Pinnacol’s golden goose: When unintended consequences produce a windfall


It will soon be two years since Channel 7’s Tony Kovaleski ambushed the Executive Director and several of Pinnacol’s Board members at the Pebble Beach resort, living the lush life of the 1% — green fees, spa treatments, luxury suites, first class airfare and gourmet meals. Not bad duty for the managers of Colorado’s government chartered, workers compensation ‘insuror of last resort.’ Created by the Legislature twenty years ago as a public alternative to a private marketplace in total disarray (think health care today), where many employers couldn’t purchase insurance from anyone at any price, PINNACOL was launched with nearly $200 million in state money. Today it dominates the Colorado market, insuring more than 70% of employers, and sits on more than $2 billion in reserves, while spinning off 20% earnings on $400 million in annual revenue. Government may not be very good at picking economic winners and losers, but, in this case, they obviously hit the jackpot.

Literally awash in cash, Pinnacol administrators began to compare their meager compensation with that of comparable managers throughout the financial industry (think Wall Street), and they successfully persuaded a compliant Board of Directors to treat them like they were corporate officers. A dozen managers at Pinnacol are now among the highest paid participants in PERA’s beleaguered pension plan. Rather than exercising restraint on executive compensation, the Board was captured by its managers, as frequently happens, and they tripped over themselves to smother their administrative team with pay packages that would permit them to hold up their heads in a room with their private sector peers. This amity was nurtured with junkets and boondoggles like the Pebble Beach trip for cooperative members of the Board.

For those who witnessed the near psychotic break on the part of Executive Director Ken Ross, who had to be physically restrained by Board members to prevent him from attacking Kovaleski, it has to come as a surprise that he remains in charge at Pinnacol. It was quite evident that his sense of entitlement approaches the pathological. As two Governors have been shamed into replacing Board members, most observers predicted a change in leadership. Rumors that the Board has devoted much of its energy in recent years covering up arrogance and misbehavior within the executive ranks at Pinnacol continue to swirl. Recently we learned that millions of dollars have been sloshing around and spilling into the accounts of the usual lobbying firms in hopes of privatizing Pinnacol. Call me paranoid, but it feels highly probable that someone is planning a Joe Nacchio style break for the door with a bagful of Colorado money.

This is not to say that lustful eyes have not been cast on Pinnacol’s bank balance, both at the Legislature and in the Governor’s office. The Colorado Supreme Court’s ruling following the Owens’ administration’s raids on the state’s cash drawers during the collapse of 2001 found that the budgeting and appropriations process is a constitutionally protected legislative prerogative, not to be second guessed by the courts. Since some of these moneys were statutorily earmarked, before they were diverted to the general fund, there was also an implicit finding that revenues are fungible, exposing the Pinnacol surplus to a midnight raid from the Capitol. If the Supreme Court had unwisely intervened, it would have found itself a perpetual battleground for disputes from the aggrieved on behalf of each program cut by the JBC.

The $2 billion plus that Pinnacol holds in “reserves” consists of somewhere between $700 million and a billion, or more, in surpluses, depending on who is counting. While this nest egg was accumulating, another $500 million in dividends have been returned to employers. Operating much like a mutual insurance company, PINNACOL has been throwing off cash. But, whom that cash actually belongs to is debatable. In a private company, these dollars would represent profits, yet Pinnacol isn’t allowed to show a profit, thus the ‘reserves’ terminology. Employers view them as over payments for which they should now be reimbursed, while others argue they should properly be held in trust for insured workers. The offer of $300-400 million to the state, as part of a privatization of Pinnacol attracts the attention of a Governor and a Legislature that have long since looted most of the remaining cash accounts in state government.

But privatization would also allow the current management team to take its considerable remaining assets to the financial markets for resale. Although they are initially prohibited from providing themselves golden parachutes, as Pinnacol becomes a privately held entity and begins to engineer an initial public offering, it would not be unusual for the officers to award themselves $50-60 million, or more, in stock options. At that point, as a private company, they will be far beyond the reach of the Colorado Legislature.

The lobbying team it has been assembling is attempting to devise a plausible defense of this outcome, yakking up the opportunity for Pinnacol to expand its sales into other states. Of course, none of this is guaranteed to go well. As a private insuror, the company could begin to ratchet up its rates on Colorado employers to produce larger profits or cover losses elsewhere.

Perhaps it would be smarter to leave well enough alone. The Legislature was lucky enough to solve a problem for Colorado employers twenty years ago, providing reliable workers compensation coverage at a reasonable price. Why mess with this success? Certainly, there is no reason for taxpayers to be launching a private company into the IPO marketplace. It would not be unreasonable for Pinnacol to return the state’s start-up investment to the Legislature, together with imputed earnings over the past two decades, in exchange for greater independence. That would produce the $400 million plus the Governor and Legislature covets, and a newly installed Board of Directors could clean house and return Pinnacol to its assigned mission and cease the search for a bonanza.

Miller Hudson served two terms in the Colorado Legislature from 1979-1983 and was later director of the Colorado Association of Public Employees. He is currently a public policy consultant in Denver.

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