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Saturday, August 28, 2004

Turn over all the rocks

The whole flap about the shenanigans at Saif Corporation, Oregon's quasi-public workers' compensation insurer, has got me thinking. Here's one of those unique Oregon institutions that we like to brag so much about -- "Things look different here" -- and it's a disaster. The problem with it is that, like so many supposedly great Oregon ideas of the '70s and '80s, it involves setting up a huge pot of public money without anything approaching adequate oversight by, or accountability to, the public.

It's got its own board of directors, elected by no one, appointed by the governor, and the average Oregonian couldn't give you the name of a single person who serves on that board, or who has ever served on it. Its budget doesn't appear to go through normal government channels, and it's free to hire all manner of consultants and other ne'er-do-wells without public scrutiny -- at least until a major fiasco is exposed, as was done with Saif. Who audits these people, if anyone? Where are their financial statements posted so that we can all take a look? Beats me.

One of Saif's antagonists, State Sen. Vicki Walker, D-Eugene, is on a mission to bring Saif back to the status of a state agency. That makes a lot of sense to me -- more so than the proposal to disband it entirely -- but anything is better than leaving the status quo. Governor Ted has put a new director in charge of Saif, but the problems run too deep. They're structural. It's time for an overhaul, not just a new driver.

The feds were recently sniffing around Saif's sweetheart contract with Neil "Tony Soprano" Goldschmidt. I don't know if U.S. Attorney Karen Immergut has found anything illegal, or what she'll dare to do if she does. But if she really wanted to make a name for herself, she could probably make some hay turning over some rocks at some of the other large pots of tax dollars that are being administered behind closed doors by hand-picked political cronies here in the Beaver State.

A few of the potential targets that come to mind, ranked from the most suspicious on down:

Portland Development Commission Oregon Lottery Commission Oregon Health and Sciences University Tri-Met Oregon Liquor Control Commission Port of Portland Metro

How many more greasy Neil-type deals or other financial unmentionables are hiding under the rocks at these amorphous entities? Ms. Immergut?

And readers, which other fine unique Oregon institutions do you think are ripe for a thorough airing-out?

Comments (18)

Jack - Would problems like SAIF occurred under the watch of Tom McCall?

Putting things like SAIF under self-control of tax dollars makes sense, only if the grand-master is someone with (according to legend) the control of someone as ethical (moral?) as Tom.

In other words, is Oregon suffering from the loss of strong/ethical leaders like Tom McCall?

There's a problem with strong leaders. They get you to neglect checks and balances. Later, when they're succeeded by bozos, you wish you had installed some, but it's often too late.

I know that's the fundamental problem. But what about Tom McCall? Speaking as someone born in the early '70s, Oregon seems to have gone downhill about the time Tom left office. Is it that simple? I mean, that's about the time Neil was rising (no pun intended) to power.

There's a problem with strong leaders. They get you to neglect checks and balances. Later, when they're succeeded by bozos, you wish you had installed some, but it's often too late.

Si Senor!! This can be quite true.
Of course the strongest leader of all would understand that, and insist on setting up a structure.

A little reality check here: SAIF doesn't spend taxpayer dollars, its money come from ratepayers. It truly operates like a business, only that it is answerable to a publicly-appointed board rather than stockholders.

Making it a state agency again would subject it to political pressure to keep raising benefits without corresponding revenues to pay them. In other words, to run more like the Oregon Health Plan.

Forcing it to be sold off would both raise costs to ratepayers and allow its replacement(s) to skim off low-risk clients while letting start-up businesses and higher risk businesses fall into the exorbitantly high-cost common risk pool.

Despite all the talk about "scandal" at SAIF, the truth is SAIF deserves an "A" for operations and an "F" for public relations. Personally, I'm rooting for new director Brenda Rocklin to fix the latter without jeopardizing the former.

Fair enough, Dr. Roberts. Saif may not play with tax dollars, as the others do, but WC insurance is required by law, and they take premiums out of employee's paychecks. Close enough to a tax for me.

