Shelli Andreski 0

REPEAL SB 1145 AND AB 1874

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We, the citizens and registered voters, and residents of the State of California do hereby petition the Governor and the California Legislators to repeal SB1145 and AB1874. These codes were adopted in 2008 as emergency legislation for the purpose of selling State Compensation Insurance Fund (SCIF). The 11-member Board and outside Consultants could not sell SCIF due to both the Constitution, and the injunction that was filed by the Insurance Commissioner, but that has not stopped the plan going forward that will drive this self-sufficient, quasi-State agency into the ground, eventually requiring taxpayer bailout. 

AB1874 significantly increased the make-up and pay of the SCIF Board of Directors from 5 members to an 11-member panel -- 9 of whom are appointed by the Governor. This bill provided for an annual compensation of $50,000 per Board Member. AB1874 also created a conflict of interest requirement for Board members that has been repeatedly violated, as some of the Board members are ALSO LIEN HOLDERS WITH SCIF, and are forcing SCIF to pay them their liens regardless of the validity of the lien. 

SB1145 repealed exemptions from the Bagley-Keene Open Meeting Act, which provides for open meetings of State bodies. This has been repeatedly violated, as Board members continue to exercise closed-door meetings in violation of this code. This bill promised the transformation of SCIF into a modern, competitive operation with effective, efficient management by giving the Board of Directors power to appoint a President, Chief Financial Officer, Chief Operating Officer, Chief Information Technology Officer, Chief Investment Officer, Chief Risk Officer and a General Counsel, and provides that the Board of Directors shall set the salary for each position. The last two positions filled, those of CFO and CRO, have been filled at the expense of $288,000 PER YEAR, with an ANNUAL 15 PERCENT BONUS based on performance. These Consultants are crippling SCIF's operations by cutting costs and operations via eliminating necessary resources and support staff, while rewarding themselves with bonuses for saving the money. 

At a whopping $450,000 PER YEAR, Tom Rowe is the second highest-paid nonacademic employee in the state, being paid from revenues from policyholders, which may or may not be returned to them in the form of dividends, depending on the financial stability and success of SCIF. Rowe’s contract includes a three-year term, an annual salary of $450,000, annual bonus eligibility equivalent to 30 percent of salary, a monthly recruitment and retention payment of $1,500, and California state civil service benefits.

How is it, when SCIF has plummeted from a 53% market share to 10%, that executives at SCIF's helm can still receive outrageous “performance” bonuses for SCIF's decline, while ignoring the mission for which SCIF was created. Salaries and bonuses of this magnitude that reward devastating failure echo those of the Fannie Mae and Freddie Mac executives who reaped huge bonuses while the real estate market was collapsing. 

The Rand Study published in 2009 gives a synopsis of the workers' compensation market insolvencies of 2003, citing SCIF's role as a dominating factor. The study provides recommendations that appear to be SCIF management's current game plan in the dismantling of SCIF: 

Increase State Fund staffing flexibility. It is important to remove incentives from the State Fund to price more aggressively in a soft market, and such incentives may be created by the desire to maintain enough premium volume to support a fairly inflexible staffing level. The State Fund might consider setting a permanent staffing level required for a relatively low market share – say, 10 percent – and then address additional demands using temporary staff and contractors.” (California’s Volatile Workers’ Compensation Insurance Market, Problems and Recommendations for Change – Lloyd Dixon, James W. Macdonald, William Barbagallo, A study by the RAND Institute for Civil Justice, ©2009) 

Layoff of employees and 'reducing the real estate footprint' by selling State buildings confirms management's endorsement of the Rand recommendations. The purpose of having these solid real estate assets was to keep SCIF's investments conservative, financially sound, and effectively, to provide a safe haven for injured employees. The purpose was not to sell to the highest bidder just to fatten the pockets of the Board members and outside consultants at the cost of employers and, eventually, California taxpayers. Selling the Market Street headquarters was contrary to the state law that required SCIF to be based in San Francisco.

Even in today's turbulent economy and resulting business downturn, SCIF should not go from 50% of market share to 10%. Even if there are more business closures, market share, as a percentage of businesses still requiring insurance, should have not dropped so dramatically. SCIF seems to have done everything possible to bring about the self-fulfilling prophecy of the Rand study by purposefully going from 50% to 10% of market share.

Either SCIF Executives are incompetent and are being unjustly rewarded or they are purposefully dismantling State Fund, following the Rand Study recommendations, so that they can later rebuild its book of business with the purpose of skirting around civil service rules prohibiting contracting out state jobs when state employees can perform these jobs at a cheaper cost. State Compensation Insurance Fund v. Riley (1937) 9 Cal.2d 126; Burum v. State Compensation Insurance Fund (1947) 30 Cal.2d 575; SPB Decision No. 00-03 (2001); Professional Engineers in California Government v. Department of Transportation(1997) 63 Cal. 4th 543; Government Code Section 19130.

One would have to wonder, now that SCIF is at the coincidental market share of 10%, if “removing incentives to price more aggressively” and “setting permanent staffing levels” for low projections was what the Legislation originally had in mind when SCIF was established by the Boynton Act in 1914. Around that same time, the voters amended the California Constitution by initiative to guarantee the constitutionality of the state workers' compensation system. State Fund's constitutional basis is found at Article 14, Section 4 of the state constitution: 

The Legislature is hereby expressly vested with plenary power, unlimited by any provision of this Constitution, to create, and enforce a COMPLETE system of workers' compensation …”

California depends on a financially sound, and self-sufficient SCIF, with an open-door policy of writing business across all classifications and sizes. California's employers and employees both depend on a healthy workers' compensation insurance marketplace, and keeping SCIF self-sustaining is key to helping maintain the competitive marketplace. 

SCIF cannot continue to be a competitive non-profit operation, all the while maintaining these destructive changes. The promise of a “modern operation” has unfortunately become just that: a top-heavy bureaucracy that is decimating its workforce for its own profit. In 97 years of being in business, SCIF has responsibly sustained its operating costs with no burden to the California taxpayer, and without the need for layoffs. The current management model has created an upset in the operations of State Fund that is jeopardizing SCIF's effectiveness and obligation in providing workers' compensation insurance to California's employers, and benefits to California's injured workers; therefore, the People are demanding the repeal of AB1874 and SB1145 immediately to stop the cataclysmic impact of the 11-member Board and outside consultants from draining the State Fund of all reserves required to protect California's employers and injured workers.

Should State Fund continue with its intent of writing only high-risk employers, reducing staff and resources, and paying itself exorbitant management salaries, State Fund will be unable to sustain itself, and the burden will fall to the employer in the form of higher premiums, and ultimately fall to the California taxpayer.  The financial instability of State Fund would destabilize the entire workers' compensation market and the business climate for the California small business community.


Repeal AB1874 and SB1145.


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