BILL ANALYSIS                                                                                                                                                                                                    �




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair


          SB 1513 (Negrete McLeod) - State Compensation Insurance Fund: 
          investments.
          
          Amended: April 16, 2012         Policy Vote: Insurance 8-0
          Urgency: No                     Mandate: No
          Hearing Date: May 24, 2012      Consultant: Bob Franzoia
          
          SUSPENSE FILE.


          Bill Summary: SB 1513 would authorize the board of directors of 
          the State Compensation Insurance Fund (SCIF) to invest or 
          reinvest, an aggregated maximum of 20 percent of the moneys that 
          are in excess of the admitted assets over the liabilities and 
          required reserves, in specified investments.

          Fiscal Impact: Increased investment risk, increased investment 
          return.
              Expansion of SCIF investment portfolio into higher risk 
              investments may, depending on investments and economic 
              conditions result in a total annual loss by the investments 
              proposed for authorization by this bill.  

          Background: As introduced, this bill would have permitted SCIF 
          to expand its investment portfolio in riskier products without 
          any limitations.  While the expansion would help with 
          diversification, there were significant concerns with the 
          resulting additional risks.  SCIF has total assets of 
          approximately $20 billion and a surplus (assets minus 
          liabilities) of approximately $5 billion.  The current version 
          of the bill limits risk by imposing a 20 percent cap 
          (approximately $1billion) on specified investments.  

          The 20 percent limit was calculated as follows:

           *   Total liabilities were deducted from total assets.  (SCIF 
          is required to support all of its policy-related liabilities 
          with currently authorized investments).
           *   Deduction for various assets and accounts (real estate, 
          surplus enhancements for reinsurance, additional capital SCIF 
          will need to set aside for higher risk investments) that need to 
          be supported by the surplus.








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           *   Deduction of a 10 percent cushion for market fluctuation of 
          assets supporting the liabilities.
           *   Deduction of an additional cushion for operational risk.
           *   The remaining balance equated to approximately 20 percent 
          of surplus.

          Proposed Law: State Fund Prohibited Excess Funds Investments 
          this bill would allow:
          (1) Insurance Code 1191 (a North American company's stock).
          (2) Insurance Code 1192.4 (10 percent maximum of capital and 
          surplus in Canadian corporate stock).
          (3) Insurance Code 1192.6 (mortgage, mortgage-backed bond, 
          mortgage participation, pass-through, conventional pass-though, 
          trust or participation certificate secured with real property or 
          pool of real property). 
          (4) Insurance Code 1192.10 (securities with undivided interest 
          in, right to receive payments from or payable primarily from 
          distributions on pools of financial assets other than those 
          permitted by Insurance Code 1192.6, as specified). 
          (5) Insurance Code 1194.7 (federal home loan bank stock).
          (6) Insurance Code 1198 (maximum investment limit on corporate 
          capital stock of 10 percent of insurer's admitted assets 
          exceeding liabilities & reserves).

          Staff Comments: Existing law authorizes SCIF to invest primarily 
          in bonds.  While this minimizes risk, it can also limit 
          investment earnings. 

          By way of comparison, STRS has similar investments with the 
          exception of Insurance Code 1194.7 (federal home loan bank 
          stock).  STRS may invest per Insurance Code 1192.4 (Canadian 
          corporate stock) but without a ten percent limit.
           
          Clearly, the biggest risk is investment in Insurance Code 1191 
          (North American company stock).  Both PERS and STRS have had 
          losses in this investment but annually overall have had 
          investment gains.















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