BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Jackie Speier, Chair SB 1459 (Simitian) Hearing Date: April 5, 2006 As Amended: March 28, 2006 Fiscal: Yes Urgency: No SUMMARY Would amend the Political Reform Act of 1974 to provide for public financing for candidates for the office of Insurance Commissioner (IC), and would impose a fee on insurers for that purpose DIGEST Existing law 1. Prohibits the expenditure of public funds by public officers or candidates for the purpose of seeking elective office; 2. Establishes limits on the amount of campaign contributions that an individual or group can make to a candidate for state or local elective offices; 3. Allows for the Political Reform Act to be amended by statute if either: a. A statute that furthers the purposes of the Political Reform Act is passed by a two-thirds majority roll call vote by both houses of the legislature and signed by the Governor, and at least 12 days prior to passage in each house the bill has been distributed to the FPPC for distribution to the media and any person who has requested copies of such bills, or b. The statute is passed by a majority vote and becomes effective only after approval of the voters. SB 1459 (Simitian), PageB This bill 1. Would amend the Political Reform Act of 1974 to allow public financing of political campaigns for IC through a fee collected from insurers; 2. Would enact the "Insurance Commissioner Election Accountability Act of 2006" (Act) and make several legislative findings including that: a. The position of IC is unique among state elected officers because s/he regulates a single industry; b. Candidates for IC have to raise campaign money from groups, including insurers and insurers' organizations that have specific stakes in the outcomes of decisions that will be made by the IC; c. The office of the IC has suffered from the taint of at least one serious instance of corruption that led to resignation of an IC, and been subjected to frequent allegations of being unduly influenced by the insurance industry; d. A mechanism for funding a publicly financed IC election does not undermine the intent of Proposition 73 of 1988 that prohibited the expenditure or acceptance of public moneys for the purpose of elective campaigns; e. The fee charged to insurers under this Act is only for the purpose of financing campaigns for the office of IC, and are appropriate and no more than necessary for that purpose; f. Insurers and policyholders benefit by having an IC free of the taint of selective industry contributions; g. Insurance consumers will benefit from the effective and unbiased regulation of the insurance industry; 3. Would establish criteria for candidates who voluntarily SB 1459 (Simitian), PageC seek to qualify for campaign funding under this Act, including: a. The candidate must file a declaration with the FPPC stating that the candidate has and will comply with all provisions of this Act, including limitations on contributions from any sources not specifically allowed; b. The candidate receives at least 7,500 qualifying contributions of $5 from registered voters that are recorded with the FPPC, as specified; c. The candidate deposits all qualifying contributions in the candidate's campaign account, and subsequently writes a check for all such funds for deposit in the Insurance Commissioner Election Accountability (ICEA) Fund that is created by this Act; 4. Would define candidates as participating or non-participating for purposes of implementing the provisions of this Act; 5. Would define key election periods as follows: a. The "Exploratory campaign period" runs from 18 months prior to the primary election to 90 days prior to the primary, inclusive; b. The "Qualifying period" runs from 270 days prior to the primary election to 90 prior to the primary, inclusive; c. The "Primary election campaign period" runs from the 89th day prior to the primary to the day of the primary; d. The "General election campaign period" runs from the day after the primary to the day of the general election; 6. Would allow a candidate in the first election cycle following the effective date of this Act to be certified as a participating candidate despite having accepted otherwise non-allowable contributions if those contributions are returned to the contributor, held in an account to retire a debt from a previous campaign, SB 1459 (Simitian), PageD or are deposited in the ICEA Fund; 7. Would prohibit any candidate who becomes a qualifying candidate and accepts ICEA funds in the primary from accepting non-allowable private contributions in the general election, whether or not the candidate takes ICEA funds for the general election; 8. Would prohibit a participating candidate from soliciting or receiving political contributions for any other candidate, political party, or political committee; 9. Would require a participating candidate to conduct all campaign activities through a single campaign account, but would allow the candidate to maintain another account for the purposes of retiring campaign debt from a previous election, but for no more than six months following the date of the election; 10. Would require the candidate to pay all campaign expenses, except petty cash up to $100 per day to pay expenses of no more than $25 each, with an ICEA debit card provided by the FPPC, and would require records of all expenditures be provided to the FPPC, including those utilizing petty cash; 11. Would prohibit use of ICEA funds for any purpose other than direct campaign purposes, and specifically would prohibit use of ICEA funds for legal defense in any campaign law enforcement proceeding, the candidate's personal support, compensation to the candidate's