Existing law establishes the State Compensation Insurance Fund to be administered by a board of directors for the purpose of transacting workers compensation insurance and other public employment-related insurances, as specified. Under existing law, the board is composed of 11 members, 9 of whom are appointed by the Governor. Existing law requires the Governor to appoint the chairperson and one board member from organized labor, as well as appointing board members, other than the labor member, who have specified qualifications.

This bill would require one of the board members that the Governor appoints to be a current or former small business owner who is or has been a small business owner for more than 5 years or who is a State Compensation Insurance Fund policyholder, as specified. The bill would provide that the small business owner member shall be appointed to the first board vacancy that is not left by the labor member or the member with an auditing background.

Existing law establishes the State Compensation Insurance Fund to be administered by a board of directors for the purpose of transacting workers compensation insurance and other public employment-related insurances, as specified. Under existing law, the board is composed of 11 members, 9 of whom are appointed by the Governor. Existing law requires the Governor to appoint the chairperson and one board member from organized labor, as well as appointing board members, other than the labor member, who have specified qualifications.

This bill would require one of the board members that the Governor appoints to be a current or former small business owner who is or has been a small business owner for more than 5 years and or who is a State Compensation Insurance Fund policyholder, as specified. The bill would require the exemption from specified qualifications that currently applies to the labor member to also apply to the small business owner member. The bill would provide that the small business owner member shall be appointed to the first board vacancy that is not left by the labor member or the member with an auditing background.

Existing law establishes the State Compensation Insurance Fund to be administered by a board of directors for the purpose of transacting workers compensation insurance and other public employment-related insurances, as specified. Under existing law, the board is composed of 11 members, 9 of whom are appointed by the Governor. Existing law requires the Governor to appoint the chairperson and one board member from organized labor, as well as appointing board members, other than the labor member, who have specified qualifications.

This bill would require one of the board members that the Governor appoints to be a current or former small business owner who is or has been a small business owner for more than 5 years. years and who is a State Compensation Insurance Fund policyholder, as specified. The bill would require the exemption from specified qualifications that currently applies to the labor member to also apply to the small business owner member. The bill would provide that the small business owner member shall be appointed to the first board vacancy that is not left by the labor member or the member with an auditing background.

Existing law establishes a workers compensation system, administered by the Administrative Director of the Division of Workers Compensation, that generally requires employers to secure the payment of workers compensation for injuries incurred by their employees that arise out of, or in the course of, employment. Existing law requires an employer to provide all medical services reasonably required to cure or relieve the injured worker from the effects of the injury.

This bill would express the intent of the Legislature to enact legislation that would streamline and regulate the workers compensation system to improve the process for the benefit of small businesses and the employees of the State of California.

GOVERNOR'S VETO

GV Bill Id:AB 61

Author:(Holden)

As Enrolled Ver:September 8, 2017

2/3 vote

Original Committee Reference: INS.

SUMMARY: Requires that one member of the State Compensation Insurance Fund (SCIF) board of directors (board) be a current or former owner of a small business.

FISCAL EFFECT: Unknown

COMMENTS:

1. Purpose. According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers' compensation insurance from SCIF. There is a desire to include more input from the small business community. This bill is needed to provide the SCIF board with additional insight to the realities of operating a small business and how a worker's compensation claim can impact small business functions.
2. What is SCIF? SCIF was created by statute in 1914 to act as a workers' compensation insurer for the state and to serve as the workers' compensation insurer of last resort in the private market. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be "neither more nor less than self-supporting." The State of California is not liable for any obligations of SCIF. In 2016, SCIF collected nearly $1.4 billion in premium, and small businesses accounted for roughly 40% of the premiums collected. However, approximately 90% of all SCIF policies are issued to small businesses.
3. Board Qualifications. The current board structure was established by legislation in 2008 following a number of audits and investigations triggered by allegations of misconduct by SCIF board members. In response to these investigative and audit findings, the legislature passed an extensive reform package, including expanding the board from five to 11 members and requiring that a majority of the board have substantial experience with organizations of SCIF's size and complexity. Current law requires that one board member be a current/previous policy holder and that one member have an auditing background and chair the board's audit committee.

GOVERNOR'S VETO MESSAGE:

This bill requires one of the Governor's appointees to the State Compensation Insurance Fund be a current or former small business owner.

I have not seen evidence that the Fund is lacking insight relative to the needs of its many small business policyholders. Nevertheless, if the Fund needs to improve its expertise in this area, current law provides sufficient opportunity to appoint board members with experience running a small business.

Analysis Prepared by: Paul Riches / INS. / (916) 319-2086 FN: 0002446

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 61

Author:(Holden)

As Amended Ver:August 23, 2017

Majority vote

Original Committee Reference: INS.

SUMMARY: Requires that one member of the State Compensation Insurance Fund (SCIF) board of directors (board) be a current or former owner of a small business.

The Senate amendments

1. Require that the first board vacancy after January 1, 2018 not currently filled by a member representing labor or with auditing background be filled by a small business owner.
2. Require the small business member to meet existing experience requirements for most SCIF board members.
3. Make technical and clarifying changes.

