Governor Arnold Schwarzenegger and California Insurance Commissioner John Garamendi have teamed up to propose amendments to a bill that would subject the State Compensation Insurance Fund to solvency laws just as other domestic workers' comp carriers. The bill would also not permit the Commissioner to conserve or liquidate it or to tamper with its Board or leadership. Still one element of the bill has the potential for major controversy.

An Assembly staffer confirmed to the Workers' Comp Executive that Juan Vargas (D-Chula Vista) is accepting the amendments to his bill: AB 2125. The language in the amendment is the culmination of two years of negotiations between SCIF management, the governor, and the Insurance Commissioner, and in most respects is a win-win for all concerned.

The amendments complete a legal battle that started in 2003 when SCIF sued the Department of Insurance to prevent it from conserving SCIF under risk-based capital statutes. In December 2004, a judge ruled that SCIF is, in facts, subject to RBC laws, but SCIF vowed to appeal. The second part of the case, never tried, was to deal with the Commissioners fair or unfair application of RBC to SCIF.

Since that point, the parties have been meeting to resolve the dispute.

The controversial part of the proposal would allow SCIF to invest its funds more like a commercial carrier rather than the conservative limits it now must follow. While this would seem on its face to increase SCIF's ability to profit from its cash hoards, it also provides SCIF the opportunity to buy stock – even in its competitors – and to profit – unfairly some carrier sources say – because of its tax free status. This is said to remove the level playing field designed in.

With Billions of dollars in investment capital available it would be relatively easy for SCIF management to direct the acquisition of stock in a competitor and to gain a seat on the competitor's board thereby potentially exposing the competitive secrets of the other company one carrier executive pointed out.

This is the same argument SCIF management has made time after time to prevent various kinds of information form being exposed. Most recently this argument was made in an attempt to prevent the legislature from authorizing the State Auditor to audit SCIF.

SCIF is said to have lost major amounts of money – in the millions - by investing in Enron bonds and there is also concern about just how much investment savvy its management could muster.

But the other less controversial amendments reaffirm the commissioner's duties and obligations regarding the oversight of SCIF as a workers' comp carrier. It would require that the commissioner perform extra reporting to the governor and to the legislature if SCIF's finances exceed certain thresholds within RBC, but it will not allow the Commissioner to conserve or liquidate SCIF, or in any way interfere with its ability to transact insurance. This is exactly what SCIF wanted.

In addition, the amendments clarify that the commissioner cannot remove the president or the board of directors, confirming that the authority lies with the governor – another win for SCIF.

In other words, the insurance commissioner will keep general regulatory authority over SCIF, but he will be bereft of the power to push executioner's button.

A copy of the proposed amendments as they stand today have been posted in our resources section click here to view part 1 and part 2.

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