record Searchlight newspaper, that "[I have] accomplished the things I wanted to accomplish – primarily the decrease in [workers' comp] rates and to secure the expansion of the facility here in Redding."
Just how Dagg accomplished a decrease in insurance rates – the result of the governor's reform package – is unclear. But what is clear is that he played a role in getting State Fund to build the regional office while he sat on its Board.
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Timeline
1987
Kent Dagg is hired as CEO of Shasta Builders Exchange. Jeanne starts.
1995
Dagg is instrumental in forming the Golden State Builders Exchanges safety group, which eventually grows to account for more than $500 million in premium with State Compensation Insurance Fund. He still heads it.
July 2004
Dagg is appointed to State Fund's board of directors along with Jeanne Cain of the California Chamber of Commerce and business owner Vincent Mudd.
December 2005
State Fund announces plans to build the 75,000-square-foot district office in Redding and files an agreement of sale with the Shasta County Recorder's office on Dec. 20.
April 2006
Escrow closes on 11-acre property, according to Lewis-Pipgras, which sold the property to State Fund.
September 2006 (on or about)
Workers' Comp Executive reports that State Fund's board votes to increase commissions on group business by 20 percent. Workers' Comp Executive raises the specter of conflict of interest with Dagg and Frank DelRe, administrator of the large Western Insurance Administrators safety group, in voting for the increase even though their safety groups would benefit from such an action.
October 2006
Dagg and DelRe are asked to step down in light of conflict-of-interest allegations.
December 2006
Workers' Comp Executive details how State Fund's safety group program is rife with possible corruption and how it was used by former SCIF president Jim Tudor as a way to curry political favors.
March 2007
Jim Tudor and vice president Renee Koren are fired from State Fund and escorted out of headquarters offices.
Some additional questions arise as to this land deal:
Records show that the owner prior to Granite did not get a rezoning on that parcel, which is likely why the property was up for sale. Lewis-Pipgras/Granite likely got invoved because the timing was better for its rezoning. There is more than $100K invested in getting this ready for rezoning. The partnership sells because the SCIF offer is more valuable than what it will be able to get for the property if it stays on the land and is its developer.
There were several other property deals going on at the same time as this: The property next to the Market Street headquarters, formerly a parking lot, was rezoned and a building approved. There were negotiations ongoing about selling the property after getting the building permit although SCIF strategy at the time was to move as much out of San Francisco as possible. The Vacaville property was purchased and built out around the same time-frames. Why then does SCIF come in and pay a premium for a parcel that will also have commercial opportunities once fully built out? What is the plan here? Of course, this easily could be excused as solid business dealings during a period of time that SCIF is also trying to shed market share and, correspondingly, lose income in the billions of dollars.
Well, that doesn't make a whole lot of sense, does it? And why is SCIF buying the property and planning to increase (and in fact guarantees) its workforce in Redding? Certainly this is a trade-off for all the concessions made to build the SCIF property and secure redevelopment money. As it relates to Shasta County and the City of Redding, it would seem that this is a fairly standard package of incentives, much as was offered to Blue Cross.
Obviously, all this could be more easily understood if SCIF Board meetings were public, as they are in Arizona, and minutes open to public inspection, which they are not.