Plus, isn't that the point? It should either be a true public entity or a true private business -- not some fuzzy thing in the middle that avoids all the normal safeguards of the two and gives people license to steal.

Again, let's talk reality rather than ideology. SAIF's competition is complaining they have trouble competing because SAIF's rates are too low and their reserves are too large. How does that translate into a license to steal?

Liberty Northwest, as today's Oregonian reports, has put hundreds of thousands of dollars into a campaign to force SAIF out of business. Companies insured by SAIF are likely to shell out millions to keep SAIF in business. Who is stealing from whom?

As I say, I'm not against there being a Saif. Abolishing it makes no sense. But letting it shell out a million bucks to weasels like your good buddy Neil G. and three or four hundred grand a year to some CEO type is a ripoff.

Rates would be even lower if it were run as a state agency, by a guy like you, being paid around, say, $175K. And you shouldn't need consultants.

for once, let me disagree with Jack (B.) and agree with Jack (R.). SAIF's quasi-private status has caused people heartburn since the state divested itself, but the simple fact is, _IT WORKS_. It's too bad that SAIF hired Neil, and it's too bad that its former managers took the Liberty Northwest/DiLorenzo litigation so personally that they got sanctioned for shredding documents. But if you get past the thin veneer of scum, you find a worker's compensation insurer that provides insurance much, much, cheaper than other insurers, which is its prime function. Jack (B.), your criticism is formalistic rather than functional. What about restoring SAIF to its status as a state agency would help it do its job better?

It looks to me like Saif is wasting hundreds of thousands a year on consultants, p.r. firms, lawyers, and overpaid in-house execs. If it took that money and gave it back to ratepayers, that would make it even better than it is now. But as a "quasi-public" trough for all the, as you put it, "scum," it's not properly accountable for itself, and it's wasting a lot of money.

As for its competitor, they're just obsessed people, and they're wasting a lot of somebody's money. Shareholders and/or ratepayers, I presume.

The last CEO of SAIF, whose compensation you apparently resent, was paid approximately half as much as the CEO of Liberty Northwest. As for the money paid to Goldschmidt, how do you know it was any less than the money Liberty is paying John DiLorenzo?

It's always easy to sit on the outside and tell other people how much money they're wasting in their business--particularly if you don't know anything about how to run that particular business yourself. That's why having the government, via legislative oversight, run business enterprises is generally a bad idea.

I don't doubt that if Vicki Walker had been exercising regular oversight on SAIF, they would have been twice as politically correct and half as productive. I don't think ratepayers would have benefited.

If you think SAIF would be better run as a state agency, then why shouldn't Portland take over PGE?

If its CEO deserves the kind of money she was making, then Saif deserves to pay taxes into the general fund, and federal taxes too, for that matter. Does it? If you want quasi-public status, you need to live with quasi-public pay.

Comparing the Goldschmidt payoffs to DiLorenzo's money doesn't move me much. "The opposition are corrupt, wasteful jerks, so we can be too" just doesn't do it for me.

Saif is in a nasty battle right now, but it's a battle that it brought on itself. And although it deserves to survive, it doesn't deserve a vote of confidence.

As for Portland and PGE, funny you should mention that. I'm starting to come over to the idea that a city takeover would be better than the Texas Pacific deal. But that's another post entirely.

And hey, why aren't you in New York? In all seriousness, to me, guys like you are the future of your party. Their bad for not having you there.

The idea that quasi-public agencies have to pay less is a non sequitor. Even if it were true, in the case of SAIF's CEO versus Liberty Northwest's, that is what is happening. Still, SAIF gets criticized, Liberty Northwest doesn't.

It also sounds like you haven't been following the news stories on the pay received by credit union executives (which are also nonprofit organizations paying no taxes).

I'm not trying to justify what SAIF has done by saying Liberty Northwest is just as bad. I am trying to argue that maybe there is a reason these folks are spending so much money on consultants, PR, etc., in their competitive environment. Arguing that one side should unilaterally disarm is like arguing that either Bush or Kerry supporters should unilaterally quit running the 527 "independent" ads.