family, the candidate's personal appearance, capital assets worth more than $500 and a useful life beyond the current election cycle, independent expenditures, contributions to other candidates, or a gift to any person in excess of $25; 12. Would allow the candidate to raise "seed money" of no more than $100 per contributor prior to the end of the qualifying period, but in not more than $75,000 in aggregate of seed money, and would impose reporting requirements on those contributions, as specified; 13. Would require a candidate seeking qualification to report all seed money contributions and expenditures to SB 1459 (Simitian), PageE the FPPC within 72 hours of the close of the qualifying period; 14. Would specify that seed money is to be spent only during the exploratory and qualifying periods, and any unspent seed money would be turned over to the FPPC for deposit in the ICEA Fund; 15. Would require the FPPC to certify that a candidate is or is not eligible for ICEA funding within five days of the candidate's submission of an application signed by the candidate and the candidate's campaign treasurer under penalty of perjury, and would provide that the FPPC's decision is final, subject to judicial review within 48 hours; 16. Would provide a candidate $1.5 million in ICEA funding for a primary, special or special runoff election on the date that the FPPC certifies the candidate as a qualified participating candidate, but in the case of a primary election no earlier than the beginning of the primary election campaign period; if the candidate has no opponent in the primary, the amount is 10% of the amount provided a candidate in a contested election; 17. Would provide an eligible qualified candidate $3 million in ICEA finding for the general election campaign period within 24 hours after certification of the primary election results; 18. Would provide the same general election funding to candidates who were not a qualified party candidate in the primary but received at least 20% of the primary vote or who collect valid signatures of registered voters during the primary period equal in number to 5% of the votes cast for IC in the last general election, and who fulfill all other requirements of the Act; 19. Would establish new expenditure reporting requirements for non-participating candidates for IC, and would provide that if a non-participating candidate spends more than the amount of the ICEA allotment during the primary or general election cycle, the FPPC shall immediately release additional ICEA funding to all participating candidates in an amount equal to the excess spending by the non-participating candidate, up SB 1459 (Simitian), PageF to 500% of the initial ICEA funding, to wit, a candidate could receive up to $7.5 million in public funds for the primary election and $15 million for the general election; 20. Would require all independent expenditures of $1,000 or more in connection with a non-participating candidate for IC be reported, as specified, to the FPPC within 24 hours, and would allow matching public funds as described in #19 above be provided to the participating candidate the expenditure was intended to oppose or defeat; 21. Would allow the FPPC to fine any individual or organization that fails to report independent expenditures as required or provides false information up to three times the amount of the independent expenditure in addition to any other remedies; 22. Would prohibit all candidates for IC, or a committee controlled by a candidate for IC, from receiving any contributions more than 18 months before the primary election; 23. In addition to the monies provided in #16 and #17 above, would allow candidates to accept monetary or in-kind contributions from political parties provided the total of all such contributions does not exceed 5% of the original ICEA funding allotment, or $75,000 in the primary and $150,000 in the general election period; 24. Would establish the ICEA Fund in the State Treasury, and would continuously appropriate funds to the FPPC to carry out this Act; 25. Would fund the Act through a fee equal to .01% of the amount of gross premiums, with funds deposited into the ICEA Fund; 26. Would provide that any unspent funds distributed to any participating candidate who does not remain a candidate for the primary or general election, or any funds not spent by the candidate for the primary or general election for which they were distributed would be returned to the ICEA Fund; SB 1459 (Simitian), PageG 27. Would allow for voluntary donations to the ICEA Fund; 28. Would prohibit a participating candidate and his or her staff from paying campaign costs by cash, check, money order, loan or any other means other than the ICEA debit card or "line of debit", except for petty cash as described in #10 above; 29. Would provide that if the FPPC determines there are not enough funds in the ICEA program to adequately fund all eligible candidates, it shall proportionately reduce the amount provided to all eligible candidates; in such a case a candidate may either decide to become a non-participating candidate or collect contributions under the limits applicable to nonparticipating candidates up to the amount the candidate would have been entitled to receive if ICEA was fully funded; 30. Would provide that if a participating candidate spends more than the ICEA funding and the FPPC determines that it had no material effect on the election outcome, the candidate would repay to the FPPC an amount equal to the excess for deposit into the ICEA Fund, but if the FPPC determines that the excess had or could have had a significant impact on the outcome, the candidate would repay the FPPC an amount 10 times