BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 1513|
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THIRD READING
Bill No: SB 1513
Author: Negrete McLeod (D)
Amended: 4/16/12
Vote: 21
SENATE INSURANCE COMMITTEE : 8-0, 4/11/12
AYES: Calderon, Gaines, Anderson, Corbett, Correa, Lieu,
Lowenthal, Wyland
NO VOTE RECORDED: Price
SENATE APPROPRIATIONS COMMITTEE : 7-0, 5/24/12
AYES: Kehoe, Walters, Alquist, Dutton, Lieu, Price,
Steinberg
SUBJECT : State Compensation Insurance Fund
SOURCE : State Compensation Insurance Fund
DIGEST : This bill expands the investment options
available to the State Compensation Insurance Fund (SCIF)
to include preferred and common equity and additional fix
asset investments, and allows SCIF to participate in the
Federal Home Loan Bank of San Francisco.
ANALYSIS : Existing law:
1. Requires the board of directors (board) of the SCIF 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
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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. Expands 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. Restricts such investment or reinvestment to 20% of the
moneys that are in excess of the admitted assets over
the 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.
Background
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 (IC) 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
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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.
In 2010, SB 1407 (Senate Banking, Finance and Insurance
Committee), Chapter 651, Statutes of 2010, authorized SCIF
to invest excess funds pursuant to a list of products
described in IC 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.
This bill (with anticipated amendments) allows 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:
1. Corporate stock with restrictions (IC Sections 1191;
1198);
2. Stock in Canadian corporations with restrictions (IC
Section 1192.4);
3. Investments in mortgages and mortgage-backed securities
(IC Section 1192.6);
4. Securities of an unaffiliated business entity (IC
Section 1192.10); and
5. The Federal home loan bank (IC Section 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.
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FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee, 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.
SUPPORT : (Verified 5/24/12)
State Compensation Insurance Fund (source)
American Federation of State, County and Municipal
Employees, AFL-CIO
ARGUMENTS IN SUPPORT : According to SCIF, "�s]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.
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.
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.
JJA:kc 5/25/2012 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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