Prompted by top-level resignations, a wide-ranging criminal investigation and allegations of conflicts of interest, legislation looms to force changes in the way the multibillion-dollar State Compensation Insurance Fund is governed. The proposal, a still-unnamed Assembly bill, stems in part from a request by Gov. Arnold Schwarzenegger, who earlier considered calling a special session of the Legislature on the issue.
It is still a work in progress, but some elements already are emerging: It would expand SCIF’s governing board, as sought by the fund’s new president; bring in highly paid experts exempt from Civil Service rules, tighten fiscal controls, improve oversight over thousands of vendors and require the fund’s deliberations, currently held in closed-door board meetings, to be more accessible to the public. The first Capitol hearing is planned for Jan. 30 in the Senate Banking, Finance and Insurance Committee, chaired by Linden Democrat Mike Machado.
The bill, meanwhile, is being worked up in the Assembly Insurance Committee, chaired by Assemblyman Joe Coto, D-San Jose. Administration officials met with key Assembly lawmakers on Tuesday.
“We want an opportunity to provide an update on the progress we are making on the items discussed in the CDI report,” said fund spokeswoman Jennifer Vargen, referring to a recent audit commissioned by the California Department of Insurance that was sharply critical of the fund. “We continue to move forward. We are a large organization, and we are asking for a few key (exempt) positions to be able to attract candidates to bring those with both education and experience to guide the fund.”
The fund, known as SCIF, is a sort of governmental hybrid that sells workers’ compensation insurance to employers who can’t get it anywhere else in the market. The $3.2 billion-a-year fund, staffed by 8,100 state employees, is the largest workers’ comp insurer in the nation. It is an integral piece of California’s business community and operates much the same way as a private company, although the five voting members of its governing board are appointed by the governor, while its three ex officio members include one each from the Senate and Assembly and the head of the state Department of Industrial Relations. The fund, created in 1914, sells workers’ comp coverage to 220,000 businesses has about $22 billion in reserves. Despite its size and influence, the fund has rarely captured the public’s attention.
But that has changed during the past year.
In March, SCIF President Jim Tudor was abruptly fired by the governing board, along with Renee Koren, a Tudor deputy and head of SCIF’s group insurance program. The firings followed a lengthy internal investigation and the resignations under fire of board members Kent Dagg and Frank DelRe, who stepped down amid allegations of conflicts of interest that businesses they controlled profited through their connection with the fund. No charges have been filed. Fund officials turned over the results of their internal probe to outside investigators. Currently, a joint investigation is being conducted by the Department of Insurance, the San Francisco district attorney’s office and the California Highway Patrol, which frequently handle criminal investigations of state agencies. The CHP believes the investigation may take a year to complete.
The problems have prompted a new look at the fund. Last year, a bill carried by Assemblyman John Benoit, R-Palm Desert, AB326, would have toughened the fund’s auditing procedures, while a bill jointly authored by Coto and Benoit, AB1682, would have expanded the governing board to 11 members. Both bills were halted in the Legislature pending further negotiations, but either bill may wind up being rewritten to accommodate the new proposals. “Serious problems with the State Fund’s operations have come to light in the past several months,” one Assembly analysis noted. “Two board members were relieved of their positions as a result of apparent conflicts of interest, and the president was recently relieved of his position as a result of apparent improprieties related to the handling of the State Fund’s ‘safety groups.’”
“We need to have a professional board with the ability to hire professionals to oversee the operation,” Benoit said. “I fully agree with more transparency to the extent allowed by law. There is absolutely no reason why they can’t be very, very transparent and have a board like any major insurance corporation. There should be good conflict-of-interest rules applied with good common sense.”
SCIF President Janet Frank has proposed a series of changes to the governor and to lawmakers. “Key among these are the needs to add exempt executive positions in an organizational structure that contains clear lines of accountability and responsibility,” she wrote Coto on Dec. 13. “The structure I envision is similar to those found in leading insurance companies.” Frank urged adding a chief financial officer, a chief operating officer, a general counsel, a chief information officer and officers for risk and investments.
She also proposed expanding the board to 14 voting members and increasing their pay to levels that are competitive within the insurance industry. Potentially, the sharpest opposition to Frank’s expansion proposal comes from organized labor, unless there are assurances that the increased number of board members will include labor representatives. The Coto-Benoit bill, AB1682, eventually drew labor’s support — with the promise that it would be amended to include more labor representatives.
Capitol sources familiar with the issues say there is support for increasing the size of the board and hiring a professional executive staff.
There are concerns, however, about the fund’s lack of public transparency and its oft-stated position of declining to release information to the public — a posture that the fund says is justified because its operations entail sensitive and proprietary business information. The fund notes that it conducts internal audits, separate from any commissioned by the insurance commissioner or the Legislature, and it has commissioned outside auditors to examine the agency — although the findings of those audits are not subject to public disclosure.
The lack of oversight, public or otherwise, has kept at least some of the fund’s internal practices from sufficient scrutiny, the CDI-commissioned audit noted.
That audit showed that the fund “lacks the sufficient resources to provide the oversight necessary for an insurer of the fund’s size and complexity,” according to Insurance Commissioner Steve Poizner’s office. “SCIF paid in excess of $500 million in group association administration fees from 1997 through January 2007. Of this amount, over $140 million was paid to an entity controlled by a person who was a board member from 2003 through 2006. In addition, over $125 million was paid to associations with whom another member of the board from 2004 through 2006 had a business affiliation.”
Frank believes that a professional staff and an expanded board will address many of the problems cited in the audit.
“An appropriately staffed board is necessary to strengthen our corporate governance,” Frank wrote Coto.