the value of the excess; 31. Would make it a misdemeanor for a candidate to knowingly accept more ICEA benefits than those to which they are entitled, spend more than the ICEA funding they have received, or misuse that funding; if the FPPC determines that the violation significantly impacts the results or conduct of the election, the candidate may be fined up to $25,000 or imprisoned in county jail for up to one year, or both; 32. Would require any person found criminally guilty of a misdemeanor or felony under this Act to spend at least 24 hours in jail or state prison; 33. Would require the FPPC to adjust all contribution limits, seed money limits, and public financing amounts in every odd-numbered year to reflect any increase or decrease in the Consumer Price Index and the increase SB 1459 (Simitian), PageH in registered voters, as specified 34. Would specify that this Act be placed on the June 3, 2008 ballot; 35. Would provide for severability if any provision of this Act is held invalid. COMMENTS 1. Purpose of the bill . To provide for public financing of candidates for Insurance Commissioner in order to add to the credibility of that office and to ensure effective and unbiased regulation of the insurance industry. 2. Background . The office of the Insurance Commissioner is unique among statewide elective offices in that its holder directly regulates a single industry. This narrow regulatory focus leaves the office open to conflicting charges. Some have charged that an IC may exchange favorable treatment of insurers for campaign contributions or other items of value to the political fortunes of the IC. Others, sometimes insurers, make the opposite charge: that an IC is engaging in excessive and inappropriate regulatory actions in order to build up a public reputation of being "tough" that will serve the IC well in future campaigns. Through the IC's power to issue regulations, licenses, approve rate increases, launch market conduct investigations, enforce Insurance Code requirements, assess penalties and myriad other actions, the IC exercises tremendous power over the insurance industry. However, much of this power is wielded through subjective and technical enforcement activities, and this can make abuses of authority difficult to identify. For example, the question of whether an insurer is financially impaired is partially a question of math--- whether the ratios that are used to analyze an insurer's finances are trending in an adverse manner-and partially a judgment call--- can the trend be reversed? Interim IC Clark Kelso commented to this SB 1459 (Simitian), PageI committee that, every day, he had access to very sensitive information about insurer finances. This information was valuable in the sense that it could make or break a given company should it be publicly reported or acted upon by others. Proposition 103 of 1988 changed the job of IC from an appointed to an elected position, and also required the IC to approve most insurance rates in advance instead of after the fact, among other provisions. By making the IC elected instead of appointed, the proponents of Prop. 103 intended to make the position more accountable to the people. In practice, the high cost of running a statewide election campaign now requires the IC to raise significant amounts of money to finance such an effort. The insurance industry has traditionally been a significant source of funding for a wide variety of elective offices and political activities. According to the Foundation for Taxpayer and Consumer Rights (FTCR), proponents of Prop. 103, as a practical matter, the ability of insurance companies to elect sympathetic candidates has been demonstrated in several instances, including the second election of an IC in 1994. According to the FTCR, to the degree that insurance companies are more concerned about electing a supportive candidate than is the general public, the insurance companies will be more likely to successfully dominate the electoral process. The unique aspects of the office of the Insurance Commissioner were brought home in 2000 with the discovery of some 26 settlements between the DOI and insurers between 1997 and 2000. Although some of the settlement funds went to traditional uses (such as repaying the Department of Insurance for its costs of enforcement), millions of dollars were diverted to fund television commercials and other activities featuring the IC. The funds were not deposited in the General Fund, the settlements themselves were secret and, as a result, neither the Legislature, nor the public were aware of how this money was generated or spent until media reports drew attention to the expenditures. As noted in the Overview of this committee's final SB 1459 (Simitian), PageJ report on its investigation into the abuses of power under the former IC, "The very power of the office invites abuse. Out of sight of the press, the Legislature and the public, the IC may enter into agreements with insurers, decide not to go forward on an examination, approve rate increases or decreases, or even tip off insurers about pending regulatory actions."