Quake Plan May Require New Funding

Concerns that California is committing too little public money to support a state-run earthquake insurance agency may be a large part of the Internal Revenue Service’s decision to withdraw its approval of a federal tax exemption.

Those concerns, as well as the retirement of an IRS official who endorsed the exemption before it was approved in February, contributed to an IRS letter April 30 withdrawing the approval--pending further review, according to IRS sources familiar with the decision.

A federal tax exemption is essential to creating the new earthquake insurance agency, said Insurance Commissioner Chuck Quackenbush, who last winter offered a $24-million annual state contribution through diversion of premium taxes.

The IRS sources said the order for the review had come from high in the agency and also reflected the view that the state of Florida--which has won an exemption for a catastrophe insurance package for hurricanes--was willing to put more state funds into it.

The sources spoke on condition they not be identified. IRS press aides have persistently refused to say anything about why the review was ordered or how long it would last, maintaining that they legally are bound to privacy.

Quackenbush deputy Richard Wiebe said recently that the IRS silence has also extended to the insurance commissioner and his Washington lawyers who are seeking the exemption.

Wiebe said Quackenbush was spurned when he offered after the April 30 withdrawal of the exemption to visit the IRS to discuss the matter, and that his lawyers have not been welcomed to discuss it either, despite the fact that they did have such discussions months ago when the issue of a state contribution first arose.

After the exemption was granted by the IRS in February, Quackenbush was quoted in a trade publication, The Insurance Regulator, as bragging to a Standard & Poors industry conference how he had successfully applied political pressure to the agency.

“It all came down to California having 54 electoral votes, and we were headed to an insurance meltdown that I was not going to take the blame for,” the commissioner was quoted as saying. “One week after I was told they were not inclined to approve [the exemption], I got a phone call and I was told that we would get the exemption.”

The IRS sources indicated these remarks had nothing to do with the withdrawal of the exemption.

Quackenbush never denied the quotes, although he did note that he had not known a reporter was in the room.

Quackenbush has said the proposed California Earthquake Authority cannot function without the exemption because not enough money can be accumulated if the federal government taxes the fund.

The IRS concerns are important, because legislators in a conference committee in Sacramento are now in the process of fashioning an acceptable compromise bill formally authorizing the agency.

“It would be awful if we adopted something contingent on their approval, and then found out we were not on the same wavelength at all and they wanted something entirely different,” said a legislative staff member involved in the deliberations.

But the assertions of IRS sources that the agency wants a bigger state contribution may create a major obstacle to enactment of the legislation.

Florida has already agreed to assess all insurance policyholders to raise additional money should a hurricane catastrophe exceed certain damage limits.

California legislators, by contrast, rejected the notion of such a general assessment. And some legislative staff members think Quackenbush exceeded his authority in telling the IRS he would devote the 2.35% premium tax collected on quake insurance policies as a state contribution.

Normally, the premium tax goes into the state general fund. Quackenbush’s offer would take money away from other state programs.

So far, in the conference committee deliberations, no one has suggested adding more state revenue to support the Earthquake Authority.

The sources gave no figures for what would satisfy the IRS, and Wiebe, Quackenbush’s spokesman, said the commissioner cannot rely on reports of what IRS sources are saying in such a general way for fashioning new proposals.

“We won’t know until we hear from the IRS directly and on the record,” he said.

Meanwhile, legislative proceedings have slowed to a crawl on the matter, with only one meeting last week making little progress, and the next one not scheduled until the middle of this week.

New means of providing disaster insurance have become a more pressing issue since major hurricanes and the Northridge earthquake caused the largest insurance damage payouts in history.

Some companies have threatened to stop offering key coverages in disaster-prone states, particularly populous Florida and California, unless the government caps their liability.