CAPITOL JOURNAL / DANIEL M. WEINTRAUB : Garamendi Wary of Standing on Shaky Ground

California’s earthquake recovery program, hailed as a major achievement less than two years ago, now may be put on the shelf before it gets under way.

Insurance Commissioner John Garamendi, who voted for the program when he was a state senator, now says it will not work and should be repealed.

The program’s imminent demise says a little about the short memories of state lawmakers and even more about the ambition of Garamendi, who has run for three statewide offices and hopes one day to move on from his present post.

Both the commissioner and those who have jumped on his bandwagon appear to be holding the earthquake program to standards it was never expected to meet, and then knocking it for failing to meet their lofty expectations.

The California Residential Earthquake Recovery Fund has its roots in the Loma Prieta earthquake, which devastated parts of the San Francisco Bay Area in October, 1989. After the quake, lawmakers returned to Sacramento in special session and passed a 13-month, quarter-cent sales tax increase to help repair the damage. In all, the state government’s toll topped $1 billion.

The big quake reminded policy-makers that most Californians do not buy private earthquake insurance because the policies are expensive and come with high deductibles, typically 10% of the insured value of the home. That means the owners of a $200,000 home, even if they have insurance, have to pay the first $20,000 in repair bills out of their own pocket.

In a rare burst of activism, then-Gov. George Deukmejian proposed a remedy. He suggested assessing every homeowner a surcharge on their annual hazard insurance premium, with those in earthquake-prone communities paying more than residents of safer areas. The money would go into a pot to be used for future earthquake recovery efforts. Homeowners were promised up to $15,000 in coverage after a deductible ranging from $1,000 to $3,500, depending on the value of their home.

After months of hearings and many amendments, the Legislature approved the governor’s proposal on the last night of the 1990 legislative session. It was to take effect July 1, 1991.

Along came Garamendi. The former Democratic state assemblyman and senator became the state’s first elected insurance commissioner in November, 1990. Even before taking office two months later, Garamendi began complaining about the earthquake program.

He noted several technical problems, including enforcement of the mandatory surcharge, which lawmakers believed could be readily fixed. He asked for and received a six-month delay in implementing the program. But then Garamendi lowered the boom. He said the fund could not survive on the $36 annual surcharge that the average homeowner was going to be asked to pay.

If a quake occurred in the early years of the program, Garamendi warned, there would not be enough money in the fund to cover the damages. Even over the long term, he said, there might be a shortfall. If the state earthquake program were a private insurance company, he would have to shut it down as insolvent.

Those are strong words coming from California’s chief insurance regulator. The only problem is that the earthquake program is not a private insurance company, and it was never meant to act as one.

When Deukmejian proposed the program, everyone acknowledged that the fund would never be able to pay full benefits in a truly catastrophic quake. And the Administration said it was “obvious” that the fund would be insufficient to respond to a major quake in its early years. The hope was to build a reserve of $4 billion to $5 billion before the first major payouts were required.

If a big quake hit in the meantime, or even a moderate one in the first year or two, the state would have to do what it always has: find the money, somewhere, to help the victims rebuild. Only this time, the state would have set aside some money in a “shaky day fund” that would help cushion the blow.

Legislators, including then-Sen. Garamendi, accepted this premise when they voted to enact the program. It was no secret. The only difference now: Garamendi realizes that in a big quake, he will be the man on the spot.

If a major temblor strikes in the next year or two, people are going to come running to Garamendi for their checks, and he is not going to have all the cash he needs to make good. That will not help his image as a capable administrator. He will have to depend on the Legislature to fulfill its unwritten pledge to back the program.

For an insurance commissioner who dearly wants to be governor, that is not a risk worth taking.