EXISTING LAW:

1. Establishes SCIF as a quasi-public entity to be the insurer of last resort for workers' compensation insurance.
2. Establishes an 11 person board for SCIF with board members serving five year terms.
3. Provides that nine of the board members are appointed by the Governor and one each by the Speaker of the Assembly and the Senate Rules Committee.
4. Requires that at least one person on the board have sufficient background in auditing to serve as chair of the board's Audit Committee.
5. Provides that the Speaker of the Assembly shall appoint a representative from organized labor to the board.
6. Provides that the Senate Rules Committee shall appoint an officer or employee from a business that is a SCIF policyholder to the board.
7. Provides that the Director of Industrial Relations serves as an ex-officio member of the board.
8. Requires the remaining board members to have substantial experience in workers' compensation, legal, investment, financial, corporate governance and management, or accounting with entities similar in size to SCIF.

FISCAL EFFECT: Unknown

COMMENTS:

1. Purpose. According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers' compensation insurance from SCIF. Current law requires that only one member be a current or previous policy holder. There is a desire to include more input from the small business community. This bill is needed to provide the SCIF board with additional insight to the realities of operating a small business and how a worker's compensation claim can impact small business functions.
2. What is SCIF? SCIF was created by statute in 1914 to act as a workers' compensation insurer for the state and to serve as the workers' compensation insurer of last resort in the private market. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be "neither more nor less than self-supporting." The State of California is not liable for any obligations of SCIF. In 2016, SCIF collected nearly $1.4 billion in premium, and small businesses accounted for roughly 40% of the premiums collected. However, approximately 90% of all SCIF policies are issued to small businesses.
3. Board Qualifications. The current board structure was established by legislation in 2008 following a number of audits and investigations triggered by allegations of misconduct by SCIF board members. In response to these investigative and audit findings, the legislature passed an extensive reform package, including expanding the board from five to 11 members and requiring that a majority of the board have substantial experience with organizations of SCIF's size and complexity. Current law requires that one board member be a current/previous policy holder and that one member has an auditing background and chair the board's audit committee.

Analysis Prepared by: Paul Riches / INS. / (916) 319-2086 FN: 0001916

 THIRD READING  

Bill No: AB 61

Author:

:

Vote:

SENATE INS., BANK. & FIN. COMMITTEE: 9-0, 6/28/17

AYES: Mendoza, Galgiani, Glazer, Hernandez, Lara, Morrell, Newman, Portantino, Roth

NO VOTE RECORDED: Berryhill, Gaines, Hueso, Mitchell

ASSEMBLY FLOOR: 77-0, 5/11/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill requires one board member of the State Compensation Insurance Fund (State Fund) appointed by the Governor to be a current or former small business owner who is or has been a small business owner for more than five years, as specified.

Senate Floor Amendments of 8/23/17 revise the requirements for appointment of a small business member to the State Fund board, and eliminate the exemption from a requirement that this appointee have substantial specialized experience.

ANALYSIS:

Existing law:

1. Establishes State Fund, a quasi-state agency, for the purpose of transacting workers’ compensation insurance, to be administered by a board with full power, authority and jurisdiction to conduct the business of the fund.
2. Directs State Fund to be fairly competitive with other insurers, and states the intent of the Legislature that it be neither more nor less than self-supporting.
3. Specifies that the board of directors is composed of 11 members serving five-year terms, nine of whom are appointed by the Governor including the chairperson, one must be from organized labor, at least one person must have sufficient background in auditing to serve as chair of the board's Audit Committee, and all but the labor member must have substantial experience in positions involving workers’ compensation, legal, investment, financial, corporate governance and management, accounting, or auditing responsibilities with entities of sufficient size as to make their qualifications relevant to State Fund.
4. Provides that one board member is appointed by the Assembly Speaker to represent organized labor, and one board member is appointed by the Senate Committee on Rules and must have been a policyholder of State Fund or an employee of a policyholder for at least one year preceding the appointment.
5. Provides that the Director of the Department of Industrial Relations serves as an ex-officio member of the board.
6. Provides that each voting member of the board shall be paid an annual compensation of $50,000, to be automatically adjusted for inflation, as specified, beginning January 1, 2010; compensation is currently $56,959.
7. Specifies that the Milton Marks Postgovernment Employment Restrictions Act applies to State Fund’s board and appointed employees.
8. Specifies that the board and appointed officers are prohibited from lobbying State Fund for two years after leaving employment with State Fund.

This bill:

1. Requires one board member appointed by the Governor to be a current or former small business owner who is or has been a small business owner for more than five years or has been a policyholder of State Fund for one year immediately preceding the appointment and continuing in this status during the period of his or her membership.
2. Provides that the small business member shall be appointed to the first board vacancy that is not left by the labor or auditing background member.

