In California’s difficult economic climate all businesses are looking for ways to remain competitive and stay afloat. Businesses small and large are trying innovative strategies just to keep the doors open. Even the State Compensation Insurance Fund (SCIF) is thinking up creative ways to serve its clients and act more like a private insurance company. SCIF is sponsoring AB 228 to give itself authority to sell workers’ compensation policies to cover the out-of-state workers of California-based businesses. SCIF says this legislation is needed to reduce red tape and improve efficiency. Seems simple right? Not really, there is a lot more to this story.
All California employers are mandated to carry workers’ compensation insurance to cover medical and wage losses if their employees have an accident in the work place. SCIF was created as a quasi-state governmental entity to ensure that all California employers can buy workers’ compensation insurance and meet this mandate. Because SCIF has to provide coverage to any employer that applies, it is exempt from paying federal income taxes.
SCIF claims AB 228 will reduce the extra time and paperwork imposed on its policyholders that need coverage for their out-of-state employees. It’s not that simple. Allowing SCIF to use its beneficial tax status that is derived from its mandate in California is unfair to private carriers and to other state funds. Unlike SCIF, private insurers pay billions in federal taxes.
SCIF points to 16 other state funds that are allowed to sell policies covering out-of-state employees. But SCIF is overstating what the other state funds are allowed to do. Arizona is in the process of privatizing and West Virginia is already a private carrier. Maine and Minnesota state funds pay federal income taxes. State funds in Colorado, Kentucky, Montana and Texas offer this coverage by using fronting agreements which allow the state fund to act as a reinsurer. New Mexico and Utah state funds offer coverage through subsidiaries that are regulated and licensed to do business in the other states.
Given the broad language of AB 228, there needs to be a serious discussion of the implications this bill presents for SCIF’s policyholders – California’s employers. If SCIF follows this course and is licensed in other states with guaranty fund obligations and other assessment obligations, these new liabilities could ultimately be passed on to California employers. Under this proposed scheme, SCIF could be subject to regulation by insurance departments other than California. AB 228 further raises several policy implications on SCIF’s core functions, for example: What type of businesses does SCIF intend to insure or reinsure in other states?
If SCIF wants to operate as a private carrier, they should follow the same rules as private insurers and pay federal taxes. California’s Insurance Code says SCIF should compete “fairly” with the private market. Insurers in the private market handle healthy competition every day and welcome more competition. However, SCIF is trying to have it both ways by pushing AB 228 through the Legislature. They want to retain their preferential tax treatment and guaranteed market of California’s small employers while acting like a private insurer that operates in other states. There is nothing fair about AB 228. If SCIF wants to be a private insurer they should mutualize and become private like state funds in Arizona and Nevada.
Given the shrinking public coffers and the struggling economy, now is not the time to jam a self-interest bill through the legislative process that will give one public entity special treatment. SCIF is acting outside of its stated mission. Legislators should see through this smoke screen. Given the many unknown consequences raised by AB 228, this issue should be fully vetted and studied by the Legislature before any major changes are made.