BILL ANALYSIS                                                                                                                                                                                                    






                        SENATE COMMITTEE ON BANKING, FINANCE,
                                    AND INSURANCE
                           Senator Ronald Calderon, Chair


          AB 1117 (Fuentes)        Hearing Date:  June 17, 2009  

          As Amended: April 13, 2009
          Fiscal:             No
          Urgency:       Yes
          

           SUMMARY    Would amend the State Compensation Insurance Fund  
          (SCIF) law to clarify that existence, amendment, or renewal of a  
          contract of insurance between SCIF and an organization of which  
          any member of the board of directors is an officer or employee  
          shall not constitute a conflict of interest for purposes of the  
          SCIF law.  Includes legislative findings that the amendments  
          made by the act are technical in nature, do not change the law,  
          and are intended to clarify that members of the SCIF Board of  
          Directors are not disqualified from participating in decisions.   
          The act would take effect as an urgency measure.
          
           
          DIGEST
            
          Existing law

             1.  Current Government Code provisions prohibit a public  
              official from using their public position to influence a  
              governmental decision in which the party knows or has reason  
              to know they have a financial interest.

            2.  For the purposes of this same law, having a financial  
              interest in a decision includes situations where it is  
              reasonably foreseeable that the decision will have a  
              material financial effect, distinguishable from its effect  
              on the public generally, on the public official, on a member  
              of his or her immediate family, or on any of specified  
              situations, including any business entity in which the  
              public official is a director, officer, partner, trustee,  
              employee or holds any position of management.

            3.  Other Government Code provisions, also applicable to the  
              SCIF Board, prohibit a public official from being  
              financially interested in any contract made by them in their  




                                                        AB 1117, Page 2




              official capacity.

            4.  Board Members of the State Compensation Insurance Fund  
              (SCIF) are subject to the above Government Code law  
              concerning financial conflicts of interest and having an  
              improper financial interest in any contract made by their  
              governing body.

            5.  The SCIF Board is an 11 Member Board.

            6.  An express provision of current SCIF law, in the section  
              prohibiting financial conflicts of interest, states "the  
              existence of a contract of insurance between the State  
              Compensation Insurance Fund and the policyholder member  
              appointed by the Senate Committee on Rules shall not  
              constitute a conflict pursuant to this section".

           
          This bill

           1.  Would add to the SCIF conflict of  interest law a statement  
              that the "existence, amendment, or renewal of a contract of  
              insurance between" SCIF and an organization  "of which any  
              member of the board of directors is an officer or employee  
              shall not constitute a conflict of interest  pursuant to  
              this subdivision".

           2.  States legislative findings that the amendments made by the  
              act are technical in nature, do not change the law, and are  
              intended to clarify that members of the SCIF Board of  
              Directors are not disqualified from participating in SCIF.

           3.  The act would take effect as an urgency measure.
           


           COMMENTS

          1.  Purpose of the bill   The sponsor states that this bill is  
              intended to ensure that members of the SCIF Board of  
              directors are not incorrectly disqualified from  
              participating in important decisions of the board that  
              impact policyholders generally and no board member uniquely.  
              The bill is an urgency measure so that upon enactment it's  
              provisions will apply to current SCIF board members and  
              operations.




                                                        AB 1117, Page 3





           2.  Background  Oversight hearings conducted by this committee in  
              prior legislative sessions have examined the administration  
              and internal operational controls of SCIF and identified  
              numerous deficiencies, including deficiencies with respect  
              to conflicts of interest generally and more specifically  
              financial conflicts of interest. To address these matters,  
              Insurance Code Section 11770 was amended last year to add  
              the provisions described above concerning conflicts of  
              interest, including expressly subjecting board members to  
              the financial conflict of interest provisions described  
              above in the Existing Law section which are found in the  
              Government Code.

          3.  The State Compensation Insurance Fund (State Fund) was  
              created by statute in 1914 to act as a workers' compensation  
              insurer for the state and to serve as the workers' comp  
              insurer of last resort in the private market.  

          4.  The Government Code provisions apply to situations where a  
              public official is an employee or manager of an organization  
              if the public official participates in a decision which it  
              is reasonably foreseeable will have a material financial  
              effect on the organization which is distinguishable from its  
              effect on the public generally.

          5.  Under the Government Code financial conflict of interest  
              provisions, every SCIF board member who is either a manager  
              or an employee of an organization seeking a contract of  
              insurance with SCIF is currently prohibited from seeking  
              such insurance on terms that it is reasonably foreseeable  
              would benefit their organization in a way materially  
              different from the terms available to other members of the  
              public, which should reasonably be construed here to mean  
              other similarly situated businesses.  

          6.   Insofar as all Board Members are subject to the above rules  
              under current law, every SCIF Board Member is currently  
              prohibited from seeking to obtain a material financial  
              advantage in terms for insurance coverage on behalf of an  
              organization they are a manager of employee which is  
              distinguishable from the terms available to the public. 

          7.  Notwithstanding the above, the stipulation added last fall  
              to the SCIF board conflict of interest law stating that "a  
              contract of insurance" between SCIF and "the policyholder  




                                                        AB 1117, Page 4




              member appointed by the Senate Committee on Rules shall not  
              constitute a conflict pursuant to this section" can be  
              construed to imply that such a contract between any other  
              board member and SCIF "shall" constitute a conflict, even if  
              it passes scrutiny under the more stringent Government Code  
              provisions. 

           8.  Support  .  State Compensation Insurance Fund 

           9.  Opposition    None

           10. Questions  Inasmuch as the substantive law governing  
              financial conflicts of interest for SCIF board members is  
              now in found in Chapter 7 of Title 9 of the Government Code,  
              commencing with Section 87100) and in Article 4 (commencing  
              with Section 1090) of Chapter 1 of  Division 4 of Title 1 of  
              the Government Code, shouldn't the effort to clarify that  
              contracts of insurance do not in themselves trigger  
              conflicts of interest be based explicitly on adherence to  
              those provisions? 

           11. Suggested Amendments  . On page 4, line 24, after  
              "subdivision.", strike the remainder of line 24, then strike  
              lines 25 through 28, inclusive, and insert:  

               For purposes of board actions affecting generally applicable  
              rates, a member of the board of directors shall not be  
              deemed to have a financial interest in a contract of  
              insurance between the State Compensation Insurance Fund and  
              an organization of which any member of the board of  
              directors is an owner, officer or employee pursuant to  
              Chapter 7 of Title 9 (commencing with Section 87100) of the  
              Government Code or Article 4 (commencing with Section 1090)  
              of Chapter 1 of Division 4 of Title 1 of the Government  
              Code"
               
          12. Prior Legislation   AB 1874 (Coto), Chapter 322, Statutes of  
              2008 

           



          POSITIONS
          
          Support




                                                        AB 1117, Page 5




           
          State Compensation Insurance Fund
           
          Oppose
               
          None

          Consultant:   Kenneth Cooley
                    (916) 651-4102