Background

State Fund was created by statute in 1914 to act as a workers’ compensation insurer for the state and to serve as the workers’ compensation insurer of last resort in the private market. It also serves as a Third Party Administrator (TPA) for self-insured public and private employers. The State of California is its largest TPA client. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be “neither more nor less than self-supporting.” The State of California is not liable for any obligations of State Fund. State Fund currently insures almost 115,000 businesses and collected nearly $1.4 billion in premiums in 2016. Small businesses accounted for about 40% of the premiums collected but almost 90% of its policies.

Just like other insurers, State Fund is regulated by the California Department of Insurance (CDI) and is required to report its business quarterly to the Governor, including its resources and liabilities, and to use an outside auditor to annually audit its books and operations.

Until 2008, State Fund had just five board members who were required to be State Fund policyholders, or employees of policyholders. This posed a significant challenge because while State Fund is a large multibillion dollar insurance company, most of its policyholders are small to medium sized businesses. As a result, few of its policyholders had experience running a large insurance company. In March 2007, the Senate Banking, Finance and Insurance Committee held a hearing to examine allegations of financial and operational improprieties involving senior State Fund officials. In the fall of 2006, two board members voluntarily resigned after conflict of interest concerns were raised. The CDI, as part of its regulatory authority, in 2007, launched a full operational and financial audit of State Fund by an outside firm, RSM McGladry. That audit provided a scathing review of an organization run amok, with poor business and accounting practices throughout the organization. Many of the problems identified in the audit had roots in the fact that State Fund’s board was unusually small for an insurance company of its size, and lacked expertise to adequately supervise State Fund operations or the executive team.

In response to these problems, legislation passed in 2008 (AB 1874 Coto, Chapter 322, Statutes of 2008) expanded State Fund’s Board of Directors from 5 to 11 voting members, required board members to have specifically relevant experience for an organization as complex as State Fund, including workers’ compensation insurance, auditing, and corporate governance, and provided for compensation of board members. Having 11 members allows the board to more effectively staff important subcommittees, including investments, governance and audit.

For purposes of the bill, “small business” means an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of $10 million or less over the previous three years, or is a manufacturer, as defined, with 100 or fewer employees.

Recent amendments allow the appointee to either be a small business owner or a State Fund policyholder. While the majority of State Fund’s policyholders are small to medium size businesses, this will give the Governor more options and could potentially lead to the appointee being a policyholder but not a small business as defined in the bill. The requirement for the appointee to have specialized experience in an entity of comparable size to State Fund may make it possible that the appointee will not be a small business owner.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 8/24/17)

California Small Business Association

OPPOSITION: (Verified 8/24/17)

None received

ARGUMENTS IN SUPPORT: According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers’ compensation insurance from State Fund. After six additional members were added to the Board of Directors in 2009, it resulted in only one member being a previous policy holder. While this structure isn’t undesirable, there is a desire to include more input from the small business community. This bill is needed to offer additional insight on how a small business functions and how a workers’ compensation claim affects the business and its operations.

ASSEMBLY FLOOR: 77-0, 5/11/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, Quirk, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Dahle, O'Donnell, Patterson

Prepared by:

8/25/17 10:09:01

**** END ****

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 61

Author:(Holden)

As Amended Ver:July 5, 2017

Majority vote

Original Committee Reference: INS.

SUMMARY: Requires that one member of the State Compensation Insurance Fund (SCIF) board of directors (board) be a current or former owner of a small business.

The Senate amendments

1. Require that the first board vacancy after January 1, 2018 not currently filled by a member representing labor or with auditing background be filled by a small business owner.
2. Make technical and clarifying changes.

EXISTING LAW:

1. Establishes SCIF as a quasi-public entity to be the insurer of last resort for workers' compensation insurance.
2. Establishes an 11 person board for SCIF with board members serving five year terms.
3. Provides that nine of the board members are appointed by the Governor and one each by the Speaker of the Assembly and the Senate Rules Committee.
4. Requires that at least one person on the board have sufficient background in auditing to serve as chair of the board's Audit Committee.
5. Provides that the Speaker of the Assembly shall appoint a representative from organized labor to the board.
6. Provides that the Senate Rules Committee shall appoint an officer or employee from a business that is a SCIF policyholder to the board.
7. Provides that the Director of Industrial Relations serves as an ex-officio member of the board.
8. Requires the remaining board members to have substantial experience in workers' compensation, legal, investment, financial, corporate governance and management, or accounting with entities similar in size to SCIF.

FISCAL EFFECT: Undetermined.

