Salaries skyrocket at California state insurance fund following years of scandal
A California public agency that offers workers’ compensation insurance coverage to employers has recruited a high-priced team of former executives from the private sector to turn it around after years of scandal and financial problems.
But the hires are earning six-figure salaries that dwarf others in state government, drawing concerns from some in the state Capitol who question the cost as the agency rebuilds following investigations in years past that led to the removal of top managers and mass layoffs forced by loss of business.
The State Compensation Insurance Fund, known as State Fund, has also been criticized for hiring the spouses and adult children of agency managers. Its 11-member board of directors, which is appointed by the governor and legislative leaders, has become a soft landing spot for former lawmakers and other political insiders.
Bonuses and incentives awarded by State Fund’s board have boosted compensation to more than $500,000 each for its seven top managers including its CEO, whose annual pay is some $732,000 — more than three times the $210,000 salary of the governor. The salaries have prompted some lawmakers to call for an oversight hearing to determine whether the compensation is justified.
Carmen Balber, executive director of Consumer Watchdog, a group that keeps tabs on the insurance industry, said the pay “seems beyond the pale.”
“It sounds completely out of proportion for executives at any state agency to be making so much money, considering the governor makes only about $200,000 a year,” she said.
Agency officials including Board Chairman David M. Lanier say the compensation is warranted due to the unique mission of State Fund, which was created by the Legislature in 1914 to provide workers’ compensation insurance to businesses in the state, including those who can’t afford coverage from the private sector.
State Fund currently insures some 110,000 California businesses, down from 292,000 policyholders in 2002. Its market share grew significantly from the mid-’90s through 2002 as deregulation of rates and other factors led many private firms to reduce the price of their coverage, causing them to struggle financially and eventually leave California or go out of business. State Fund was left to pick up the slack.
Changes in the law have helped bring more private insurers back into California, creating more competition and reducing State Fund’s market share from 52% to 10.85%, though it remains one of the top providers of workers’ compensation insurance in the state.
The agency’s officials refer to it as a “quasi state entity” because, although its employees are state government workers, it does not receive taxpayer money from the state treasury, instead deriving its revenue from some $1 billion in premiums paid by the businesses it insures, as well as returns on funds it invests.
“The challenge we have is it’s a billion-dollar insurance company,” Lanier said. “There’s not another one of those in state government, so we need and value talent and expertise from the insurance industry.”
The agency’s biggest troubles began in 2007, when State Fund’s board fired its president and vice president after an audit found questionable financial practices involving the sale of discounted policies through outside associations linked to some board members. The scandal also resulted in the resignation of two board members whose private firms collected at least $265 million over 10 years from State Fund for administering group policy programs.
In 2011, State Fund laid off 25% of its 6,800 workers in response to its loss of market share. And its workforce has continued to drop, sitting now at 4,270 employees.
In the years after the scandal, the board of directors sought to expand its powers by persuading the Legislature to increase from one to 16 the number of executive positions exempt from civil service rules and pay scales.
In 2014, the board appointed Vernon Steiner as president and CEO of State Fund, who touted his 30 years of experience in the insurance industry. He received a base salary of $450,000 as well as various performance-linked bonuses.
Steiner appealed in 2017 for the latest expansion of civil service exemptions, telling the state Senate Insurance Committee that he and the board needed more leeway to recruit additional talent in competition with the private sector as part of his efforts to turn the agency around.
“Although I absolutely understand we are a public agency and that we serve the public, we do it in a way that is a little bit different than most other public agencies,” Steiner told lawmakers. “We compete with private carriers, and although the labor pool within civil service offers a lot of rich expertise and experience, it doesn’t generally offer insurance expertise.”
Steiner has faced pointed questions about State Fund‘s executive salaries from legislators who said they were concerned about the fat paychecks from the public agency.
“This is the state, and I look at these salaries that you are talking about paying and they are more than almost every university president at the California State University, who run an incredibly diverse campus of 40,000 students and employees,” Sen. Steve Glazer (D-Orinda) told Steiner at the 2017 hearing. “That’s troubling to me.”
The average annual salary for presidents at California State University campuses is $330,000.
