Paul Nitze: A bad time to cash out Pinnacol
Special to The Aspen Times
Aspen, CO Colorado
Let’s say you’re shopping for a used car and you see two ads in the paper. One says, “Must sell car to eat” and the other says, “Must sell to make room for the new convertible.” Any doubt about which owner’s likely to drop his price?
Colorado’s general fund, which was pretty well-fed until a couple of years ago, is now starving. So it’s no surprise that those who do business with the state see this year’s budget as a chance to drive some wickedly hard bargains. Thankfully, this kind of budget pain only hits our state every decade or more. We’re no California in that respect.
Executives at Pinnacol Assurance have seized this moment to put a $200 million offer on the table to privatize the quasi-public workers compensation insurer. Here’s how their offer works: The state gets $150 million over two years (plus $50 million more over 30 years), Pinnacol starts paying state taxes on some premiums, and state oversight of Pinnacol shrinks dramatically.
This deal would be laughed out of the Capitol during any other budget cycle, but this year it’s getting a hard look from the governor and some of the House and Senate leadership. Pinnacol execs are crossing their fingers that an alliance of pragmatic Dems and privatization-happy Republicans will form a majority and complete the deal.
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Smell something fishy about this? You should, though not necessarily for the reason you think. State Senate President Brandon Schaffer has called the offer too low, as have Sens. Morgan Carroll, Lois Tochtrop, and others. Sen. Carroll was head of the Interim Committee that investigated a variety of alleged problems at Pinnacol last year after the Legislature failed to strip $500 million out of Pinnacol’s hefty reserves.
Pinnacol has $2 billion in assets, so it’s not surprising a lot of people think $200 million is a low-ball offer. Morgan Stanley, which would earn an advisory fee on any deal, is currently evaluating the fairness of that offer. It’s likely they’ll recommend a number that’s somewhat, but not much, higher.
So let’s say we optimistically double it to $400 million. That’s a fair price for Pinnacol’s “independence,” but it’s a raw deal for Colorado over the long haul. The problem isn’t the price – after all, while the state treasury kicked in funding when Pinnacol was created in 1987, most of those reserves came from employers and not taxpayers. Sure, Pinnacol gets a tax break, but the accumulated value of that tax break is a far cry from $2 billion.
The problem is what comes next. Ken Ross, Pinnacol’s CEO, is buying freedom from oversight and regulation, but keeping Pinnacol in the pole position as the insurer of last resort. Republicans love the idea of privatizing Pinnacol because they think government bureaucrats are lousy managers. But a privatized Pinnacol wouldn’t really have to scrap it out in the marketplace.
Workers comp isn’t like car insurance. The market simply isn’t as competitive or transparent. If it were, states across the country wouldn’t have had to create insurers of last resort in the first place. Since its predecessor was created way back in 1915, Pinnacol has played a huge role in keeping workers comp rates relatively low in this state, and we should count ourselves lucky on that score.
That same century of experience should also teach us that if we killed Pinnacol altogether, we’d lose our insurer of last resort. If anything, the ability of private insurers to play that role has gotten worse over recent decades, not better. So, just like every other state, we have to deal with the strange beast that is a quasi-public insurer of last resort.
Because of the role that it plays, Pinnacol will always get favored treatment from the state. What it wants from its current offer is the freedom to pay its executives what it likes, enter new insurance markets, deny claims as it likes, and operate in secrecy. All while keeping all the perks, like tax exemptions and employee access to the state’s retirement fund.
Republicans can complain all they like about ham-handed oversight and legislative overreach on Pinnacol. Hey, they’ve got a point. What they fail to grasp is that imperfect oversight of what’s effectively a quasi-public monopoly is the least worst option. You think Sen. Carroll’s committee uncovered abuses during last year’s hearings? Wait until Pinnacol is a black box the state auditor can’t touch.
We’re lucky Pinnacol low-balled the price of its freedom. If they’d made a fair offer, legislators would’ve swallowed hard and taken the money. Now Pinnacol will have to wait another decade, until we’re hungry again.
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