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Budget Gap Closer: Sail or Sale...Sale Of State Fund Under Real Consideration

Award Winning Story


A "For Sale" sign is likely to be posted in front of California's State Compensation Insurance Fund, multiple highly placed state officials have confirmed to Workers' Comp Executive. While nothing is sure at this point, the discussion has moved from an idea to a consideration and is being thought of in terms of a method of closing the budget gap. Such a discussion is moving quietly all around the Building, as the Capitol is called by insiders. And this time there is the potential for a conflict of interest.

What form this will take and under what conditions is undeterminable at this point. It is known that it is far more likely to be in the form of a sale rather than a privatization plan. State Fund has reduced its staff down to nearly 8,000 state employees.

"We've heard the idea from both Republicans and Democrats. I don't think anybody has thought it through," Mike Prosio, Chief Deputy Legislative Secretary for Governor Schwarzenegger says, "State Fund's like 8,000 state employees. We could absorb them. We don't want them to lose their jobs, so what are you going to do with that? That's another layer."

There are principally four assets State Fund has: its surplus; its reserves; its property; and its book of business. If the Legislature finds a way to keep a residual market any of these assets could be sold and altogether the potential inflow to the general fund is estimated at between $10 and 20 Billion. Various mechanisms are being discussed to sell it off in part or in whole.

"Others have proposed it to us...others outside the horseshoe. We'll look at it the way we look at any other way of potentially closing the budget," says Prosio.

State Fund remains by far the largest writer of workers' comp in the state and insures an estimated 220,000 employers. Most of these are small businesses and would likely prove a desirable asset for other carriers.

Conflict Connections

Turning State Fund into a private carrier is not a new idea. It was pushed by Governor Pete Wilson in the late 90s. The California Chamber of Commerce also leaned favorably towards the idea in those days. It has resurfaced again both because of the storm clouds of scandal covering State Fund and because there is a budget crisis of epic proportion. But this time, there is an unusual connection. And that connection has the potential to become, or create at least has the appearance of, a conflict.

Jeanne CainJeanne Cain is State Fund Board Chairperson. She is also executive vice president for the California Chamber of Commerce where she oversees the development of public policy and strategy. Cain, perhaps not so coincidently, served as a legislative secretary and deputy chief of staff for Governor Pete Wilson.

State Fund has been rife with mismanagement and conflict of interest problems especially in its group insurance programs. Several members of the Board were asked to leave, its president and some key members of the executive committee were either forced to resign or demoted. A new president took over in October, and legislation is being considered to reform the governance of State Fund. Prosio says selling State Fund would be a Herculean Task.

Opposition to the sale is likely to come from both labor and from some number of the nearly 300 groups and associations to which State Fund provides coverage and large commissions. But small business is likely to favor the proposal.

"Some people view State Fund as a major asset. But frankly if you did try to sell it, what do you do with the insurer of last resort? It's probably more complicated than some other asset issues we face," Prosio says. "There has to be an insurer of last resort. Do you get rid of the State Fund all together?"

Prosio told Workers' Comp Executive that the governor will have a better idea of what the future holds for State Fund at the May budget revise.


Workers' Comp Executive, ISSN 1074-0988 Copyright © 2008 Providence Publications, LLC - All Rights Reserved.