Among Gov. Arnold Schwarzenegger's ideas to rescue California from a budget shortfall is the sale of a portion of the State Compensation Insurance Fund -- the 95-year-old fund conceived as the insurer of last resort for state workers' compensation, and one of the largest U.S. compensation insurers. He has forwarded the proposal -- which he believes can raise $1 billion -- to the state legislature.

The self-sufficient nonprofit, which provides insurance to state employers at cost, reported $1.67 billion in net premiums written in 2008, according to an AMB Credit Report.

"Given the state's current budget situation, with a $24 billion deficit, we are evaluating all assets -- including the state fund -- to determine what is best for the state," said Rachel Cameron, Schwarzenegger's deputy press secretary. The governor intends "a sale that will maintain a sound and stable workers' compensation system for California and provide a guaranteed market for employees, while getting the highest value for the state."

Bruce Wood, associate general counsel and director of workers' compensation for the American Insurance Association, said that partial privatization of the state fund presents significant challenges to the private market. "If that were to be done, California would indeed be unique," he said. He added that the proposal raises a lot of unanswered questions in a state that is "forever on a watch list."

The language the governor's office has sent for legislative adoption authorizes a sale that provides "the best combination" of three standards -- the highest price or best value to the general fund; the greatest security of payment; and the best qualifications for continued performance of the insurance services.


Potential buyers, though, would have to weigh the difficulties in the fund's past.

"California's employers and employees both depend on a healthy workers' compensation insurance marketplace, and reforming SCIF is key to helping maintain that competitive marketplace," Insurance Commissioner Steve Poizner said in a statement last year. California officials had been rebuilding the fund's management and operations as a result of criminal investigations and administrative reviews of alleged past mismanagement and questionable expenditures of hundreds of millions of dollars (BestWire, Oct. 15, 2008).

The governor's office said he looks forward to debate over the partial privatization of SCIF, but Schwarzenegger won't accept a rollback of his workers' compensation reforms.

A SCIF spokesperson pointed out that those who are currently insured with the fund will continue to be insured and that, at this point, it's still just a proposal.

The top five writers of workers' comp in California, according to A.M. Best state/line data for 2008 were: State Compensation Insurance Fund of California, with 22.58% market share; American International Group Inc., with 7.55%; Liberty Mutual Insurance Co., with 6.68%; Travelers Group, with 6.32%; and Berkshire Hathaway Insurance Group, with 5.74%.