As for why I'm not in New York, I was offered the chance but decided summer in Oregon with my family was more attractive than summer in New York with my political party. The older I get, the more jealously I horde my personal time. Call it my version of family values.

“The idea that quasi-public agencies have to pay less [in salaries and consulting fees] is a non sequitor.”

From an economist’s point of view the above statement is patently absurd.

PGE, in comparison, is a regulated utility that is expressly granted a monopoly on condition that it is subject to rate regulation and review of the reasonableness of the costs upon which those rates are justified.

SAIF cannot even remotely argue that the State of Oregon should create a monopoly for providing insurance services for all workers compensation. With the electricity market - the inefficiency of having 5 or 8 or 20 sets of electric lines traversing our streets is obvious. The only inherent inefficiency upon which the legislature could possibly hang its hat on for interfering in the insurance business, to create a quasi-public entity, is the apparent lack of the stomach to maintain a competitive marketplace. Rather than fight the evils of monopoly the state has caved in and become a monopolist themselves and legislatively authorized predatory pricing.

Consider this hypothetical -- if there are two private insurance companies would it be lawful to require, for example, that all the construction trade companies use insurance company X rather than insurance company Y and must pay a negotiated rate that guarantees X a certain return above costs? This is just a portion of the market, yet it gives certainty of survivability to X that is not provided to Y and likewise allows X to distribute is overhead costs more broadly. X gets a competitive advantage over Y only through the power of politics.

The precise mechanism for obtaining a competitive advantage is not at issue here. The issue is to recognize that two private entities playing by two separate sets rules is antithetical to capitalism. A monopoly can exist so long as it does not engage in predatory pricing or other unlawful conduct that reflects the exertion of its monopoly power.

The legislature carved out a protected chunk of the market, all state employees, via ORS 656.017(2) and handed it to SAIF. If SAIF exclusively served all state employees then there would be no problem for the remainder of the market for employers other than the state itself.

I can give another example. The Oregon State Bar, late last year, required a $15 annual fee from every single member as part of a five-year one million dollar contract with an Ohio company to scan Oregon case law. This is a new entrant to the market that did not exist before. I had a case law CD for the Mac, back in 1997, with my own crude search engine of exclusively my own creation. If poor little old me could do this without nary a peep of official investment from anyone why then must the Ohio company need a guaranteed market to enter the market? From the Ohio company’s perspective it makes good business sense. From my perspective it kills the market for low-end research and the eventual, and cooperative, development of a digest to compete with the king in the market. From December 2002 through May 2003 I had learned Perl Apache and MySQL and put up a website with access to the opinions on the internet. I was in the process of adding search capability and thorough hypertext linking to match that of the CD. And yes, I abandoned other stuff (an opportunity cost) to engage in this risky behavior. My thoughts were to make the investment in Oregon and refine the tools, then perhaps enter other markets. Can you think of any market outside the current set of members of the Oregon State Bar to whom I might offer Oregon case law research on the web? Can I compete with the $15 dollar annual fee? Don’t forget, the fee is not optional to members of the bar and is not dependant upon whether the members actually use it. People pay even though they may never even use the service. Now that is a competitive advantage that only the bar or a government entity can create for a private company. Would I, the poor slob who cannot even take the bar exam and practice law, become the embodiment of capitalist evil if I were to demand that the OSB cease and desist from its unlawful monopolistic practices in collusion with the Ohio company? There would be no real money in it for me, just pride and a purpose in life. Now here is the kicker – suppose I send a $15 check to the bar and ask for the same access that bar members have to the Ohio company’s newly scanned Oregon service. Will the bar deny me access on the same terms as the bar members? (I’ve been waiting to make such a request for the fun of it. It also parallels precisely to the desire of private businesses that want lower SAIF costs.) If they let me have access, then must they give every Oregonian access on the same terms? Has not the Ohio company now become a player in the private market, owing exclusively to the actions of the government (or the bar)? Sure, you know what you are getting, but you do not know what might have been. The sweet anticipation of honey from Winnie the Poh just does not exist in such a market when politicians are free to work their magic to kill competition and immunize themselves from the brutality of competition and capitalism. The folly of the Ohio company is the present business risk that I might have them discontinue all further operations in Oregon because they would not be here but-for the unlawful activity of the Oregon State Bar (which continues today). I would also demand that they destroy the product that was derived from the unlawful activity. SAIF is not safe, even for serving state employees, unless they stop interfering in the private market outside the sphere of state employees.

