BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 1051 (Fletcher) Hearing Date: July 1, 2009
As Amended: April 28, 2009
Fiscal: Yes
Urgency: No
SUMMARY For purposes of the CalVet Home Loan program, would
authorize the California Department of Veterans Affairs (CDVA)
to establish apart from the fund for the Home Loan program a
pooled self-insurance fund in the State Treasury to enable
consolidation of CalVet's four currently authorized insurance
programs into a group of subfunds administered jointly and to
require CDVA to file an annual report with the Legislature about
the health of the fund.
DIGEST
Existing law
1. Provides that admitted insurers are authorized to enter
into agreements with the Department of Veterans Affairs to
furnish insurance covering property being purchased from
the department under the Veterans' Farm and Home Purchase
Act of 1943, at such special rates and with forms of
coverage as are determined by the Director of Veterans
Affairs to be reasonable. The use of such rates and forms
by insurers are expressly permitted by the Insurance Code.
2. Establishes the Veterans' Farm and Home Purchase Act of
1943 and the Farm and Home Building Fund of 1943 (1943
Fund) to further the purposes of the 1943 Act and related
Acts.
3. Authorizes or requires various insurance coverages to be
purchased or provided with respect to the properties in
which the department maintains an interest.
4. Authorizes the department to operate four separate
insurance reserve funds to provide adequate and affordable
insurance programs for the properties in the program. The
four funds are:
AB
1051 (Fletcher), Page 2
a. The Disaster Indemnity Fund, covering
earthquake and flood risks;
b. The Fire and Hazard Insurance Fund;
c. The CalVet Legacy Self-Insurance and
Disability Fund; and
d. The CalVet Primary Mortgage Insurance Fund
AB
1051 (Fletcher), Page 3
This bill
1. Requires the Department of Veterans Affairs (CDVA) to
establish and maintain a Pooled Self-Insurance Fund in the
State Treasury to consolidate, in the discretion of the
Secretary, the reserves of its various insurance funds.
2. Requires CDVA To adopt rules and regulations to
administer the Fund and authorizes insurance purchases from
monies in the Pooled Fund.
3. Requires an annual CDVA report to the Legislature on any
insurance coverage implemented or required by the CDVA.
The report is to include, but not be limited to, the type
of insurance coverage, its cost, loss-ratio information,
the reason for purchasing the insurance, and any changes in
existing insurance coverage and the reason for those
changes.
4. The annual report must show, for all subfunds, that
within three years of borrowing rates have adjusted to
balance income to expenses and any internal borrowing has
been repaid in full. Each subfund is required to be
self-sufficient within three years of the date it borrowed
from another subfund.
5. Six months after the Pooled fund is created, and
biennially thereafter, there shall be an audit of each
subfund to ensure adequate rates are being charged. Premium
rates of each subfund must be monitored and adjusted
annually to ensure self-sufficiency and reconcile internal
borrowing between subfunds.
6. The CDVA Secretary is authorized, upon declaration of
emergency, to permit the Pooled Self-Insurance Fund to
borrow from the Veterans' Farm and Home Building Fund of
1943, subject to the requirement that such borrowed funds
are to be fully repaid from the Pooled Self-Insurance Fund
within a period of time not to exceed three years. Upon
the dissolution or termination of any subaccounts or
subfunds in the Pooled Fund, any excess moneys shall revert
to the Veterans' Farm and Home Building Fund of 1943.
7. The measure states it is the intent of the Legislature
to establish the Pooled Self-Insurance Fund in order to
ensure that each of the department's insurance reserve
AB
1051 (Fletcher), Page 4
funds are self-sufficient and adequately maintained for the
benefit of the contract purchasers. For reasons of prudent
financial management, the department will pool the reserves
for the purpose of providing reliable, consistent, and
affordable home protection, and to encourage the
strengthening of bond ratings, thereby increasing the
efficacy of the Veterans' Farm and Home Purchase Act of
1974.
COMMENTS
1. Purpose of the bill Current law does not allow the
commingling of moneys among the four insurance reserve
funds. With the exception of the Disaster Indemnity Fund,
premiums for the other three insurance reserve funds are
paid directly into the CalVet Program's operating fund, and
shortfalls experienced by these funds result in use of the
Program Fund to reconcile any insurance-related deficit.
2. This bill, sponsored by the CDVA, is intended to remove
the insurance reserve funds from the CalVet Program Fund,
and then combine the four insurance reserve funds into one
Pooled Self-Insurance Fund with segregated sub-accounts,
and authorize the insurance reserve funds to subsidize each
other, as needed. According to the department, this will
stabilize CalVet insurance program reserves, and by
reducing the potential for the insurance programs to seek
financial assistance from the 1943 Fund, support a
strengthening of CalVet bond ratings, thus helping to
reduce borrowing costs in the home loan program.
3. Background Since 1922, the CDVA has administered the
CalVet Home Loan Program, which finances the purchase of
homes and farm properties to eligible veterans as a
self-supporting bond enterprise fund with no impact on the
State's general Fund. It is funded primarily by
self-liquidating general obligation bonds approved by the
voters, the most recent being in November 2008. The
program sells properties to veterans using contracts of
purchase whereby the Program retains the title to the
properties until the veteran has paid in full, after which
the legal title is transferred from the CDVA to the
veteran.
4. The CalVet Program has four insurance reserve funds: the
Disaster Indemnity Fund (covers earthquakes and floods),
the Fire & Hazard Insurance Fund, the CalVet Legacy
AB
1051 (Fletcher), Page 5
Self-Insurance & Disability Fund, and the CalVet Primary
Mortgage Insurance Fund. All of these insurance programs
are either mandated or authorized by state law and are
intended to provide additional security for the CalVet
Program's interest in the properties.
