BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 1513|
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UNFINISHED BUSINESS
Bill No: SB 1513
Author: Negrete McLeod (D)
Amended: 6/27/12
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
SENATE FLOOR : 39-0, 5/29/12
AYES: Alquist, Anderson, Berryhill, Blakeslee, Calderon,
Cannella, Corbett, Correa, De Le�n, DeSaulnier, Dutton,
Emmerson, Evans, Fuller, Gaines, Hancock, Harman,
Hernandez, Huff, Kehoe, La Malfa, Leno, Lieu, Liu,
Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Rubio,
Simitian, Steinberg, Strickland, Vargas, Walters, Wolk,
Wright, Wyland, Yee
NO VOTE RECORDED: Runner
ASSEMBLY FLOOR : 78-0, 8/16/12 (Consent)- See last page for
vote
SUBJECT : State Compensation Insurance Fund
SOURCE : State Compensation Insurance Fund
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DIGEST : This bill expands, until January 1, 2025, 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.
Assembly Amendments require the Department of Insurance
submit a report to the Legislature by January 31, 2019,
which assesses the benefit and risk of the SCIF's equities
investment history as specified, and sunset the bill on
January 1, 2025.
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
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
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bank.
3. Requires the Department of Insurance submit a report to
the Legislature by January 31, 2019, which assesses the
benefit and risk of the SCIF's equities investment
history by measuring the volatility and total return of
the fund's investment portfolio with and without
equities.
4. Sunsets this bill on January 1, 2025.
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
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
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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 the bill
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, until January 1, 2025, 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.
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 8/17/12)
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State Compensation Insurance Fund (source)
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.
ASSEMBLY FLOOR : 78-0, 8/16/12
AYES: Achadjian, Alejo, Allen, Atkins, Beall, Bill
Berryhill, Block, Blumenfield, Bonilla, Bradford,
Brownley, Buchanan, Butler, Charles Calderon, Campos,
Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson,
Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani,
Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Gorell,
Grove, Hagman, Halderman, Hall, Harkey, Hayashi, Roger
Hern�ndez, Hill, Huber, Hueso, Huffman, Jeffries, Jones,
Knight, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza,
Miller, Mitchell, Monning, Morrell, Nestande, Nielsen,
Norby, Olsen, Pan, Perea, V. Manuel P�rez, Portantino,
Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao,
Wagner, Wieckowski, Williams, Yamada, John A. P�rez
NO VOTE RECORDED: Ammiano, Lara
JJA:k 8/17/12 Senate Floor Analyses
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SUPPORT/OPPOSITION: SEE ABOVE
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