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April 9, 2009

Rocky Mountain Two Step: Destabilize and Deprivitize?

Colorado, like most states, is facing a serious budget deficit. They are scrambling to balance the budget. So the legislature came up with the brilliant idea of tapping the reserves set aside by Pinnacol, the state's largest provider of workers comp coverage, with 70 percent of businesses in the fold. Pinnacol began as a state operation and was subsequently spun off. It now operates - very profitably - as a mutual insurance company.

The state, facing a budget deficit of $1.4 billion, has its eye on $500 million that Pinnacol has set aside to cover the future costs of current claims. They have proposed a Rocky Mountain two step: first, make Pinnacol a state agency, as it once was, thereby assuming control of the company's assets. Then, draw $500 million from the reserves and use them to cover a chunk of the current budget deficit.

As is so often the case, Pinnacol is being punished for being successful. Despite having reduced comp premiums by 42 percent over the past four years, and despite having set aside the funds needed to cover future obligations on current claims, Pinnacol is now the proverbial sitting duck. Blinded by cash in the coffers, legislators are poised to make two big mistakes: deprivatize a successful privatization and destabilize a financially stable operation. What are they smoking in the thin mountain air?

Mediocre Alternatives
A consortium of Colorado businesses has lined up against the ill-advised measure. As an alternative, they suggest three steps to close the budget gap:
: "tobacco securitization" - selling bonds against future tobacco settlements [after the economic debacle of the past 8 months, you might label this proposed process insecuritization.]
: sell state buildings [in a depressed market???]
: Reduce the pay of all state employees across the board [easy for the private sector folks to say]

At this point, I'm not convinced that either plan is worth pursuing. As a general rule, it is a bad idea to solve big,short-term problems by making bigger, long-term mistakes. Here's hoping that cooler heads in the clear, mountain air of Colorado kick back with a Coors and figure out a better path toward solvency .

Posted by Jon Coppelman at 3:26 PM Link to, Comment (3), or E-mail this post
Comments

Can the state really make Pinnacle a state agency? Can they really seize their funds just like that? Doesn't Pinnacle have a say? How unfair for them. Seems they have done all the right things to secure their business and the state is going to take that away from them to serve there own needs? What happens now if a state employee has a devastating claim that requires those reserves? Where will the state and Pinnacle be then?

Posted by: bgoff at April 10, 2009 11:25 AM

Might I be so rude as to suggest that the State try cutting costs, quit subsidising illegal aliens, reduce state programs and try living within its income.

I know, how old fashioned.

Posted by: Charles Read at April 10, 2009 1:01 PM

I must agree wholeheartedly with Mr. Read and that the state legislators might consider such a radical and unpopular idea as cutting services and social subsidies and not penalize a successful operation to feed their "habit" for overspending.

The same situation is now occuring in states like New York as well.....any pool of legitimate reserve funds is being looked upon as "fresh meat" to devour and waste. This path of least resistance seems to be pushed by folks who actually never held a private sector job or owned a business themselves.

The alternative business proposed plan here is not well thought out either.

Posted by: Mark at April 13, 2009 9:22 AM
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