COMMENTS:

1. Purpose. According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers' compensation insurance from SCIF. Current law requires that only one member be a current or previous policy holder. There is a desire to include more input from the small business community. This bill is needed to provide the SCIF board with additional insight to the realities of operating a small business and how a worker's compensation claim can impact small business functions.
2. What is SCIF? SCIF was created by statute in 1914 to act as a workers' compensation insurer for the state and to serve as the workers' compensation insurer of last resort in the private market. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be "neither more nor less than self-supporting." The State of California is not liable for any obligations of SCIF. In 2016, SCIF collected nearly $1.4 billion in premium, and small businesses accounted for roughly 40% of the premiums collected. However, approximately 90% of all SCIF policies are issued to small businesses.
3. Board Qualifications. The current board structure was established by legislation in 2008 following a number of audits and investigations triggered by allegations of misconduct by SCIF board members. In response to these investigative and audit findings, the legislature passed an extensive reform package, including expanding the board from five to 11 members and requiring that a majority of the board have substantial experience with organizations of SCIF's size and complexity. Current law requires that one board member be a current/previous policy holder and that one member have an auditing background and chair the board's audit committee.

Analysis Prepared by: Paul Riches / INS. / (916) 319-2086 FN: 0001221

 THIRD READING  

Bill No: AB 61

Author:

:

Vote:

SENATE INS., BANK. & FIN. COMMITTEE: 9-0, 6/28/17

AYES: Mendoza, Galgiani, Glazer, Hernandez, Lara, Morrell, Newman, Portantino, Roth

NO VOTE RECORDED: Berryhill, Gaines, Hueso, Mitchell

ASSEMBLY FLOOR: 77-0, 5/11/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill requires one board member of the State Compensation Insurance Fund (State Fund) appointed by the Governor to be a current or former small business owner who is or has been a small business owner for more than five years, as specified.

ANALYSIS:

Existing law:

1. Establishes State Fund, a quasi-state agency, for the purpose of transacting workers’ compensation insurance, to be administered by a board with full power, authority and jurisdiction to conduct the business of the fund.
2. Directs State Fund to be fairly competitive with other insurers, and states the intent of the Legislature that it be neither more nor less than self-supporting.
3. Specifies that the board of directors is composed of 11 members serving five-year terms, nine of whom are appointed by the Governor including the chairperson, one must be from organized labor, at least one person must have sufficient background in auditing to serve as chair of the board's Audit Committee, and all but the labor member must have substantial experience in positions involving workers’ compensation, legal, investment, financial, corporate governance and management, accounting, or auditing responsibilities with entities of sufficient size as to make their qualifications relevant to State Fund.
4. Provides that one board member is appointed by the Assembly Speaker to represent organized labor, and one board member is appointed by the Senate Committee on Rules and must have been a policyholder of State Fund or an employee of a policyholder for at least one year preceding the appointment.
5. Provides that the Director of the Department of Industrial Relations serves as an ex-officio member of the board.
6. Provides that each voting member of the board shall be paid an annual compensation of $50,000, to be automatically adjusted for inflation, as specified, beginning January 1, 2010; compensation is currently $56,959.
7. Specifies that the Milton Marks Postgovernment Employment Restrictions Act applies to State Fund’s board and appointed employees.
8. Specifies that the board and appointed officers are prohibited from lobbying State Fund for two years after leaving employment with State Fund.

This bill:

1. Requires one board member appointed by the Governor to be a current or former small business owner who is or has been a small business owner for more than five years and has been a policyholder of State Fund for one year immediately preceding the appointment and shall continue in this status during the period of his or her membership.
2. Provides that the exemption from specified qualifications that applies to the labor member also applies to the small business owner member.
3. Provides that the small business member shall be appointed to the first board vacancy that is not left by the labor or auditing background member.

Background

State Fund was created by statute in 1914 to act as a workers’ compensation insurer for the state and to serve as the workers’ compensation insurer of last resort in the private market. It also serves as a Third Party Administrator (TPA) for self-insured public and private employers. The State of California is its largest TPA client. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be “neither more nor less than self-supporting.” The State of California is not liable for any obligations of State Fund. State Fund currently insures almost 115,000 businesses and collected nearly $1.4 billion in premiums in 2016. Small businesses accounted for about 40% of the premiums collected but almost 90% of its policies.

Just like other insurers, State Fund is regulated by the California Department of Insurance (CDI) and is required to report its business quarterly to the Governor, including its resources and liabilities, and to use an outside auditor to annually audit its books and operations.

Until 2008, State Fund had just five board members who were required to be State Fund policyholders, or employees of policyholders. This posed a significant challenge because while State Fund is a large multibillion dollar insurance company, most of its policyholders are small to medium sized businesses. As a result, few of its policyholders had experience running a large insurance company. In March 2007, the Senate Banking, Finance and Insurance Committee held a hearing to examine allegations of financial and operational improprieties involving senior State Fund officials. In the fall of 2006, two board members voluntarily resigned after conflict of interest concerns were raised. In 2007, the CDI, as part of its regulatory authority, launched a full operational and financial audit of State Fund by an outside firm, RSM McGladry. That audit provided a scathing review of an organization run amok, with poor business and accounting practices throughout the organization. Many of the problems identified in the audit had roots in the fact that State Fund’s board was unusually small for an insurance company of its size, and lacked expertise to adequately supervise State Fund operations or the executive team.

