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California Insurance Commissioner Steve Poizner announced today that he “implemented a permanent 10% cut in the Department’s budget.”  Tough times, belt-tightening and all that goes along with the incredible dysfunction of the state budget and the disastrous economy is the hook on which the Commissioner hangs this plan.

But it misses the mark.

As the regulator of a financial services industry that affects so many individuals and businesses directly at the pocketbook level, the public needs more, not less, oversight these days.  And particularly in light of the financial sector meltdown and related shenanigans.  Can anyone say AIG?  You don’t cut firefighting budgets during wildfire season.  And you don’t cut financial industry regulators during economic crises.  (By the way, Commissioner Poizner agreed to a plan to raise insurance fees to expand the firefighting budget last year during wildfire season.)

I welcome cutting waste, like when the Department successfully pushed to maintain some of the required duplicate and triplicate copies of hundred page insurance documents electronically instead of on more paper.  Good cutting.  But when you’re dealing with a hundred twenty billion dollar industry (in California alone) that sells complex financial products, the $13 million that Commissioner Poizner is “permanently cutting” will leave consumers getting the shaft who could have used the protection.   

Less money overall means less oversight overall, notwithstanding the paean to bureaucratic efficiency that inevitably accompanies such cuts.  These cuts are a win for the insurance companies who don’t want to be regulated and a loss for the businesses and individuals who pay insurance premiums and file claims.  When there’s $13 million less in your budget, you’re cutting more than the text messaging feature on staff cell phones.  You’re saying (even if publicly you promise no service cuts) we’re not going to fight every improper rate hike or unfair claims practice that our staff identifies.  We’ll have to let some slide.

Interestingly, the Commissioner has decided not to seek too much in the way of cutting fees that fight fraud perpetrated by consumers against insurers (such as questionable claims, staged accidents).  Most of the fees that fund that kind of fraud stay in place.  Except for one – the fee on insurance companies.  They’re getting a 60% cut on the fraud investigation fee they pay.  So at least AIG will be getting some relief.

The other thing that makes Commissioner Poizner’s call to permanently whack the Department’s budget strange is that the Department is not affected by the State’s budget pickle.  That’s because the Department of Insurance is not funded through the state budget but instead by fees on insurance companies and others licensed by the department such as agents, brokers and adjusters as well as fees tacked on to policyholder premiums.  So it’s not dependent on tax revenue, it’s not taking from education and it doesn’t impact the state’s general fund.  It’s almost as though the state’s budget crisis is a convenient excuse to reduce the regulatory capacity of the Department.   

The Commissioner says that he is “voluntarily” reducing the budget to show that his Department can do its part.  But the voluntary savings don’t actually improve the state budget situation in any way.  But they do leave the public a little more exposed at exactly the wrong time.