Excluding the university systems — which pay some athletic coaches millions of dollars — Steiner at $732,000 is the third-highest-paid state executive after the chief investment officers for the two state retirement funds, who make more than $800,000. By comparison, University of California President Janet Napolitano’s base salary and car allowance total $578,000 to run a system with 227,000 employees and a budget of $37.2 billion.
Glazer voted for the five new executive positions after he was assured in early 2017 that the committee would get periodic reports on the compensation. Committee members including Glazer said recently that they think an oversight hearing should be held by the Legislature.
The committee last heard from Steiner at a hearing in April that focused on the insurance industry, but not executive compensation issues. He said his agency had “engaged in a large-scale transformation” that improved the financial strength and customer service and culture of the organization.
“Although we have more work ahead of us, our efforts to date have yielded positive results and provided important benefits to California businesses and injured workers,” Steiner said. “I would say we are financially as strong as we have ever been.”
In a letter to lawmakers in 2018, Steiner said State Fund’s base pay and cash payouts to managers trended in the 25th to 50th percentile within the insurance industry.
Mike Mattoch, a former chief counsel for the Assembly Insurance Committee who has also worked as an industry executive with USAA, said the not-for-profit State Fund could pay its executives half as much and still draw talent with expertise in insurance.
“It’s a very cushy gig,” said Mattoch, who now works as an attorney for Consumer Watchdog. “They don’t do much of anything and they get paid a ton.”
In November, the State Fund board approved raises in base salary, bonuses and incentive payments for 17 managers, including Steiner, whose base pay this year has been increased by $36,000, or 7%, to $544,450. By comparison, State Fund’s then-CEO was paid $273,000 in 2007.
Steiner also gets an annual “at-risk compensation differential,” which is linked to performance, according to State Fund spokeswoman Jennifer Vargen. That amount is currently $177,623.
On top of that, Steiner receives a separate performance-based incentive payment of $30,000, and $17,900 for a “Long-Term Incentive Plan.” State Fund also contributed $39,046 to Steiner’s CalPERS retirement plan.
Other executives who receive performance and incentive payments include the chief operating officer, whose annual compensation this year is $566,000, and the chief information officer, whose yearly compensation is $588,000.
Lanier said his satisfaction with the progress of State Fund reforms led him to vote at November’s meeting for the increases in salary and incentives and bonuses for the executives, including Steiner.
“He walked into a very difficult circumstance. State Fund has been on a remarkable transformation and turnaround, internally, externally,” Lanier said.
High salaries are not the only concern some state officials have with the agency. State Fund also employs the relatives of some of its executives.
Both of Steiner’s sons have worked at the agency — his son Bennett was hired by the agency last year and is an underwriter making $50,400 annually.
“All civil service rules were followed and extra steps were implemented to ensure a fair process,” said Jonathon Tudor, an agency spokesman, who said Bennett Steiner’s application received an extra round of reviews in which his name was redacted and he was determined by a human-resources panel to meet the position qualifications.
Steiner’s other son, Casey, participated in a State Fund summer internship program in 2017 and 2018, making $16 an hour while attending college, but has never been an employee, Tudor said.
The agency’s vice president for human resources, Brandee Radaikin, was hired in July 2011 and receives a base salary of $130,600. Her husband, Bruce Radaikin, received an agency job in 2017, and his pay is $44,000.
“Bruce’s relationship to Brandee was disclosed when he applied to State Fund,” Tudor said. “Brandee played no role in his hiring. All civil service rules were followed. Bruce and Brandee are in different departments and report up through different executives.”
In 2013, the agency hired Douglas Ziemer as a program manager with an annual salary of $130,000, and two years later hired his wife, Nicole Ziemer to a personnel office job, with a top salary of $81,000. The Ziemers both left the agency in July and did not play a role in each others’ hiring, Tudor said.
Balber said hiring family members of managers is a concern.
“You might see that kind of nepotism in the insurance industry, but it has no place in an agency that is selling insurance with the state imprimatur,” Balber said. “That’s a problem.”
Republican state Sen. John Moorlach of Costa Mesa, who also serves on the Senate Insurance Committee, said the state doesn’t have a central manager monitoring the hiring of family members at its many agencies, a practice he said is prevalent.
“It is rampant within the state,” he said. “I have heard plenty of stories and I don’t like what I have heard.”