PART II: Contractionary Budget Cuts Transfer Wealth To The Rich

The massive cuts to fundamental public services are working a massive transfer of wealth from the less wealthy to the more wealthy. I don’t think this is news to many readers here, but being able to provide a concrete example or two helps win the watercooler wars.  

In Part I, I talked about how slower fire response times will in effect create a “tax” that will disproportionately impact lower earners.

In this Part II, I will discuss how the privatization of State Compensation Insurance Fund will disproportionately impact small businesses.

More on the flip.

One gimmicky aspect of the recent budget disaster was the sale of State Compensation Insurance Fund’s book of business. (ABX4 12)

The California Labor Code requires that all employers carry workers compensation insurance. (Lab. Code §3700.) There are a few very tiny loopholes. The workers compensation system provides for no-fault coverage for on-the-job injuries in exchange for foregoing regular civil suits in tort. Workers compensation benefits include wage replacement, medical treatment[1], job retraining, among others. The system includes its own tribunals which relax the formal rules of evidence and procedure that exist in normal courts.

In the parlance of the ongoing health care debate in Washington, there is a “mandate” on workers compensation. Every employer has to have it. If you look, you’ll see that your home-owners insurance policy covers this in case someone doing work at your house is deemed an employee.

And in the parlance of that same debate, there exists a “public option” (at least for now). That public option is the State Compensation Insurance Fund, not-so lovingly referred to as “SCIF.”

SCIF was established in 1914 to provide a non-profit “public enterprise” insurance agency for workers compensation. The “public option” as recently as a few years ago provided roughly half of the workers compensation policies in California, but now appears to have dwindled to about 25%. Other insurers have fled the market or priced themselves out of most businesses’ range, even after reform.

Now SCIF probably isn’t something we want to hold up as a shining example of “public options.” It has been riddled with massive incidents of fraud lately (I would say, so have private companies, but who would hear that?).

So how would this work? [2] Would the best accounts be sold off leaving SCIF as a high-cost, high-risk vehicle that would streak towards insolvency?

From the Sacramento Business Journal.

Fundamentally transforming State Fund would be a “huge public policy blunder” and “extraordinarily ill advised,” said Steve Young, senior vice president and general counsel for Insurance Brokers and Agents of the West, a trade association. “I really believe it would be catastrophic for California consumers to fundamentally alter the safeguarding role that State Fund has played.”

In other words, we might find ourselves in a workers’ comp cost spiral that the “public option” won’t be there to cushion.

State Fund is often called the insurer of last resort. It brings “a level of honesty and true competition to the workers’ comp market,” Young said, though there’s no statutory mandate for the nonprofit to accept all applicants. The insurer was there for employers a decade ago when other insurance companies fled the market or went under during a systemwide crisis.

Of course, this won’t affect large businesses. Businesses with enough capital can simply self-insure (Lab. Code § 3700(b)) or pay the higher rate. Businesses that can’t afford the coverage will either resort to tricks like changing employees to sham “independent contractors” which could land them criminal penalties, or they may just have to go out of business.

As a result, competition will be eliminated by killing off small businesses making the conservatives scare tactic about businesses leaving California to become a self-fulfilling prophecy.

[1] In conversations I’ve had with experts on the SB 840 project, they told me that workers’ compensation was not included. I wonder how much savings there would be if everyone had medical treatment regardless of employment and that cost was removed from the comp system, where it has to be the hugest component. It seems to me it would not only increase employee mobility, but entrepreneurialism–you know, capitalism. Conservatives actually hate capitalism and competition and want mercantilism, but that’s for another diary.

[2] It won’t. Mark. My. Words. In the next budget go-round, they will have to address the shortfall from this sale ridiculously marked at over $1b.