<1> California law was subsequently amended to require that settlements be made public and that funds be deposited in the state treasury (SB 1805, Escutia, Chapter 971, Statutes of 2000, and SB 2107, Speier, Chapter 1091, Statutes of 2000). During the legislative investigation into the misconduct by the IC in 2000, staff of the Department of Insurance (DOI) alleged that the IC had a target of $3 million to be raised from title insurers accused of market misconduct in order that the IC could purchase advertising time to promote himself to the public. There were problems in the business practices of title insurers, including allegations of illegal kickbacks to real estate agents, etc. Thus, the examinations (and ultimately settlements) went forward. However, as this case demonstrates, determining the real reason for regulatory actions taken by any IC is difficult. There may be a mixture of legitimate and highly irregular motivations for exercising regulatory authority when an IC needs to prepare for a future election. Funding based on premium . This bill would fund its provisions through a fee on insurers based on .01% of premium. California generally levies a premium tax of 2.35% of premium on most forms of insurance. The basis of the premium tax is the amount of "gross premiums" received upon business done in the state, less returned premiums. Some insurers are taxed using different formulas, such as title insurers who are taxed 2.35% of income and ocean marine insurers which are taxed at a rate of 5% of underwriting profits. Surplus line brokers are taxed at 3% of surplus line premiums. A lower .50% rate is applied to premiums received under pension and profit sharing plan contracts. ------------------------- <1> Department of Insurance: In Rubble After Northridge," Report of the Senate Committee on Insurance, August 28, 2000. SB 1459 (Simitian), PageK There is an issue regarding whether the .01% levied by this bill is a fee or a tax, and the bill is keyed a majority vote bill, in part, because the initial determination of Legislative Counsel was that the .01% levy is a fee. Committee staff has asked Legislative Counsel to revisit this question but a clear answer was not available by the time this analysis was prepared. It should be noted that the Legislature may change the gross premiums tax rate on a majority vote basis<2>. A majority vote is also permissible to amend the Political Reform Act when the amendment is put to the voters. In light of the initial determination that the bill imposes a fee, the bill's language states that the benefit of "effective and unbiased regulation of the insurance industry" will benefit both insurers and insurance consumers, and the language of the findings appear to assume that the cost of the levy will be passed on through higher premiums. By way of a benchmark, the average auto insurance premium in California in 2003 was $821 per year. If the .01% fee were passed on to consumers, the average cost would be approximately 8.21 cents per year per policy. The .01% levy proposed by this measure is considered sufficient and necessary to fully fund the purposes of this bill. The combination of the fee and the existing premium tax would effectively increase the amount paid by insurers to 2.36% of gross premiums, less returned premiums. Using the .01% rate, with gross premiums reported by the DOI in 2004 of approximately $85 billion, some $8.5 million would be raised per year through the fee and deposited into the ICEA Fund, resulting in a pool of approximately $34 million per election cycle. That amount would increase as premiums increase over time. In the 2002 Insurance Commissioner race, the Democratic and Republican candidates spent approximately $3.4 and $2.4 million respectively. Constitutional free speech issues? Participation in public financing is voluntary under this bill, but the bill may still be challenged as violating the U.S. and California Constitutions' guarantee of free speech. While the right to freedom speech is not absolute, when ------------------------- <2> Article XIII, Section 28 SB 1459 (Simitian), PageL a law burdens core political speech, it must be "narrowly tailored to serve an overriding state interest." McIntyre v. Ohio Elections Commission (1995), 514 US 334. This bill does not propose to ban all private contributions to campaigns. A candidate could choose to accept private contributions, and thus be deemed a "non-participating" candidate. However, this bill would prevent all candidates for IC, including those who do not choose to participate in public financing, from receiving any contributions more than 18 months prior to the election. This provision may restrict the ability of non-participating candidates to amass the resources necessary for effective advocacy. However, whether or not this restriction violates a key test established by the U.S. Supreme Court in Buckley v. Valeo (1976) 424 US 1 is disputed by proponents and opponents of the bill. As noted below, objections have also been raised to this bill because it may be deemed to compel speech. It should be noted that at least three other states have passed laws that provide substantial public financing to state candidates: Arizona, Maine and Massachusetts. 3. Support . According to the author, the office of Insurance Commissioner in California has suffered from the taint of at least one serious instance of corruption leading to the premature departure of an incumbent, and has been subjected to frequent allegations of being unduly influenced by the insurance industry that it regulates. These allegations, whether true or false, weaken the regulatory authority of the IC and require him or her to give undue consideration to special interests when making decisions. 