From a regulatory standpoint, both the Disaster Indemnity
Fund and the CalVet Primary Mortgage Insurance Fund are
types of insurance that are subject to the risk of periodic
"catastrophe" losses. To avoid an excessive aggregating of
risk of loss, these lines are established in the ordinary
residential insurance market as monolines and subjected to
other rules to avoid an excessive aggregation of risk. For
the CalVet program, a key element of its success has
traditionally been the nature of its program availability
inevitably leads to a wide distribution geographically of
the properties it owns which its veterans are paying off
over time.
To illustrate how their portfolio addresses the risk
exposure from its Mortgage Guaranty Insurer operations, 42%
of its loans are pre-2000. 28% are 2000-2004 and 30% are
2005 and later and none of the loans they insure are
variable rate loans, 40 year loans, or interest-only loans.
CalVet reports that its delinquency and foreclosure rates
are lower than those for the mortgage guaranty programs of
the US Department of Veterans Affairs and the Federal
Housing Administration:
FY 2008/09 delinquency rates
CalVet 4.87% USDVA 5.19% FHA 7.28%
FY 2008/09 foreclosure rates
CalVet 0.64% USDVA 0.83%FHA
1.04%
Finally, CalVet has provided documentation that their loan
delinquencies are spread across all counties in California,
which is an appropriate risk mitigation strategy to avoid
excessive geographic concentrations of risk in the mortgage
guaranty line of insurance.
5. With the exception of the Disaster Indemnity Fund,
premiums for the other three insurance reserve funds are
paid directly into the CalVet Program's operating fund-the
Farm and Home Building Fund of 1943. Shortfalls
experienced by the three non-segregated funds currently
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1051 (Fletcher), Page 6
result in use of the 1943 Fund to reconcile a deficit.
6. In fiscal year 2007/2008, the Fire & Hazard insurance
program experienced a $1.2 million loss, while the
Indemnity program had a $1.3 million gain. Because the
premiums for Fire & Hazard coverage are paid directly into
the 1943 Fund, all claims and operating expenses are paid
directly from the 1943 Fund. Therefore, the shortfall
experienced by the Fire & Hazard reserve fund resulted in
the use of the 1943 Fund in order to reconcile the deficit.
7. In the 2006/2007 fiscal year, both reserve funds showed
an increase at year end; however for several years prior,
the Indemnity fund operated at a loss. Under a worst case
scenario, multiple major disasters could have a major
effect on the solvency of the 1943 Fund and cause the
Program to default on bond payments. If this were to
occur, taxpayers would have to make the debt service
payments.
This outcome, however unlikely, has nonetheless been fully
disclosed to California voters and taxpayers. The analysis
of Proposition 12 on the November 2008 ballot, which
authorized the state to sell an additional $900 million in
general obligation bonds to support the Cal-Vet program and
was approved (63.6% "Yes") , stated as follows:
"Throughout its history, the Cal-Vet program has been
totally supported by the participating veterans, at no
direct cost to the taxpayer. However, because general
obligation bonds are backed by the state, if the
payments made by those veterans participating in the
program do not fully cover the amount owed on the
bonds, the state's taxpayers would pay the
difference."
8. Conclusion Based upon the CalVet program
characteristics, experience, and structure of operations,
and based also upon the fact that, in effect, all veterans
are simultaneously insured by all programs, AB 1051's
approach to pooling the varied insurance risks should not
produce an identifiable disparate impact on any veteran in
any fund and for the program as a whole, will not
materially alter the risks, financially speaking, from
AB
1051 (Fletcher), Page 7
those that exist today. This latter point follows from the
fact the existing program is now backstopped by the
Veterans' Farm and Home Building Fund of 1943 and
ultimately the General Fund, based on the G.O. bonds that
provide funding for the CalVet enterprise fund.
9. The author states , "a change is needed to increase the
solvency of the CalVet Home Loan insurance programs
overall. Current legislation does not allow for this
co-mingling of reserves, as only the Indemnity Fund is
statutorily mandated as separate from the Program's
Operating Fund. This bill will allow the other three
insurance funds to operate outside of the 1943 Fund similar
to the Disaster Indemnity Fund."
10. By allowing all four insurance funds to operate in
manner such as the Disaster Indemnity fund, the 1943 Fund
will remain solvent, with a better bond rating and with
more funds available to loan program. This would enable the
1943 fund the flexibility to meet the growing needs of the
CalVet Farm and Home Loan Program brought about by the
change in federal law that opened up the program to all
post-1977 military veterans.
11. Support In support of the bill, the Department of
Veterans Affairs , which is the sponsor has advised the
committee that a key feature of the CalVet insurance
programs is that they are all mandatory insurance programs
for each veteran who participates in the program. This
means that while AB 1051 will consolidate CalVet insurance
program subfunds in the Pooled fund created by this bill
(authorizing borrowing between funds as needed) since
essentially all veteran loan holders participate in all
insurance programs, no veteran will lose money as a result
of any borrowing and loss of interest earnings in any
subfund whereas all interest earned on any reserve in the
fund would benefit all program Veterans.
12. CalVet has advised the committee it retains numerous
consultants to assist in the operation of its insurance
programs and maintains contact with the Department of
Insurance for assistance as needed, particularly on matters
regarding the financial security of insurers.
13. Opposition None
AB
1051 (Fletcher), Page 8
14. Questions None
15. Suggested Amendments None
16. Prior Legislation None
POSITIONS
Support
American Legion, Department of California
California Association of Veterans Service Officers (CVSO)
Oppose
None
Principal Consultant: Kenneth Cooley (916) 651-4102