California Commissioner to Sue State Over State Fund Sale

California Insurance Commissioner Steve Poizner said he will sue to block a potential $1 billion sale of assets of the State Compensation Insurance Fund, saying such a transaction would be unconstitutional and could lead to higher costs.

As part of a budget deal to address a skyrocketing state deficit, Gov. Arnold Schwarzenegger signed ABX4 12, legislation to sell a portion of the state-backed workers' compensation insurer's book of business (BestWire, July 21, 2009). SCIF holds nearly one-quarter of the workers' compensation market share in California. With $1.7 billion in direct premiums written in 2008, it is the sixth-largest U.S. workers' compensation writer.

"The pilfering of funds used to pay the claims of injured workers to instead help fill the state budget gap is both unconscionable and unconstitutional," Poizner said in a statement. "This $1 billion sale of SCIF assets could not only endanger the solvency of SCIF, but is a direct affront to the state's jobs and business climate."

The lawsuit will name Department of Finance Director Michael C. Genest and State Treasurer Bill Lockyer as defendants, Poizner said. SCIF will be named as a Real Party of Interest. A spokesman for Lockyer declined to comment.

"We continue to believe we can achieve a higher value for the state by selling a portion of State Fund?s book of business to a private entity. We believe that this action is legal. We wouldn?t have proposed it if we didn?t believe it was legal," Schwarzenegger spokesman Mike Naple said.

The litigation would pit Poizner, California's second-highest-ranking Republican and a candidate for the 2010 GOP gubernatorial nomination, against the Schwarzenegger administration and Lockyer, an elected Democrat.

The legislation requires the SCIF Board of Directors to concur with any sale, with any authorization to expire Jan. 10, 2012, if no deal is reached. In July, the SCIF board adopted a resolution opposing "any proposed legislation regarding the sale or other disposition of State Compensation Insurance Fund assets and liabilities for the purpose of balancing the California budget" (BestWire, July 21, 2009).

The legislation violates a provision of the state constitution requiring the legislature to enact "appropriate legislation" to establish a "complete system of workers' compensation," Poizner said. Selling SCIF's assets for the purpose of benefiting the General Fund is not "appropriate legislation," and would threaten SCIF's status as the insurer of last resort, he said.

"Ordering the State Fund to dispose of assets in order to close a budget hole without the commissioner's oversight could be disastrous, especially since the governor?s goal is quick cash," Douglas Heller, executive director of Consumer Watchdog, said in a statement.

The top five writers of workers' compensation in California in 2008, according to A.M. Best state/line data, were: State Compensation Insurance Fund of California, with 22.6% market share; American International Group Inc., with 7.6%; Liberty Mutual Insurance Cos., with 6.7%; Travelers Group, with 6.3%; and Berkshire Hathaway Insurance Group, with 5.7%.