BILL ANALYSIS Ó SENATE INSURANCE COMMITTEE Senator Ronald Calderon, Chair SB 1513 (Negrete McLeod) Hearing Date: April 11, 2012 As Amended: March 29, 2012 Fiscal: Yes Urgency: No SUMMARY Would expand the investment options available to the State Compensation Insurance Fund (SCIF) to include preferred and common equity and additional fix asset investments. Would also allow SCIF to participate in the Federal Home Loan Bank of San Francisco. DIGEST Existing law 1.Requires the board of directors of the State Compensation Insurance Fund to invest and reinvest, from time to time, all moneys in SCIF in excess of current requirements in the same manner as is authorized in certain provisions applicable to private insurance carriers; 2.Prohibits the board from investing or reinvesting in certain investments, including real estate and call options on common stock. This bill 1.Would expand the board's choice of investments of excess moneys by allowing the board to invest or reinvest in additional investments in the same manner as provided for private carriers, including, but not limited to, in the stock of certain corporations, specified mortgage-related investment instruments, and in the stock of a federal home loan bank; 2.Would restrict such investment or reinvestment to 20% of the moneys that are in excess of the admitted assets over the SB 1513 (Negrete McLeod), Page 2 liabilities and required reserves for specified investments, including the stock of certain corporations, specified mortgage-related investment instruments, and in the stock of a federal home loan bank. COMMENTS 1.Purpose of the bill To expand SCIF's investment authority to diversify its investments, increase its portfolio stability, and hedge its portfolio against inflation. 2.Background and Discussion SCIF provides California's worker's compensation insurance to any interested employer, including those that are unable to self-insure or find private sector alternatives. SCIF was created in 1914 to help ensure all employers have a strong and stable option for their workers' compensation needs. SCIF, like other insurance carriers, relies both on income from premiums and growth from investments. The success of investment strategies directly impacts the bottom profitability of a carrier. As a quasi-governmental agency, SCIF remains a nonprofit entity must return excess income, over legally required reserves or surplus, to the policyholders. Insurance Code section 11797 authorizes moneys in SCIF that are in excess of current requirements to be invested and reinvested from time to time and defines which investment options are currently available to SCIF and generally limits those options to long-term corporate and municipal bonds. From 1914 to 1979, SCIF's investment portfolio was limited to "securities authorized by law for the investment of funds from savings banks." Since 1979, SCIF's investment opportunities have been expanded on four separate occasions and now include many of the same investment opportunities as private insurance carriers, including state and federal bond investment. SB 1513 (Negrete McLeod), Page 3 In 2010, SB 1407 (enacted as Chapter 651, Statutes of 2010) authorized SCIF to invest excess funds pursuant to a list of products described in Insurance Code sections 1190 et. seq. While SB 1407 clarified SCIF's authority to invest "in the same manner provided for private insurance carriers," it also prohibited higher-risk investments otherwise available to private insurance carriers. SB 1513 (with anticipated amendments) would allow SCIF to invest up to 20% of moneys that are in excess of its admitted assets over liabilities and required reserves in a supplemental menu of investment options that includes: a. Corporate stock with restrictions (Ins. Code §§ 1191; 1198); b. Stock in Canadian corporations with restrictions (Ins. Code § 1192.4) ; c. Investments in mortgages and mortgage-backed securities (Ins. Code § 1192.6); d. Securities of an unaffiliated business entity (Ins. Code § 1192.10); and e. The Federal home loan bank (Ins. Code § 1194.7). According to SCIF, the fund is performing well with yields on current investments at 4.4% and declared $50 million in dividends or renewal credits. 1. Summary of Arguments in Support a. According to SCIF, "Ýs]tudies confirm that over longer periods of time (5 - 10 years and longer) equities outperform fixed income assets and create more stability (less price volatility)." This bill allows SCIF to conform its portfolio to proven investment strategies. SB 1513 (Negrete McLeod), Page 4 b. SCIF also notes that investment choices currently available will prove inadequate if inflation rates increase. In particular, SCIF indicates that it needs additional investment tools to respond to increasing liabilities related to medical inflation. c. SCIF also explains that permitting it to become a member of the Federal Home Loan Bank (FHLB) allows it to use FHLB advances to manage working capital needs. SCIF could reduce its cash holdings by borrowing money on a daily basis at lower rates to fund operations, permitting it to keep its money invested in fixed income bonds. SCIF would pay off the advances when investment income or principal is deposited into its bank account. 1. Summary of Arguments in Opposition None received. 2. Questions a. SCIF's investment options were expanded in 2010. Has enough time passed to evaluate the success of those additional investment options? b. Will expanded investment options result in lower premiums for policyholders? c. Could lower premiums resulting from improved investment performance present unfair competition to private insurance providers that lack SCIF's federal tax exempt status? 1. Suggested Amendments Proposed amendments correct a drafting error in the last set SB 1513 (Negrete McLeod), Page 5 of adopted amendments that unintentionally restricted SCIF's investment authority related to currently authorized vehicles. The new amendments return that portion of the bill to its prior state so that it will reflect SCIF's current investment authority. 2. Prior and Related Legislation a. AB 25 (Evans) (enacted as Chapter 24, Statutes of the 4th Extraordinary Session of 2009) authorized SCIF to invest in general obligation bonds or other evidence of indebtedness issued by the state. b. SB 1407 (Senate Committee on Banking, Finance and Insurance) (enacted as Chapter 651, Statutes of 2010) authorized SCIF to invest excess funds pursuant to certain products described in Insurance Code sections 1190 et. seq. c. AB 1873 (Huffman) (enacted as Chapter 583, Statutes of 2010) authorized SCIF to invest in Property Assessed Clean Energy (PACE) bonds. POSITIONS Support State Compensation Insurance Fund (SCIF)/Sponsor American Federation of State, County and Municipal Employees, AFL-CIO (AFSCME) Opposition None received Consultant: Hugh Slayden, (916) 651-4773