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