In response to these problems, legislation passed in 2008 (AB 1874, Coto, Chapter 322, Statutes of 2008) expanded State Fund’s Board of Directors from 5 to 11 voting members, required board members to have specifically relevant experience for an organization as complex as State Fund, including workers’ compensation insurance, auditing, and corporate governance, and provided for compensation of board members. Having 11 members allows the board to more effectively staff important subcommittees, including investments, governance and audit.

This bill maintains the same number of board members, but exempts the small business appointee from the relevant experience in a comparable large organization requirement. For purposes of the bill, “small business” means an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of $10 million or less over the previous three years, or is a manufacturer, as defined, with 100 or fewer employees.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 7/3/17)

California Small Business Association

OPPOSITION: (Verified 7/3/17)

None received

ARGUMENTS IN SUPPORT: According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers’ compensation insurance from State Fund. After six additional members were added to the Board of Directors in 2009, it resulted in only one member being a previous policy holder. While this structure isn’t undesirable, there is a desire to include more input from the small business community. This bill is needed to offer additional insight on how a small business functions and how a workers’ compensation claim affects the business and its operations.

ASSEMBLY FLOOR: 77-0, 5/11/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, Quirk, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Dahle, O'Donnell, Patterson

Prepared by:

7/5/17 15:23:05

**** END ****

SENATE COMMITTEE ON INSURANCE, BANKING AND FINANCIAL INSTITUTIONS

Senator Tony Mendoza, Chair

2017 - 2018 Regular

Bill No: AB 61 Hearing Date: June 28, 2017

Subject: State Compensation Insurance Fund: board

SUMMARY

Requires one board member of the State Compensation Insurance Fund (State Fund) appointed by the Governor to be a current or former small business owner who is or has been a small business owner for more than five years, as specified.

DIGEST

Existing law

1. Establishes State Fund, a quasi-state agency, for the purpose of transacting workers’ compensation insurance, to be administered by a board with full power, authority and jurisdiction to conduct the business of the fund.
2. Directs State Fund to be fairly competitive with other insurers, and states the intent of the Legislature that it be neither more nor less than self-supporting.
3. Specifies that the board of directors is composed of 11 members serving 5 year terms, nine of whom are appointed by the Governor including the chairperson, one must be from organized labor, at least one person must have sufficient background in auditing to serve as chair of the board's Audit Committee, and all but the labor member must have substantial experience in positions involving workers’ compensation, legal, investment, financial, corporate governance and management, accounting, or auditing responsibilities with entities of sufficient size as to make their qualifications relevant to State Fund.
4. Provides that one board member is appointed by the Assembly Speaker to represent organized labor, and one board member is appointed by the Senate Committee on Rules and must have been a policyholder of State Fund or an employee of a policyholder for at least one year preceding the appointment.
5. Provides that the Director of Industrial Relations serves as an ex-officio member of the board.
6. Provides that each voting member of the board shall be paid an annual compensation of $50,000, to be automatically adjusted for inflation, as specified, beginning January 1, 2010; compensation is currently $56,959.
7. Specifies that the Milton Marks Postgovernment Employment Restrictions Act applies to State Fund’s board and appointed employees.
8. Specifies that the board and appointed officers are prohibited from lobbying State Fund for two years after leaving employment with State Fund.
   

This bill

1. Requires one board member appointed by the Governor to be a current or former small business owner, as specified, who is or has been a small business owner for more than five years.
2. Specifies that the exemption from specified qualifications that applies to the labor member also apply to the small business owner member.
   

COMMENTS

1. Purpose of the bill According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers’ compensation insurance from State Fund. After 6 additional members were added to the Board of Directors in 2009, it resulted in only one member being a previous policy holder. While this structure isn’t undesirable, there is a desire to include more input from the small business community. This bill is needed to offer additional insight on how a small business functions and how a worker’s compensation claim affects the business and its operations.

1. Background State Fund was created by statute in 1914 to act as a workers’ compensation insurer for the state and to serve as the workers’ compensation insurer of last resort in the private market. It also serves as a Third Party Administrator (TPA) for self-insured public and private employers. The State of California is its largest TPA client. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be “neither more nor less than self-supporting.” The State of California is not liable for any obligations of State Fund. State Fund currently insures almost 115,000 businesses and collected nearly $1.4 billion in premium in 2016. Small businesses accounted for about 40% of the premiums collected but almost 90 % of its policies.

As a non-profit quasi state entity tasked to operate in the private workers’ compensation market, State Fund faces a mandate different from other workers’ compensation insurers: to maintain enough market share to remain financially stable and provide quality services, but not to compete for increased market share or make a profit. Just like other insurers, State Fund is regulated by the California Department of Insurance (CDI) and is required to report its business quarterly to the Governor, including its resources and liabilities, and to use an outside auditor to annually audit its books and operations.