I do not expect a lawyer to understand this. I do expect an economist to know this instinctively. The attorney for Liberty studied economics before law, so I expect him to be motivated at least as much by the economic principal as by the money from legal fees. Perhaps Liberty is the pawn that is letting the attorney indulge in his debate? (This seems the most plausible.)

I would add a mandatory course on basic economics to the curriculum of the law schools because it is obvious that the Oregon State Bar does not have a sufficiently large pool of folks to spot even the most elementary concepts of capitalism and private enterprise. Maybe lawyers understand capitalism -- it is just that they don’t care, as a group, to protect this institution. To me, monopoly is bad, regardless of whether it is government sponsored or not.

If SAIF did not have unique access to all state employees then the salary issue could be exclusively one of business judgment. By branching out to exert monopolistic pressure in the private arena SAIF has not relinquished its unique tie to state employees and likewise has not become free from direct scrutiny of its salaries. It makes perfect sense to demand an end to the monopolistic practices of a monopoly – and it also makes equal sense not to create quasi-public this-and-that’s all over the legal map. They are simultaneously half-illegal and half-legal. It is enough make one’s head spin – they share one thing in common, they lack of objective accountability.

Ron, if you think the basis of the dispute between Liberty and SAIF is SAIF's exclusive right to provide worker's comp insurance to state employees, then you really don't understand the issue. If Liberty wanted the chance to compete for that business, I think the legislature would probably pass that bill in a heartbeat. They haven't done that.

You remind me of alot of economists, who look at a successful enterprise and say, "Sure it's successful in practice. But can it work in theory?"

Jack R, Pardon me if I complain, simultaneously, about the current state of affairs and the proposed alternative.

If we stick with creating general laws that are equally applicable to government and private employer alike then the state could act as its own self-insurer in like fashion to large private employers. The proposed measure prohibits this self-insurance role for the state even as to its own employees.

The proposal goes overboard, in my view, because it puts the private insurers in a position to jump into the river of cash which streams to public employees. This employee pay accounts for nearly 80 per cent of government expenditures. The measure just redirects that stream and creates an incentive for legislators to use politics to fill the trough for Liberty, and others, with state money.

SAIF could have been kept in that self-insurer box and stayed out the retail. Liberty could have stuck to getting SAIF out of retail. Then I would be happy -- from an economist’s pointed of view.

So long as private insurers want to save their business judgment discretion while simultaneously getting chummy with the folks at the DAS then we will have merely substituted one unaccountable monster with another.

BTW -- the specific repeal of ORS 656.017(2) in the measure starkly contradicts your apparent perception that Liberty does not want to serve public employees. If the legislature was OK with that then I suppose there was some other issue that was on the table. That issue was the pool of money that SAIF obtained due to its unique position to exert monopoly power. It does seem fitting that SAIF not be allowed to use this war chest of illgotten gain at the instant its’ politically protected competitive advantage is removed.

Will SAIF retreat to serving only state employees, as an agency, if the measure is defeated? Will a judge force the retreat?

Will SAIF want to become fully private? (Inclusive of the abandonment of the exclusive right to serve state employees.) This is the intriguing possibility. They could be equally chummy with DAS as Liberty. The problem here is valuing the forward obligations of SAIF so as to diminish the perceived sale value of SAIF to some (theoretical) well-funded potential buyer. The actuarial services of a firm like Milliman would come in as handy here as with PERS. Just doctor up some numbers using assumptions that no judge seems to understand then sell it at a fire sale price. Who do you suppose would love to negotiate the sale? Would the buyer have indirect indirect links to PERS too? Viola, we have profit because of the fire sale purchase price. The buyers, theoretically of course, would be disappointed if SAIF were to retreat and become a mere state agency serving exclusively state employees. The negotiator too would be sadly disappointed. Liberty too would be disappointed by a retreat because they do want to serve state employees.