4. Opposition . According to the National Association of Insurance and Financial Advisors of California (NAIFA), all Californians should be able to make a campaign contribution to any candidate that they believe would effectively and appropriately represent their interests. By prohibiting the insurance industry and other private entities from making campaign contributions to the Insurance Commissioner or to candidates for that office, SB 1459 deprives the insurance industry of their first amendment rights. SB 1459 (Simitian), PageM In addition to agreeing with NAIFA, the Pacific Association of Domestic Insurance Companies opposes SB 1459 because the funding through the premium tax would result in consumers paying for the election of the IC, affecting the First Amendment rights of consumers and their desire to support candidates of their own choosing. The Association of California Insurance Companies (ACIC) objects to many of the "finds and declarations" of SB 1459. Specifically, ACIC disagrees that the IC is unique among state officers in that the IC's role is to regulate a single industry. ACIC argues that the insurance regulatory structure is no different than many others in state government where single industries such as utilities, financial institutions, realtors, and doctors are regulated by public officials. ACIC also does not believe that insurers have "unduly influenced" the DOI. According to ACIC, the statement that "the connection between the influence of regulated entities and ineffective or biased regulatory oversight is well documented?" is untrue. They characterize as "especially appalling" the suggestion that that every other elected official is immune from bias and ineffectiveness even though their campaigns for public office are also funded by contributions from private parties. ACIC argues that there is no justification for a measure that would unconstitutionally impose private funding restrictions on a single official or the single industry that is regulated. State Farm opposes SB 1459 because it believes the bill violates the First Amendment by compelling insurance companies to engage in speech, it violates the California constitutional provision that imposes a premium tax "in lieu" of all other taxes, and because it violates the California constitutional requirement that taxes be passed by a 2/3 vote of both houses of the legislature. State Farm particularly objects on the basis of compelled speech because State Farm has made a policy decision not to make any political contributions because the costs of those are passed on directly to policyholders. 5. Related legislation . SB 1459 (Simitian), PageN a. AB 583 (Hancock) which passed the Assembly on January 30, 2006 and is currently pending before the Senate Elections, Reapportionment and Constitutional Amendments Committee would provide for voluntary public financing of all candidates for state office, including the office of IC. There are several key differences between the bills, however, including: i. AB 583 would provide only $1 million for the primary and $2 million for the general election campaigns for IC (versus $1.5 and $3 million in this bill), but would still allow for additional funds to match spending by a non-participating opponent up to 500% of the original allotment (potentially $5 million for the primary and $10 million for the general election); ii. AB 583 would provide significantly less funding to candidates who are not major party candidates; iii. AB 583 would reduce the amount of allowable contributions to any candidate for IC from the current $5,600 to $5,000 per election from individuals and from $11,100 to $10,000 from small contributor committees; iv. AB 583 would provide that campaign contributions of $500 or more would be considered income for purposes of the Political Reform Act; v. AB 583 would provide for imprisonment of up to five years for a criminal violation of the Political Reform Act; vi. AB 583 would provide for forfeiture of the office if the candidate spends or obligates to spend more than 110% of their Clean Money funding. b. SB 953 (Speier 2000) would have restricted campaign contributions to candidates for Insurance SB 1459 (Simitian), PageO Commissioner by insurers that have proceedings pending before the Department of Insurance. 6. Questions . a. This bill makes knowing and willful violation of its provisions a misdemeanor/felony when the violation is found to have significantly impacted the outcome of the election. The bill does not require forfeiture of the ill-begotten office. Should language be added to require a person convicted of violating this Act to forfeit office? b. Although the bill specifies that the amount of the fee to be collected is to be calculated as a percentage of the gross premium collected pursuant to Revenue and Taxation Code section 12202, it does not amend that section. Should the bill specifically designate who will collect the tax from insurers, e.g. whoever is responsible for collecting the gross premium tax pursuant to the tax code to clarify implementation and effective collection of the fee/tax? Would specifically designating this is an increase in the gross premium tax in the tax code, as allowed by the California Constitution by a majority vote, eliminate questions regarding the legality of the majority vote designation? c. Should the ban on all political contributions more than 18 months prior to the primary election be eliminated to resolve at least one of the issues regarding free speech? d. If the cost of the .01% levy were explicitly required to be passed on to policyholders as a gross premiums tax or fee, would this eliminate the argument of the insurance companies that they are in the position of being compelled into speech? POSITIONS SB 1459 (Simitian), PageP Support None received Oppose Association of California Insurance Companies National Association of Insurance and Financial Advisors of California Pacific Association of Domestic Insurance Companies State Farm Insurance Association of California Life and Health Insurance Companies Insurance Brokers & Agents of the West Liberty Mutual Group Nationwide Insurance Company Personal Insurance Federation of California Consultant: Erin Ryan, 651-4102