Until 2008, State Fund had just five board members who were required to be State Fund policyholders, or employees of policyholders. This posed a significant challenge because while State Fund is a large multibillion dollar insurance company, most of its policyholders are small to medium sized businesses. As a result, few of its policyholders had experience running a large insurance company. In March 2007, the Senate Banking, Finance and Insurance Committee held a hearing to examine allegations of financial and operational improprieties involving senior State Fund officials. In the fall of 2006, two board members voluntarily resigned after conflict of interest concerns were raised. The CDI, as part of its regulatory authority, in 2007 launched a full operational and financial audit of State Fund by an outside firm, RSM McGladry. That audit provided a scathing review of an organization run amok, with poor business and accounting practices throughout the organization. Many of the problems identified in the audit had roots in the fact that State Fund’s board was unusually small for an insurance company of its size, and lacked expertise to adequately supervise State Fund operations or the executive team.

In response to these problems, legislation passed in 2008 (AB 1874 Coto, Chap. 322 Stat. of 2008) expanded State Fund’s Board of Directors from 5 to 11 voting members, required board members to have specifically relevant experience for an organization as complex as State Fund, including workers’ compensation insurance, auditing, and corporate governance, and provided for compensation of board members. Having 11 members allows the board to more effectively staff important subcommittees, including investments, governance and audit.

This bill maintains the same number of board members, but exempts the small business appointee from the relevant experience in a comparable large organization requirement. For purposes of the bill, “small business” means an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of ten million dollars ($10,000,000) or less over the previous three years, or is a manufacturer, as defined, with 100 or fewer employees.

1. Support The California Small Business Association supports AB 61 because it will help provide a fair and equitable playing field for the small businesses of California through representation on the State Compensation Insurance Fund board. This addition will bring actual small business experience and solutions to the board.
2. Opposition None received.
   
3. Questions
   1. If the small business appointee has workers’ compensation insurance with another insurer, that would pose a conflict of interest. Should the small business appointee be required to be a State Fund policyholder?
   2. The bill does not specify when this appointee is to be appointed. Should it specify that the small business board member be appointed by the Governor at the time of the next relevant board vacancy—a vacancy that is not the designated labor or auditing appointee?
      
      
4. Suggested Amendments
   1. On page 2, lines 20-21, change to: of the Government Code, and who is or has been an owner of a small business for more than five years, and has been a policyholder of the State Compensation Insurance Fund for one year immediately preceding the appointment and shall continue in this status during the period of his or her membership.
   2. Add a provision that the small business appointee will be appointed at the time of the next vacancy other than the labor or accounting appointee.
      
5. Prior and Related Legislation
   1. SB 272 (Mendoza) Allows the State Fund board of directors to appoint a chief underwriting officer, chief information security officer, executive vice president of corporate claims, executive vice president of strategic planning and pricing actuary as positions exempt from civil service requirements.
   2. AB 1874 (Coto, Chap. 322 Stat. of 2008) expanded State Fund’s Board of Directors from 5 to 11 voting members and required board members to have specifically relevant experience for an organization as complex as State Fund, including workers’ compensation insurance, auditing, and corporate governance.
      

POSITIONS

Support

California Small Business Association

Oppose

None received

-- END --

SENATE COMMITTEE ON INSURANCE, BANKING AND FINANCIAL INSTITUTIONS

Senator Tony Mendoza, Chair

2017 - 2018 Regular

Bill No: AB 61 Hearing Date: June 7, 2017

Subject: State Compensation Insurance Fund: board

SUMMARY

Requires one board member of the State Compensation Insurance Fund (State Fund) appointed by the Governor to be a current or former small business owner who is or has been a small business owner for more than five years, as specified.

DIGEST

Existing law

1. Establishes State Fund, a quasi-state agency, for the purpose of transacting workers’ compensation insurance, to be administered by a board with full power, authority and jurisdiction to conduct the business of the fund.
2. Directs State Fund to be fairly competitive with other insurers, and states the intent of the Legislature that it be neither more nor less than self-supporting.
3. Specifies that the board of directors is composed of 11 members serving 5 year terms, nine of whom are appointed by the Governor including the chairperson, one must be from organized labor, at least one person must have sufficient background in auditing to serve as chair of the board's Audit Committee, and all but the labor member must have substantial experience in positions involving workers’ compensation, legal, investment, financial, corporate governance and management, accounting, or auditing responsibilities with entities of sufficient size as to make their qualifications relevant to State Fund.
4. Provides that one board member is appointed by the Assembly Speaker to represent organized labor, and one board member is appointed by the Senate Committee on Rules and must have been a policyholder of State Fund or an employee of a policyholder for at least one year preceding the appointment.
5. Provides that the Director of Industrial Relations serves as an ex-officio member of the board.
6. Provides that each voting member of the board shall be paid an annual compensation of $50,000, to be automatically adjusted for inflation, as specified, beginning January 1, 2010; compensation is currently $56,959.
7. Specifies that the Milton Marks Postgovernment Employment Restrictions Act applies to State Fund’s board and appointed employees.
8. Specifies that the board and appointed officers are prohibited from lobbying State Fund for two years after leaving employment with State Fund.
   

This bill

1. Requires one board member appointed by the Governor to be a current or former small business owner, as specified, who is or has been a small business owner for more than five years.
2. Specifies that the exemption from specified qualifications that applies to the labor member also apply to the small business owner member.
   