Did I paint the right picture? Theoretically.

Would I accept the initiative’s flaws just to spite the power broker? Then fix it later by recreating an agency dedicated exclusively to serving state employees and thereby spoil everybodies fun.

Ron, I understand the theoretical point but what practical problem are you trying to solve? Private companies insured by SAIF seem convinced that if Liberty puts them out of business, their rates will go up and start-up companies and companies in higher-risk industries fear they won't get coverage at all except in the common risk pool. My sense is they are right.

Allowing what is, in effect, the state's self-insurance company to offer insurance to other companies in competition with private insurance companies seems like a good accomodation. Where's the beef?

The combined effect of a Construction Contractors Bond, Unemployment Insurance and Workers Compensation have killed off many dreams of workers who would like to start their own businesses. These demands are of the state’s creation. Each has a public purpose. I do not look to the SAIF as the public instrument that is designed to aid start-up businesses.

The state mandates the Workers Compensation insurance. In this sense the state starts out in the position of the enemy. (Arguably the employer’s liability is limited as a trade off; for theoretical events that might happen in practice.) It is hardly magnanimous for the state, via SAIF, to then temper the harshness of the general demand. If the original demand for coverage, and the general laws that form the basis of recovery, impose too great a burden then the place to look for a fix is the original demand. SAIF, if it were confined to its self-insurance box, could offer unbiased advice on such changes to general law.

The temptation for SAIF, with its present structure, to defuse the political problem through accommodation via rates obstructs the search for a solution that can be applied by other insurance companies. Included in this search could be solutions to high medical costs that we all face. SAIF, by wanting to grow, can wield stronger negotiating influence over medical costs. But this is motivated by self-interest. This too gets mixed up in the employer rates applicable to government employees because of the political urge to accommodate health care entities wanting to sit in the river of cash flowing to state employees. Is SAIF willing to make the health care industry happy via high rates for state workers to then forward on? Is this incompatible with holding down payout costs on behalf of private clients and their workers?

There are two regimes of accountability. A capitalist fool is free to drive his business into bankruptcy to the delight of his competitors. A public corporation has to endure the onslaught of a pestering public demanding explanations for every de minimus detail they find important. The mixing of public and private into one creates a structural accountability break down. One view is that the One has the best of both public and private. Another view is that the One has the worst of both public and private. I do believe in the inherent self-interest and greed of man, as is amply recognized in the structure of the three branches of the federal government. This is to say, I take the view that I will look to the outer limits of the possible excesses of a public-private combination rather than look to the outer limits of benevolence that can be accomplished. SAIF, in my view, has forfeited its role of representing the public interest in meeting the needs of private businesses and their employees the instant they started serving this group. The mere fact that SAIF also serves state employees does not diminish my complete skepticism. The mixing of the two regimes (the beef) is worse than enduring a mere private monopoly because now there is now public interest minded defender to guard the hen house. The accountability flaws and economic inefficiencies of the public-private combo mirrors, almost precisely, that of non-market economies. A role of government is to preserve a level playing field for private enterprise, and a strong component of this is recognition that the general welfare benefits of Capitalism vanish with monopoly. SAIF, to the extent they wish to play by the rules of capitalism, must also be subject to the same limits. In this case, SAIF must comply with the prohibition on predatory pricing.

SAIF is but one example of the blurring of the lines between public and private. PERS is the 800-pound gorilla. Recently it did not have the same success as SAIF. The negative consequences are just too great for simple explanation. Such catastrophic failure should serve at least as a warning that we might explore, theoretically of course, the causes so as to prevent their reoccurrence. If you fail to see the negative side of unaccountability then this is the practical problem that needs solving at this moment in time.

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