BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE INSURANCE COMMITTEE
                           Senator Ronald Calderon, Chair


          AB 1263 (Williams)       Hearing Date: June 8, 2011

          As Amended: April 7, 2011
          Fiscal:             No
          Urgency:       No
          

           SUMMARY    Would extend current post-employment lobbying 
          restrictions for SCIF Board Members and Exempt employees from 1 
          year to two years and require board approval of consulting 
          contracts with former board members of exempt employees.  
          
           DIGEST
            
          Existing law
            
          1.Establishes the State Compensation Insurance Fund as a 
            quasi-governmental agency to operate in the workers' 
            compensation insurance market in competition with private 
            insurers, and as the carrier of last resort for employers that 
            cannot obtain coverage from the private insurance market.

          2.Provides that SCIF is governed by an appointed 11-member Board 
            of Directors.

          3.Authorizes the SCIF board to appoint seven exempt officers, 
            including the president, chief financial officer, chief 
            operating officer, a chief information technology officer, 
            chief investment officer, chief risk officer, and general 
            counsel.

          4.Provides that, aside from the seven employees appointed by the 
            board, SCIF employees are subject to the civil service laws 
            otherwise applicable to state employees.

          5.Provides that SCIF is funded entirely from premiums received, 
            and earnings on these premiums and its reserves, and shall not 
            be funded with any public funds.

          6.Provides that members of the board of directors of SCIF, and 
            the seven officers appointed by the board, are prohibited from 
            lobbying SCIF for a period of one year after terminating 




                                             AB 1263 (Williams), Page 2




            employment with SCIF.
           
          This bill

           1.Would revise the prohibition on State Compensation Insurance 
            Fund (SCIF) officers and directors from lobbying SCIF from 1 
            year post-termination to 2 years after leaving employment with 
            SCIF.

          2.Would require that any agreements on SCIF's behalf which 
            provide for consulting services to be provided by a former 
            SCIF Board member or Officer must be approved by the SCIF 
            Board of Directors.

            
           COMMENTS

               Purpose of the bill  According to the Author, AB 1263 one 
               year extension of the post-employment lobbying restriction 
               and its application to other officers will, along with the 
               board approval of consulting contracts will "ensure that 
               the SCIF Board and staff are not unduly influenced by 
               former members of the Board of Directors or former 
               employees as they make decisions on how best to invest the 
               fund's money".  

               The Author notes that AB 1263's contracting provisions 
               "will bring the letting of consulting contracts to former 
               board members and employees into the open". By requiring 
               approval of such contracts by the Board (as opposed to 
               being negotiated by just a few Board members and/or staff), 
               this will "prevent the appearance of impropriety or 
               deferential treatment to former employees or Board of 
               Directors Members by the current Board".

               Finally, the author states:

                    "The SCIF acts as the workers' compensation insurer 
                    for the state and is the workers' compensation insurer 
                    of last resort.  Most of the policyholders are small 
                    to medium size businesses that cannot secure workers' 
                    compensation insurance in the private market.  The 
                    SCIF provides protection for thousands of California 
                    workers.  The management of this fund should be above 
                    question and it is important to these policyholders 
                    and their workers that the integrity of the fund be 




                                             AB 1263 (Williams), Page 3




                    above reproach.  These modest reforms limit the 
                    influence of those who are no longer on the Board of 
                    Directors or in the employment of the fund as well as 
                    allow for a dialogue about the awarding of consulting 
                    contracts to former staff and board-members."


           1.  Background and Discussion:  

              This bill appears to be a reasonable response to a recent 
              trend for increased scrutiny of SCIF related to management 
              of the fund.  Extending the prohibition on lobbying the fund 
              by former board members and employees from one year to two 
              years and imposing sunshine provisions on consulting 
              contracting by former board members and/or officers will 
              help stem the loss of public confidence.

              In 2008, the Legislature passed SB 1145 (Machado) to 
              increase SCIF's transparency and accountability in response 
              to recent concerns. At that time in 2008, the impetus for 
              those changes was described in an analysis of SB 1145 as:

                    "In the past two years, there has been an aura of 
                    scandal surrounding SCIF.  In the fall of 2006, two 
                    board members voluntarily resigned after conflict of 
                    interest concerns were raised -- the board members 
                    were, according to a DOI audit (see below), owners or 
                    had a financial interest in insurance brokers or 
                    associations receiving substantial payments under 
                    SCIF's Group Association Program.  The SCIF Board of 
                    Directors then hired an outside legal firm to conduct 
                    an internal examination and audit, and in March of 
                    2007, the Board fired several executives, including 
                    the President and an Executive Vice President.  That 
                    examination uncovered serious abuses at the highest 
                    levels and led to a joint criminal inquiry by the DOI, 
                    the California Highway Patrol (the investigatory 
                    agency  responsible for investigating state agencies 
                    when there are allegations of criminal misconduct) and 
                    the San Francisco District Attorney's office that is 
                    ongoing, and is expected to continue for several more 
                    months.

                    At the same time, the DOI, as part of its regulatory 
                    authority, launched a full operational and financial 
                    audit of SCIF by an outside firm, RSM McGladry.  That 




                                             AB 1263 (Williams), Page 4




                    audit was recently completed, and provides a scathing 
                    review of an organization run amok, with poor business 
                    practices, non-existent or ignored management control 
                    systems, and sloppy accounting procedures, among other 
                    issues, with the problems spreading throughout the 
                    organization. 

               Against this backdrop of recent history, the postemployment 
               lobbying restrictions and consulting contract protocols 
               involving former Board Members and officers of SCIF appear 
               reasonable. 


           2.  Summary of Arguments in Support:   

                  a.        The Author states AB 1263 will "prevent the 
                    appearance of impropriety or deferential treatment to 
                    former employees or Board of Directors Members by the 
                    current Board".

                  b.        According to SEIU Local 1000, AB 1263 will 
                    strengthen the 2008 reforms enacted by Senator 
                    Machado's SB1145. SEIU Local 1000 also states:

                         "anyone who solicits or does business with the 
                         State Fund staff or the board should not expect 
                         favors.  The public perception that quid pro quo 
                         may exist at State Fund must be changed.  State 
                         Fund must be willing to set a high standard of 
                         ethical integrity to be a role model against the 
                         culture of excess that pollutes the financial 
                         industry."

           3.  Summary of Arguments in Opposition:    

                  a.        None received
                   

          4.  Amendments:  

               a.     None


        
          5.  Prior and Related Legislation:   





                                             AB 1263 (Williams), Page 5




               SB 1145 (Machado) Chapter 344, Statutes of 2008, 
               restructured the governance of the State Compensation 
               Insurance Fund; allowed the board to appoint six additional 
               exempt positions in addition to the president, applied the 
               Bagley-Keene Open Meeting Act to meetings of the board; and 
               imposed a 1 year post-employment lobbying restrictions upon 
               members of the board and other executive level employees.

           
          LIST OF REGISTERED SUPPORT/OPPOSITION
          
          Support
           
          SEIU Local 1000 (Sponsor)
          State Compensation Insurance Fund
           
          Opposition
               
          None

          Consultant: Ken Cooley  (916) 651-4110