COMMENTS

1. Purpose of the bill According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers’ compensation insurance from State Fund. After 6 additional members were added to the Board of Directors in 2009, it resulted in only one member being a previous policy holder. While this structure isn’t undesirable, there is a desire to include more input from the small business community. This bill is needed to offer additional insight on how a small business functions and how a worker’s compensation claim affects the business and its operations.

1. Background State Fund was created by statute in 1914 to act as a workers’ compensation insurer for the state and to serve as the workers’ compensation insurer of last resort in the private market. It also serves as a Third Party Administrator (TPA) for self-insured public and private employers. The State of California is its largest TPA client. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be “neither more nor less than self-supporting.” The State of California is not liable for any obligations of State Fund. State Fund currently insures almost 115,000 businesses and collected nearly $1.4 billion in premium in 2016. Small businesses accounted for about 40% of the premiums collected but almost 90 % of its policies.

As a non-profit quasi state entity tasked to operate in the private workers’ compensation market, State Fund faces a mandate different from other workers’ compensation insurers: to maintain enough market share to remain financially stable and provide quality services, but not to compete for increased market share or make a profit. Just like other insurers, State Fund is regulated by the California Department of Insurance (CDI) and is required to report its business quarterly to the Governor, including its resources and liabilities, and to use an outside auditor to annually audit its books and operations.

Until 2008, State Fund had just five board members who were required to be State Fund policyholders, or employees of policyholders. This posed a significant challenge because while State Fund is a large multibillion dollar insurance company, most of its policyholders are small to medium sized businesses. As a result, few of its policyholders had experience running a large insurance company. In March 2007, the Senate Banking, Finance and Insurance Committee held a hearing to examine allegations of financial and operational improprieties involving senior State Fund officials. In the fall of 2006, two board members voluntarily resigned after conflict of interest concerns were raised. The CDI, as part of its regulatory authority, in 2007 launched a full operational and financial audit of State Fund by an outside firm, RSM McGladry. That audit provided a scathing review of an organization run amok, with poor business and accounting practices throughout the organization. Many of the problems identified in the audit had roots in the fact that State Fund’s board was unusually small for an insurance company of its size, and lacked expertise to adequately supervise State Fund operations or the executive team.

In response to these problems, legislation passed in 2008 (AB 1874 Coto, Chap. 322 Stat. of 2008) expanded State Fund’s Board of Directors from 5 to 11 voting members, required board members to have specifically relevant experience for an organization as complex as State Fund, including workers’ compensation insurance, auditing, and corporate governance, and provided for compensation of board members. Having 11 members allows the board to more effectively staff important subcommittees, including investments, governance and audit.

This bill maintains the same number of board members, but exempts the small business appointee from the relevant experience in a comparable large organization requirement. For purposes of the bill, “small business” means an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of ten million dollars ($10,000,000) or less over the previous three years, or is a manufacturer, as defined, with 100 or fewer employees.

1. Support The California Small Business Association supports AB 61 because it will help provide a fair and equitable playing field for the small businesses of California through representation on the State Compensation Insurance Fund board. This addition will bring actual small business experience and solutions to the board.
2. Opposition None received.
   
3. Questions
   1. If the small business appointee has workers’ compensation insurance with another insurer, that would pose a conflict of interest. Should the small business appointee be required to be a State Fund policyholder?
   2. The bill does not specify when this appointee is to be appointed. Should it specify that the small business board member be appointed by the Governor at the time of the next relevant board vacancy—a vacancy that is not the designated labor or auditing appointee?
      
      
4. Suggested Amendments
   1. On page 2, lines 20-21, change to: of the Government Code, and who is or has been an owner of a small business for more than five years, and has been a policyholder of the State Compensation Insurance Fund for one year immediately preceding the appointment and shall continue in this status during the period of his or her membership.
   2. Add a provision that the small business appointee will be appointed at the time of the next vacancy other than the labor or accounting appointee.
      
5. Prior and Related Legislation
   1. SB 272 (Mendoza) Allows the State Fund board of directors to appoint a chief underwriting officer, chief information security officer, executive vice president of corporate claims, executive vice president of strategic planning and pricing actuary as positions exempt from civil service requirements.
   2. AB 1874 (Coto, Chap. 322 Stat. of 2008) expanded State Fund’s Board of Directors from 5 to 11 voting members and required board members to have specifically relevant experience for an organization as complex as State Fund, including workers’ compensation insurance, auditing, and corporate governance.
      

POSITIONS

Support

California Small Business Association

Oppose

None received

-- END --

Date of Hearing: May 3, 2017

ASSEMBLY COMMITTEE ON INSURANCE

Tom Daly, Chair

ABPCA Bill Id:AB 61 (

Author:Holden) – As Amended Ver:March 23, 2017

SUBJECT: State Compensation Insurance Fund: board

SUMMARY: Requires that one member of the State Compensation Insurance Fund (SCIF) board of directors (board) be a current or former owner of a small business.

