Head of State Fund proposes change in structure, staffing

The new president of the State Compensation Insurance Fund has urged Gov. Arnold Schwarzenegger and key lawmakers to create a top-level, professionally paid staff at SCIF exempt from Civil Service rules and to at least double the size of the fund’s current governing board.

Janet Frank, a veteran insurance executive who assumed the presidency of the State Fund in July amid an array of investigations into SCIF’s governance and alleged conflicts of interest, submitted the package of proposals last week. The submission occurred about the time that the Department of Insurance released the results of a long-awaited audit it commissioned that said the fund spent hundreds of millions of dollars in return for minimal services and exercised lax oversight over its activities. During the past year, two board members resigned under fire for alleged conflicts, and the former president and a top aide departed as well. Currently, the California Highway Patrol is conducting a criminal investigation into the fund.

Details of Frank’s proposals were not available, but they include setting up a competitively paid staff recruited from key areas of the insurance industry, the addition of employees not subject to Civil Service rules who would form an executive-level staff with direct responsibility to the president and board and the expansion of the five voting members of the SCIF governing board to at least a dozen members, perhaps more.

The State Fund, which provides workers’ compensation insurance to about 220,000 employers ands collects $3 billion annually in premiums, has about 8,100 employees, all of them state workers. It has one exempt employee — Frank. SCIF, with some $22 billion in total assets, handles about a fifth of the state’s workers’ comp market and is one of the nation’s major players in workers’ compensation insurance.

Since its creation in 1914, the State Fund largely has flown under the public’s radar, selling policies to employers who can’t purchase coverage elsewhere and competing against private carriers for business. Partly, that is due to the nature of workers’ compensation insurance, which is not high on the general public’s list of burning issues.

But it is also due to the nature of SCIF itself, which is an odd creature in state government and keeps most of its activities — including its board meetings — confidential. The fund, citing sections of the state Insurance Code and the need to deal with a competitive marker, considers itself exempt from rules governing the disclosure of public records — rules that apply in varying degrees to most other state agencies, including the Department of Insurance.

“We understand the public has a vested interest in State Fund, but we do compete in the marketplace and deal with proprietary information that requires privacy. For this reason the insurance code has specifically exempted State Fund from the Public Records Act,” said SCIF spokeswoman Jennifer Vargen, citing the need to protect sensitive business information.

Others aren’t so sure, however.

Former state Sen. Jackie Speier, who headed the Senate committees on Insurance and Oversight, authored legislation in 2006 that included the State Fund in the Legislature’s auditing authority. The legislation, SB1452, was signed by the governor. It was fought by the State Fund itself, among others. The bill also requires the state auditor to issue a report each January that identifies which state agencies fail to respond to the auditor’s recommendations in a timely way. The auditor’s first report is due next month.

“The members of the (SCIF) board are appointed by the governor, and then the board members appoint the president. It’s a state agency. All of the employees who work at the State Fund are state employees,” Speier said. “It is one of those peculiar creations of state law, but I would argue that is on the one hand very much like an insurance company and should be accountable to the Department of Insurance. And because of its hybrid nature, it should be subject to outside auditing.”

The fund notes that it conducts internal audits, separate from any commissioned by the Insurance Commissioner or Legislature. SCIF also has commissioned outside auditors to examine the agency, although the findings of those audits are not subject to public disclosure.

In 2004, then-Insurance Commissioner John Garamendi asked SCIF to hire an outside auditing firm, Connolly Plunkett, to determine whether recommendations in an audit made the year before were being followed. The board declined. Later, however, then-newly appointed board chairwoman Jeanne Cain accepted the commissioner’s recommendation and ordered the review, Vargen said, and hired the firm recommended by the commissioner.

In 2006, the board hired an outside law firm to investigate the fund. Several months later, in March 2007, the board fired the fund’s former president, Jim Tudor, and deputy Renee Koren, who headed SCIF’s group insurance program, following the internal investigation. Their departures followed the resignations of two board members, Kent Dagg and Frank DelRe, who stepped down amid conflicts of interest allegations.

Nobody has been charged in connection with the allegations.

The turmoil at the fund has placed the obscure SCIF squarely in the public eye.

“To me all of these allegations are forthcoming because the fox is guarding the henhouse — but nobody is guarding the fox,” Speier added.