Wilson to Unveil Major Privatization Proposal

In a speech today, Gov. Pete Wilson is scheduled to propose the privatization of a massive government program by outlining a plan to transfer California’s $7.3-billion workers’ compensation insurance fund to private carriers.

The action is the most significant of several steps the governor has taken recently to launch the ambitious overhaul of state government that he signaled in his State of the State speech January.

Sources said Wilson will cite other plans to consolidate or eliminate government functions when he gives his first major speech on the overhaul project today in Sacramento. But they said many of the targets for change are still being developed in a project that the governor expects will consume the remaining three years of his term.

“The idea is that government should get back to the basics,” one official said. “To the extent that state government is involved in functions beyond its core functions, it needs to get out.”

A source from the Competitive Government Task Force, which Wilson convened to study government operations, said the insurance fund was considered a prime example of government exceeding its core functions.

Leading Democrats warned Wednesday that they are skeptical of the plan, and had already rejected the idea in 1993.

Unlike other targets that Wilson has considered for privatization, however, the transfer of the insurance fund to private operation is not expected to generate a major saving for the state because it is self-funded through premiums and not with taxpayer funds.

Instead, sources said Wilson’s motivation for targeting the insurance fund stems from a philosophical belief that the government is inappropriately conducting operations that should be done by the private sector.

The task force concluded that the insurance fund behaves just like a private carrier and even competes with other companies for business. “This is an example of a function the state is going to stop doing,” the source said.

The state insurance fund was created by the Legislature in 1913 as a mechanism to cover employers who were rejected by private carriers but still required by law to provide their employees with workers’ compensation insurance. It also covers most of the state’s 276,000-member work force.

Today, the state fund is by far the largest workers’ compensation provider in California, receiving about $1 billion in premiums each year, or about 18% of the state’s total collections. The second-largest carrier receives about 7% of the state’s premiums.

Sources said, however, that there are many details still to be determined about the governor’s plan.

For one thing, the fund employs more than 5,000 people who are protected by state civil service laws. Officials speculated that most could be absorbed by private carriers who assume the operation. But they also have job guarantees under state law that the governor’s plan has not addressed.

It is also an open legal question whether the insurance fund transfer would require approval from its board of directors. The board represents about 250,000 private employers who participate in the fund as well as state workers.

Also, officials said they have not decided how the private system would protect the fund’s original mission: to provide the “coverage of last resort” for employers.

And sources said they have not assessed the impact of the change on the workers’ compensation market. They said only that Wilson is determined that this change should not raise workers’ compensation insurance rates or abandon small companies.

Finally, perhaps the largest hurdle, the plan requires substantial new legislation that must navigate a tricky political course through the Legislature.

Sandy Harrison, spokesman for Senate Democratic Leader Bill Lockyer (D-Hayward), said Democrats rejected a plan to privatize the insurance fund when they conducted a major review of workers’ compensation laws in 1993. He said, however, that Democrats would remain open to considering the governor’s plan.

Still, the insurance fund legislation is just one of several bills that would be required for the governor’s ultimate plans to overhaul the state government. And prospects for the governor’s success are uncertain.

Labor groups and powerful constituencies are already gearing up to battle the plan. And Democrats have been cool to the idea, although reluctant to criticize an issue that might have public appeal.

“[Lockyer] wants to see proof that there is actual, real savings given the fact that the private sector needs to build in profit margins,” Harrison said.