EXISTING LAW:

1. Establishes SCIF as a quasi-public entity to be the insurer of last resort for workers' compensation insurance.
2. Establishes an 11 person board for SCIF with board members serving 5 year terms.
3. Provides that 9 of the board members are appointed by the Governor and 1 each by the Speaker of the Assembly and the Senate Rules Committee.
4. Requires that at least one person on the board have sufficient background in auditing to serve as chair of the board's Audit Committee.
5. Provides that the Speaker of the Assembly shall appoint a representative from organized labor to the board.
6. Provides that the Senate Rules Committee shall appoint an officer or employee from a business that is a SCIF policyholder to the board.
7. Provides that the Director of Industrial Relations serves as an ex-officio member of the board.
8. Requires the remaining board members to have substantial experience in workers’ compensation, legal, investment, financial, corporate governance and management, or accounting with entities similar in size to SCIF.

FISCAL EFFECT: Undetermined.

COMMENTS:

1. Purpose. According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers’ compensation insurance from SCIF. Current law requires that only one member be a current or previous policy holder. There is a desire to include more input from the small business community. This bill is needed to provide the SCIF board with additional insight to the realities of operating a small business and how a worker’s compensation claim can impact small business functions.
2. What is SCIF? SCIF was created by statute in 1914 to act as a workers’ compensation insurer for the state and to serve as the workers’ compensation insurer of last resort in the private market. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be “neither more nor less than self-supporting.” The State of California is not liable for any obligations of SCIF. In 2016, SCIF collected nearly $1.4 billion in premium, and small businesses accounted for roughly 40% of the premiums collected. However, approximately 90% of all SCIF policies are issued to small businesses.
3. Board Qualifications. The current board structure was established by legislation in 2008 following a number of audits and investigations triggered by allegations of misconduct by SCIF board members. In response to these investigative and audit findings, the legislature passed an extensive reform package, including expanding the board from 5 to 11 members and requiring that a majority of the board have substantial experience with organizations of SCIF's size and complexity. Current law requires that one board member be a current/previous policy holder and that one member have an auditing background and chair the board's audit committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Small Business Association

Opposition

None received.

Analysis Prepared by: Paul Riches / INS. /

Date of Hearing: May 3, 2017

ASSEMBLY COMMITTEE ON INSURANCE

Tom Daly, Chair

ABPCA Bill Id:AB 61 (

Author:Holden) – As Amended Ver:March 23, 2017

SUBJECT: State Compensation Insurance Fund: board

SUMMARY: Requires that one member of the State Compensation Insurance Fund (SCIF) board of directors (board) be a current or former owner of a small business.

EXISTING LAW:

1. Establishes SCIF as a quasi-public entity to be the insurer of last resort for workers' compensation insurance.
2. Establishes an 11 person board for SCIF with board members serving 5 year terms.
3. Provides that 9 of the board members are appointed by the Governor and 1 each by the Speaker of the Assembly and the Senate Rules Committee.
4. Requires that at least one person on the board have sufficient background in auditing to serve as chair of the board's Audit Committee.
5. Provides that the Speaker of the Assembly shall appoint a representative from organized labor to the board.
6. Provides that the Senate Rules Committee shall appoint an officer or employee from a business that is a SCIF policyholder to the board.
7. Provides that the Director of Industrial Relations serves as an ex-officio member of the board.
8. Requires the remaining board members to have substantial experience in workers’ compensation, legal, investment, financial, corporate governance and management, or accounting with entities similar in size to SCIF.

FISCAL EFFECT: Undetermined.

COMMENTS:

1. Purpose. According to the author, California is home to 700,000 small businesses, making up 99% of the employers in the state, many of which receive workers’ compensation insurance from SCIF. Current law requires that only one member be a current or previous policy holder. There is a desire to include more input from the small business community. This bill is needed to provide the SCIF board with additional insight to the realities of operating a small business and how a worker’s compensation claim can impact small business functions.
2. What is SCIF? SCIF was created by statute in 1914 to act as a workers’ compensation insurer for the state and to serve as the workers’ compensation insurer of last resort in the private market. Although created by the Legislature, it is operated as a private non-profit enterprise, and is supposed to be “neither more nor less than self-supporting.” The State of California is not liable for any obligations of SCIF. In 2016, SCIF collected nearly $1.4 billion in premium, and small businesses accounted for roughly 40% of the premiums collected. However, approximately 90% of all SCIF policies are issued to small businesses.
3. Board Qualifications. The current board structure was established by legislation in 2008 following a number of audits and investigations triggered by allegations of misconduct by SCIF board members. In response to these investigative and audit findings, the legislature passed an extensive reform package, including expanding the board from 5 to 11 members and requiring that a majority of the board have substantial experience with organizations of SCIF's size and complexity. Current law requires that one board member be a current/previous policy holder and that one member have an auditing background and chair the board's audit committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Small Business Association

Opposition

None received.

Analysis Prepared by: Paul Riches / INS. /