Fallback Claims Fund Is Struggling

At a time when the state is awash in debt, an emergency fund that covers workers’ compensation claims is pushing to borrow $1.5 billion to avoid bankruptcy and keep payments flowing to injured workers.

The California Insurance Guarantee Assn. estimated in May that it would need a half-a-billion-dollar bond issue to bail out its workers’ compensation fund. Now, the association -- a quasi-public agency not directly backed by the state -- says it needs three times that amount to keep the fund afloat.

State officials, who would need to approve any borrowing, say they are troubled that the proposed bond issue has swelled so quickly and suggest their support is no sure thing.

The fund’s role is to step in and pay claims that are due when private workers’ comp insurers fail. It is backed by a 2% fee tacked onto workers’ comp policies. At present, the association is paying $90 million a month to some 75,000 injured workers -- a pace that is proving ruinous.

“Their liabilities exceed their assets. That’s called bankruptcy,” said state Insurance Commissioner John Garamendi.

Though the public’s focus in recent months has been on the Legislature’s inability to pass a budget that closes a $38-billion shortfall, the association’s difficulties are another sign of financial trouble popping up in more obscure corners of state government.

The state’s unemployment insurance program is going broke, depleted by a flood of jobless claims.

In a sagging economy, with state lawmakers still struggling to pass a budget, some officials are skeptical about the association’s plan to take on debt -- even though the bonds would not be backed by taxpayer money.

The state is so reliant on so many other kinds of borrowing that it is now paying its bills entirely through loans, a step that avoids the politically difficult choice of raising taxes or cutting spending to balance the books.

Any bond issue must be approved by both Garamendi and the Legislature. The Senate Insurance Committee is expected to take up the matter in the coming days.

“This borrowing has to be considered with other borrowing and with tough decisions facing the Legislature,” said Garamendi, whose office appoints the bulk of the association’s governing board. “I don’t yet have the right information that this is the proper amount,” he said. “Nor am I prepared to say this is the right course.”

At the root of the association’s troubles is a deepening crisis in workers’ comp insurance. Across the state, businesses, nonprofit agencies and governments at all levels are staggering under rising premiums and heftier payouts.

In Los Angeles County, for example, the workers’ comp budget has risen from $157 million in 1998-99 to more than $350 million now.

At the same time, insurance companies specializing in workers’ comp are disappearing.

Garamendi said his department has taken over more than two dozen bankrupt companies that once sold workers’ comp insurance -- casualties of a deregulated market that, he said, produced a destructive price war over the last decade.

“It was a race to the bottom,” he said.

Workers’ comp insurers have also been pinched by escalating costs, driven in part by medical bills and legal fees.

Garamendi said that when he left office in 1991 after an earlier stint as insurance commissioner, about 100 California companies offered workers’ comp insurance. Today, he said, the number is down to a handful. “All the rest have gone bankrupt, gone out of business, folded up or left.”

In their absence, the statewide association is left to pay mushrooming claims.

“CIGA’s financial instability is a reflection of the unstable workers’ comp market,” said Assemblyman Keith Richman (R-Northridge), who has sponsored legislation meant to improve the workers’ comp system. “Many workers’ comp insurance companies have gone bankrupt and have put a severe strain on CIGA.”

The association predicts it will run out of money to pay claims in November 2004. To remain solvent until then, it plans to borrow from other emergency accounts used to pay auto, homeowners and commercial insurance claims.

Larry Mulryan, the association’s executive director, said it expects to borrow $200 million from other accounts this year.

“We can’t afford not to have this additional funding,” Mulryan said. “Everyone realizes that CIGA has done all it can in terms of inter-account borrowing. But this collapse in the workers’ compensation market is something that was unforeseen by anyone.”

He said the initial projection that the bond issue would amount to $500 million was a “pared down” estimate that did not take into account borrowing costs. It also assumed the association could borrow from other accounts longer than is the case.

Mulryan said he did not expect the association would need the entire $1.5 billion, which would be repaid by the 2% assessment. Assets from failed insurance companies would help shore up the fund and dampen the association’s need to borrow, he said.

Financial analysts have told the association there is a ready market for the bonds, Mulryan said. The bonds would not be sold until next year, when, presumably, the state will have emerged from the budget crisis that has consumed the Legislature.

“Our bond experts are advising us that, to make this most efficient, to make this least costly, we should ... have the authority to go up to $1.5 billion,” he said. “We don’t think we’ll ever need that.”

No solution is easy. In a letter to the Insurance Department in May, Mulryan wrote that the association had also considered raising the workers’ comp insurance fee from 2% to 3%. But in an economy where employers are already burdened by soaring premiums, such an increase could trigger a bitter backlash. And in any case, it would not produce enough money to close the shortfall, Mulryan wrote.

Mulryan said he has heard “a lot of support” for the association’s plan. But interviews with Garamendi and several lawmakers suggest that many questions remain.

State Sen. Tom McClintock (R-Thousand Oaks), a member of the Labor and Industrial Relations Committee, said it would be foolish to plow more money into the emergency fund without first revamping a workers’ comp system that many agree is crumbling. An Assembly-Senate conference committee is sorting out a raft of bills aiming to overhaul workers’ comp.

“You can’t fix a broken bucket by putting more water in it,” McClintock said. “You have to fix the system before you begin borrowing, or you wind up in a financial spiral that drags the entire thing down.”

Garamendi said he wanted a more detailed accounting from the association before he supported a bond issue.

“Their recommendation was $500 million,” the insurance commissioner said. “In the intervening three or four weeks, it escalated to $1.5 billion. Why? What is the cost of borrowing $1.5 billion compared to other options?

“I told [Mulryan], you owe some information to me and to the Legislature,” he said. “What’s going on here? What are the costs of this? Is there a cheaper way to do it?

“I’m very uncomfortable with it,” Garamendi said.