The governor wants to help reduce a $24-billion budget deficit by giving private insurers a chance to buy about half of customers' policies at the government-controlled State Compensation Insurance Fund.
Opponents got a powerful new voice Wednesday when Insurance Commissioner Steve Poizner warned that "a hasty or ill-considered sale could wreak havoc on the already volatile workers' compensation market."
The commissioner also released a list of 18 legal, financial and technical questions that he said should be answered before a sale takes place.
"Any sale would have ramifications throughout California's business community," warned Poizner, who is vying to be his party's gubernatorial candidate next year to succeed Schwarzenegger, a termed-out fellow Republican.
The upshot, Poizner said, could be a surge in premiums for tens of thousands of small companies when they could least afford extra costs.
Other critics argued that a sale could cause long-term damage to the company generally known as State Fund.
Private insurers said they were worried that forcing such a dramatic change at the country's largest workers' compensation insurer could create market turmoil at a time when medical costs are rising and profits are dropping.
Leading the opposition are Sacramento advocates for 175,000 small and medium-size businesses that rely on the fund for affordable insurance. Opponents fear that selling the nonprofit company's least risky policies could cause the price of workers' comp coverage to skyrocket for employers that stay with State Fund.
"It just sounds crazy to me," said Scott Hauge, the president of Small Business California, an advocacy group, and owner of a San Francisco insurance brokerage that sells State Fund policies. "Most of the small businesses that are with State Fund are there because they can't go anywhere else. If they are a more risky type of business, their rates will go way up."
State Fund Chief Executive Janet Frank was more circumspect in her comments, noting that issues surrounding the proposed sale require "substantial and thoughtful analysis because of their complexity and because the stakes associated with them are so high."
Headquartered in San Francisco, State Fund controls 22% of California's market for workers' compensation insurance. It has more than $20 billion in assets and last year wrote $1.7 billion worth of workers' compensation coverage. The company is legally obligated to serve as the "insurer of last resort" for employers, which are required to buy coverage to pay medical bills and disability benefits for victims of on-the-job injuries.
The proposed sale comes at a delicate time for the nearly century-old company. It is struggling to reinvent itself after some of its officers and former board members were allegedly involved in a financial scandal that is the target of a multiagency state criminal investigation. At least nine search warrants were served on former State Fund executives and board members last week. Investigators have allegedly uncovered about $500 million in fraud, sources close to the investigation said.
"State Fund is going in a solid direction," said Mark Webb, vice president of Employers Direct Insurance Co., an Agoura Hills workers' compensation carrier. "To have this happen at this time is very damaging."
A Schwarzenegger spokeswoman countered that the governor had no choice but to look at the possible sale of many state assets, including State Fund, to find enough revenue to plug the state's huge budget hole.
"There is no doubt that there are profitable lines of business at State Fund that would be enticing to private insurance companies," spokeswoman Rachel Cameron said.
As proposed, Cameron said any sale of State Fund assets would need to meet three criteria: State Fund would have to continue insuring customers who couldn't get coverage from a private company; the state would be required to seek the highest possible value for any sold assets; and any changes would have to maintain the stability of California's workers' compensation insurance market.
But draft legislation written by Schwarzenegger leaves it completely up to the governor's office to decide whether those criteria would be met. The proposed bill provides what amounts to legal immunity to State Fund's board of directors from being sued for voting in favor of a sale. By law, the board is bound to protect the interests of State Fund's policyholders.
What's more, the governor's plan attempts to prevent two top officials -- Poizner and Atty. Gen. Jerry Brown -- from playing any part in approving or denying the sale.
The insurance commissioner said he "routinely oversees all changes in ownership and financial structure of any insurer doing business in the state." He said he was "troubled" that the proposal would strip him of that responsibility in "a transaction that affects a company that writes more than 1 out of every 5 workers' compensation policies."