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