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January 7, 2011
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Colorado Pinnacol Problems

Colorado state lawmakers are drafting legislation that would remove Pinnacol Assurance’s tax-exempt status on
competitive market policies that some argue gives the company an unfair advantage.

The Joint Budget Committee voted Thursday to pass a motion introduced by Rep. Mark Ferrandino, D-Denver, to
draft legislation that would require Pinnacol to pay the same tax on collected premiums as other carriers.
Colorado assesses a 1% tax on premiums collected by carriers who have a regional home office in the state and
a 2% tax on carriers who do not.

That money goes into the general fund. The Department of Labor also assesses a surcharge of 1.6% of premium for the Workers’ Compensation Cash Fund, 0.1% for the Major Medical Fund and 0.03% for the Premium Cost Containment program.
Pinnacol Assurance is a state-chartered carrier that competes with other insurers and is also the state’s carrier of
last resort for employers that can’t find coverage in the voluntary market. It is the largest carrier in the state, with
55,000 policyholders. Sen. Mary Hodge, D-Brighton, who chairs the Joint Budget Committee, says the proposed tax is only fair.
“Pinnacol has 53% of the workmen’s comp insurance policies and obviously they’re not all last-resort policies,”
Hodge said. “So the bill, as we are envisioning it going forward, is they are tax-exempt on those policies that are
last resort, but on competitive policies they should pay the same premium tax that State Farm does or that
Allstate does.”

Ferrandino said the discussion about the motion was relatively short. There were some questions about the
dividends that Pinnacol has been issuing and what impact the legislation might have on the company’s ability to
give money back to its policyholders, but those are issues that will be addressed when the draft legislation is
completed next week.

“The issue is that we’re looking at a $1 billion shortfall and in my view, I understand the exempt status for the
policies they do for last resort, but for the market-based policies, it doesn’t make sense that they’re at a
competitive advantage,” Ferrandino said.

Rep. Jon Becker, R-Fort Morgan, initially objected to Ferrandino’s motion. He later removed his objection,
allowing the discussion to continue. Committee rules require unanimous consent on motions and legislation
before they can move forward.

Becker said he withdrew his objection to keep the conversation moving and see what that bill will look like. If he
doesn’t like the bill, he said he will once again object and the bill will not make it out of the committee.
“My big thing on this is I don’t want to cost the businesses of Colorado any more money,” he said.
None of the lawmakers who spoke to WorkCompCentral on Friday knew how much money would come from
removing Pinnacol’s tax exemption, or whether the company would pass on increased costs to policyholders.
They said it is too early to tell. Ferrandino said the committee sent a letter to Pinnacol asking what the impact
would be of eliminating the tax exemption for some of its policies.
Bruce Wood, associate general counsel and director of the workers’ compensation division of the American
Insurance Association, said he does not think businesses would end up footing the bill.
“I doubt any expense, such as taxes, is a direct pass-through,” he said. “However, the issue is one of policy,
whether it is appropriate for a state-created insurer to benefit at the ‘expense’ of the private market.”
Becker said there was some discussion about the negative attention that Pinnacol generated last week after
spending details of a sales junket to the Pebble Beach resort area in California were released. Expenses for the
$315,000 trip included $40,000 in golf charges, $20,000 spent on liquor, $5,000 for photographers to document
the event and almost $8,000 in room charges for Pinnacol Chief Executive Officer Ken Ross, according to a
report by KUSA television, Denver’s NBC affiliate.
Several lawmakers said Ross should resign after the spending details were made public, but Becker said the
junket wasn’t a motivating factor in the committee.

“Even though Pinnacol made some bad decisions, what we don’t want to do is take it out on the businesses that
rely on those policies,” he said. “We can look at new oversight instead of taking it out on the policyholders.”
Democrats have targeted Pinnacol in the past to help cover budget shortfalls. An effort led by Democrats in 2009
attempted to take $500 million of Pinnacol’s $700 million in reserves and transfer it into the general fund.
The state Attorney General said such a move was unconstitutional, but the issue cleared both the House and the
Senate before Gov. Bill Ritter killed it.
Ferrandino distinguished the current proposal from the efforts to “raid” Pinnacol’s reserves, and added that it is
not punishment for the Pebble Beach expenses.
“It comes in the context of balancing the budget, but in my mind, we’re giving a competitive advantage to
Pinnacol,” he said. “We’re not talking about imposing a tax any greater than any other insurance company has to
pay. We’re leveling the playing field, not penalizing Pinnacol for bad behavior.”
Kevin Krupka, owner of the independent insurance agency Mountain Insurance Brokers in Denver, said while
Republicans have argued that Pinnacol benefits small businesses by paying dividends to policyholders and
taking advantage of its reserves to keep premiums down, it has come at the cost of keeping other carriers out of
the state. Pinnacol paid $48 million in dividends to 52,000 policyholders in May.
He said some major national carriers aren’t interested in writing policies in Colorado because they can’t match
the rates Pinnacol is able to offer.
“If more real competition were allowed, that alone would benefit businesses,” he said.
Ferrandino said he expects to see draft legislation next week. At that point he anticipates extended discussions
about the bill and what impact it would have on state businesses and on the budget.
It is too early to say whether the legislation will make it out of the committee and ultimately to the governor’s
desk, Ferrandino said.
“I do think while we’re trying to fix the budget deficit, there is an openness on both sides of the aisle to look at all
the feasible options to solve the long-term budget problems,” he said. “It would have a fighting chance of
passage, but it’s not a sure thing.”
Pinnacol spokeswoman Suzi Stolte said the company is withholding comment until it sees the draft legislation.

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