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 




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          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.  





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          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.




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          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 




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          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