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Splitting California Into 6 States? Crazy

If a million people say a foolish thing, it is still a foolish thing.

Anatole France

Maybe that quote should be, “If 1.3 million people. . . . “ That’s because Tim Draper, having spent $5 million, secured 1.3 million signatures and put a measure on the 2016 California ballot that would split the Golden State into six states.

Calling himself the “risk master,” the 56-year-old, billionaire tech investor expresses his quirky desire to “reboot and refresh our state government” by creating separate areas that would be more governable – think “Hunger Games.”

California is the largest state by population, with 38 million people (12% of the U.S.’s total of 316 million), and third largest by area behind Alaska and Texas. It is the world’s 8th-largest economy. If Draper’s measure were approved, the new state of Silicon Valley would be the wealthiest in the country. Central California would be the poorest.

No state has been created from an existing one since West Virginia split from Virginia in 1863. But California has had at least 30 serious proposals to divide it into multiple states since its statehood in 1850, including a proposal passed by the state senate in 1965 to divide California into two states with the boundary at the Tehachapi Mountains, near Bakersfield. In 1992, the state assembly passed a bill to allow a referendum to partition California into three states: North, Central and South. Pundits referred to these proposed states as Log Land, Fog Land and Smog Land.

It is said that the area of the state adjacent to Oregon, long known by the fiercely independent locals as Jefferson State, produces 60% of the U.S. marijuana crop. Three years ago, ex-Google engineer-turned-political-economist Patri Friedman came up with a goofy proposal to build his own floating libertarian nation 12 miles off the coast of California – Googleland?

Assuming the current state legislature and Congress both approve of Draper’s nonsensical measure, the area we currently call California would have 12 senators in Congress, not two. As much as Texans like their beer, I’m not sure they’d like to see California get a six-pack of senators.

Among the serious repercussions that Draper fails to address are vital state infrastructure issues. These include water distribution, transportation systems, state prisons, the University of California system of 10 campuses and two national laboratories – and the largest and most progressive workers’ compensation system in the country.

Workers’ compensation laws in the U.S. are promulgated on a state-by-state basis. Besides a myriad of workers’ compensation laws, each state’s bureaucracy must produce and enforce a plethora of complex regulations, licensing procedures, collateralization requirements and other rules. States have choices to make about self-insurance, including about workers’ comp pools of smaller employers.

Perhaps one or more of the new six California states would be monopolistic – where workers’ compensation coverage is purchased through the state (as in North Dakota, Ohio, Washington and Ohio). Another possibility is an “opt-out” program (as in Texas, Oklahoma and Tennessee) that allows employers to litigate injuries in the civil system, as an alternative to the “exclusive remedy” system.

As if this weren’t enough to be concerned about, the legacy of the current active California workers’ compensation claims would be an issue.

Three key institutions were created by the state legislature and are operated like private companies: the State Compensation Insurance Fund (SCIF); the California Insurance Guaranty Fund (CIGA); and the Self-Insurers’ Security Fund (SISF). SCIF is the state’s largest workers’ comp insurer and provides an insurance alternative to those companies doing business in California that are unable or unwilling to: (1) purchase workers’ compensation coverage from private competitive insurance carriers, or (2) self-insure. CIGA provides insolvency insurance for property casualty insurers admitted to doing business in the state. SISF provides protection to the state and taxpayers for non-public, self-insured entities by taking over workers’ compensation obligations from entities that have defaulted (79 since its formation in 1984).

These three entities combined cover billions of dollars of known and incurred but not reported (IBNR) workers’ compensation with open claims going back as far as World War II. Their combined assets total in the billions.

How would those three entities be broken up into six pieces and reestablished?

California Workers' Compensation Self-Insurance Update

Under the new requirements of SB 863, California private (non-public entity) workers’ comp self-insured employers and self-insured groups (SIGs) starting this year are required to submit an actuarial study and an actuarial summary form to the Department of Industrial Relation’s Office of Self-Insured Plans (OSIP). Private self-insured employers’ actuarial submissions are due on May 1 and SIGs are due on April 15. The new actuarial study and summary form must both be prepared by a qualified actuary, as defined by OSIP.

Under SB 863, the method for calculating OSIP’s required security deposits has changed from the old method involving the Estimated Future Liabilities (EFL) formula (multiplied by a factor of 1.35 – 2.00) to the new actuarial methodology. This is considered the “gold standard” by insurers, captives, and other state Guaranty Funds as well. Self insurers are still required to submit their self-insured employers’ annual reports to OSIP as they have always done. This annual report covers the self-insured entity’s open workers’ comp claims by calendar year.

Those 340+ self-insured entities in the Alternative Security Program (ASP) of the Self-Insurers’ Security Fund (SISF) are part of the annual composite deposit program wherein SISF provides OSIP with their security deposit guarantee. They post nothing. Therefore, their security deposits are “notional” since SISF covers them. SISF’s ASP member assessments in July, 2013 will be adjusted (i.e. rebalanced) to reflect the new actuarial standard. Some ASP entities may experience increases or decreases in their annual assessments as a result of their restated open claim liabilities using a uniform actuarial standard. Currently, SISF member security deposits are based on factors of 135% to over 200% of their total EFL.

SISF's excluded entities are those that are required to post collateral (cash, LOC, securities, or security bonds) with OSIP. The 25 active California SIG's already post security deposits based upon an actuarial figure, but in 2013 SIG security deposits — like individual self-insureds — is at the undiscounted “expected level” versus the previous standard of an 80% confidence level.

Each self-insured's actuarial report must include: Incurred But Not Reported (IBNR) liabilities, Allocated Loss Adjustment Expense (ALAE), and Unallocated Loss Adjusted Expense (ULAE), less any credit for applicable excess insurance. Each of these amounts will be reported on the actuarial summary form. There are currently 55 single-entity self-insureds that will now be required to post their OSIP security deposit based upon their 2012 actuarial report submittal.

The new OSIP self-insured actuarial summary form was just placed on the OSIP website on February 14, 2013. (Note: These new requirements do not apply to government entities and JPA's).

The actuarial valuation report of the self-insured's open workers' comp claims must be as of December 31 of the previous year (i.e. 12/31/2012). Actuaries may roll forward liabilities to the December 31 date instead of having a separate study performed if the self-insured already has actuarial studies that use a different valuation date.

It's important to note that with nearly 500 self-insured entities being impacted in 2013 by SB 863 changes, exceptions to the requirement to file an actuarial summary are being developed and will be contained in a regular rulemaking package that should be publically announced within the next four to six weeks. The proposed exceptions will most likely only pertain to self-insurers that have a few open claims or a very low total ELF.

David Axene, a healthcare actuary and an Insurance Thought Leadership author and advisory board member, recommends Jeffrey R. Jordan and Frederick W. Kilbourne as actuaries who would be able to help you with the actuarial study and actuarial summary form now required as a result of the passage of SB 863:

Jeffrey R. Jordan, FCAS, MAAA
Phone: 818.879.1299
Send Jeffrey an Email

Frederick W. Kilbourne, FCAS, MAAA, FSA
Phone: 858.793.1300
Website: www.thekilbournecompany.com
Send Frederick an Email

Additional Resources To Help You Find An Actuary
Society of Actuaries
Online Directory of Actuarial Memberships