State Fund overhaul is sought

California’s troubled state-backed workers’ compensation insurance company must revamp its board of directors, stop meeting in secret and modernize its corporate governance, lawmakers demanded Wednesday.

The call for a sweeping overhaul of the State Compensation Insurance Fund, which is currently the target of a criminal investigation, came at a hearing of the state Senate’s Banking, Finance and Insurance Committee.

The committee spent more than two hours focusing on a caustic state audit of the fund that recently found rampant mismanagement, including questionable vendor payments, covert slush funds and possibly fraudulent contracts.

The company “for too many years was able to hide in the shadows,” said committee Chairman Michael Machado (D-Linden), who is sponsoring legislation to transform the way the quasi-governmental agency does business.

Machado’s bill, SB 1145, would make the first significant changes in almost a century of governance at the State Compensation Insurance Fund, which is the state’s largest insurance company and known as State Fund.

The measure would expand State Fund’s board of five political appointees to nine members and put professional financial, information technology and investment officers in charge.

The bill would also subject State Fund to California’s so-called sunshine laws. It would require the insurer’s board to meet in open sessions and make most records available to public scrutiny.

At the close of the 2 1/2 -hour hearing, Machado said, “It’s critical that we get more information than what is being disseminated” now.

The bill, said committee Vice Chairman Dave Cox (R-Fair Oaks) “could be the most important bill the Legislature deals with this year in regard to the economy.”

State Fund’s leaders long have insisted that they can’t compete with private insurers and provide workers’ compensation coverage to 220,000 California employers unless they can keep its corporate decision-making under wraps.

But board Chairwoman Jeanne Cain on Wednesday signaled a willingness to consider more openness. She said State Fund needed to balance its obligations as a state agency with its need to protect sensitive information about rate making, claims handling and marketing.

But it was just such secrecy that helped foster a scandal that’s triggered a wide-ranging criminal investigation by a task force led by the California Highway Patrol, a state Senate staff analysis prepared ahead of Wednesday’s committee hearing concluded.

“The unusual status of SCIF -- a state entity outside of regular insurance regulatory channels and yet not subject to open government requirements -- led to the current problems, including what would appear to be serious criminal activity by some of its executives,” the analysis said.

The general dimensions of where the probe might be headed were blocked out in December when the state Department of Insurance released a detailed report by an outside auditor of State Fund operations.

California Insurance Commissioner Steve Poizner ordered the audit in March shortly after State Fund’s board suddenly fired company President James Tudor and Executive Vice President Renee Koren.

The dismissals, which came with little explanation, followed the forced resignations of two State Fund board members in November 2006 amid conflict-of-interest allegations.

Later, Machado castigated a trio of Department of Insurance officials for failing to take advantage of powers granted by a 2004 law to conduct financial investigations at State Fund.

“It seems to me that the problem you have could have been discovered a lot earlier,” he said.

Machado’s criticism is unfair, said Byron Tucker, a spokesman for Poizner. He recalled that State Fund earlier in the decade sued Poizner’s predecessor, John Garamendi -- now California’s lieutenant governor -- to prevent him from looking at the insurer’s books.

State Fund also lobbied heavily against passage of a 2006 law that gave the state auditor power to look at the insurer’s books. Tucker contended that the type of audit mentioned by Machado “would not have uncovered the type of Enron-like financial shenanigans that State Fund was engaging in.”

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marc.lifsher@latimes.com