                      TO BE PUBLISHED IN THE OFFICIAL REPORTS


                           OFFICE OF THE ATTORNEY GENERAL

                                     State of California


                                     DANIEL E. LUNGREN

                                       Attorney General


                         ______________________________________

                  OPINION            :
                                     :          No. 91-402
                  of                 :
                                     :          July 7, 1991
        DANIEL E. LUNGREN            :
           Attorney General          :
                                     :
       RODNEY O. LILYQUIST           :
        Deputy Attorney General      :
                                     :
______________________________________________________________________________

          THE HONORABLE PHILLIP ISENBERG, MEMBER OF THE CALIFORNIA
ASSEMBLY, has requested an opinion on the following question:

              Are state agencies and departments required to utilize the services of the State
Compensation Insurance Fund for the adjustment and disposition of claims for workers'
compensation?

                                          CONCLUSION

               State agencies and departments are required to utilize the services of the State
Compensation Insurance Fund for the adjustment and disposition of claims for workers'
compensation unless such services cannot be satisfactorily, adequately, or competently performed
by the State Compensation Insurance Fund.

                                            ANALYSIS

                The question presented for analysis concerns state agencies and departments that have
chosen not to be insured for workers' compensation coverage. (See Lab. Code, § 3700; Ins. Code,
§ 11870.)1 If one of their employees is injured and files a claim for workers' compensation, the
agency or department must necessarily deal with the claim in some fashion. One apparent
possibility would be for the agency or department to use its own employees to investigate and
determine the amount of compensation that it should pay. It could also obtain these services from
the State Compensation Insurance Fund ("Fund") under an agreement with the Department of
Personnel Administration. (§ 11871.) The Fund is "organized as a public enterprise fund" (§ 11773)
to transact "workers' compensation insurance, and insurance against the expense of defending any
suit for serious and willful misconduct, against an employer or his or her agent, and insurance to

   1
    All section references are to the Insurance Code unless otherwise specified.

                                                 1.                                          91-402

employees and other persons of the compensation fixed by the workers' compensation laws for
employees and their dependents" (§ 11770).

                The precise issue to be resolved here is whether a state agency or department is
required to utilize the services of the Fund or may it contract with a private insurance company to
render adjustment and disposition services. We conclude that it generally would be required to
obtain adjustment and disposition services from the Fund.

       In analyzing this question, we first note the provisions of section 11871 for obtaining
adjustment and disposition services from the Fund. Section 11871 states in part:

               "The State Compensation Insurance Fund may enter into a master agreement
       with the Department of Personnel Administration to render services in the adjustment
       and disposition of claims for workers' compensation to any state agencies, including
       any officer, department, division, bureau, commission, board or authority, not
       insured with the fund.

               "The master agreement shall provide for rendition of services at a uniform
       rate to all agencies, except that the rate for the California Highway Patrol may be
       fixed independently of the uniform rate.

              "The fund may, in accordance with the agreement, adjust and dispose of
       claims for workers' compensation made by an officer or employee of any state
       agency not insured with the fund.

               "The fund may make all expenditures, including payment to claimants for
       medical care or for adjustment or settlement of claims, necessary to the adjustment
       and final disposition of claims. The agreement shall provide that the state agency
       whose officer or employee is a claimant shall reimburse the fund for the expenditures
       and for the actual cost of services rendered."

               Section 11871 does not contain a prohibition against contracting with a private
insurance company for the rendering of adjustment and disposition services. We find nothing in the
statute making its terms mandatory on all state agencies and departments. Under section 11870, a
state agency or department may contract with a private company for workers' compensation
insurance coverage if the Fund refuses to issue the insurance. If insurance coverage may be obtained
from a private company under the terms of section 11870, would not such coverage reasonably
include adjustment and disposition services? We believe that it would.

               With respect, then, to the general authority of a state agency or department to contract
for various services, Government Code section 19130 provides in relevant part:

             "(a) Personal services contracting is permissible to achieve cost savings
       when all the following conditions are met:

                    "(1) The contracting agency clearly demonstrates that the
               proposed contract will result in actual overall cost savings to the state
               ....

                   ". . . . . . . . . . . .



                                                  2.                                           91-402

                  "(3) The contract does not cause the displacement of civil service
                employees. . . .

                   ". . . . . . . . . . . .

                    "(11) The potential economic advantage of contracting is not
                outweighed by the public's interest in having a particular function
                performed directly by state government.

               "(b) Personal services contracting also shall be permissible when any of the
        following conditions can be met:

                ". . . . . . . . . . . .

                  "(3) The services contracted are not available within civil service,
                cannot be performed satisfactorily by civil service employees, or are
                of such a highly specialized or technical nature that the necessary
                expert knowledge, experience, and ability are not available through
                the civil service system."

                 Government Code section 19130 codifies a number of judicially imposed conditions
developed over the years in cases examining services contracts in light of the creation of the state
civil service in the California Constitution. (California State Employees' Assn. v. State of California
(1988) 199 Cal.App.3d 840, 845.) Article VII of the Constitution includes within the state civil
service system "every officer and employee of the state except" as specifically exempted. In
California State Employees' Assn. v. State of California, supra, 199 Cal.3d 840, 844, the court
explained:

                 "Decisional law interprets article VII as a restriction on the `contracting out'
        of state activities or tasks to the private sector. [Citations.] The restriction does not
        arise from the express language of article VII. [Citation.] `Rather, it emanates from
        an implicit necessity for protecting the policy of the organic civil service mandate
        against dissolution and destruction.' [Citation.]"

                 As set forth in the cases and Government Code section 19130, "an established
exception to the mandate of civil service exists where the nature of the services in question is such
they cannot be performed `adequately or competently or satisfactorily' by employees selected
through civil service." (California State Employees' Assn. v. State of California, supra, 199 Cal.3d
840, 851; see Burum v. State Compensation Ins. Fund (1947) 30 Cal.2d 575, 582; State
Compensation Ins. Fund v. Riley (1937) 9 Cal.2d 126, 134-136.) While this exception is expressly
contained in subdivision (b) of the statute, it "is an implicit part of subdivision (a)." (California State
Employees' Assn. v. State of California, supra, 199 Cal.3d 840, 852; see 73 Ops.Cal.Atty.Gen. 95,
101 (1990).) Although "at some point a service which is more costly when performed under civil
service than when contracted out may on that account be one which cannot be performed
satisfactorily, adequately or competently" (California State Employees' Assn. v. State of California,
supra, 199 Cal.App.3d 840, 851), the requisite cost savings must come from such factors "`as
economies of scale, superior technology or lower overhead costs'" rather than from wage rates that
are significantly lower than state pay rates (California State Employees' Assn. v. State Personnel
Board (1986) 178 Cal.3d 372, 381).

              One other statutory scheme merits discussion in resolving the question presented.
Public Contract Code sections 10335-10354 govern "all contracts entered into by any state agency

                                                    3.                                              91-402

for services to be rendered to the state . . . ." (Pub. Contract Code, § 10335.) With certain
exceptions, this statutory scheme requires state contracts for services to be approved by the
Department of General Services and subjects them to controls established by the Department of
Finance and the State Personnel Board. (Pub. Contract Code, §§ 10335-10377, see California State
Employees' Assn. v. State of California, supra, 199 Cal.3d at 852-853; 74 Ops.Cal.Atty.Gen. 10, 12-
14 (991).)2

                Here, the Fund is available and providing adjustment and disposition services to state
agencies and departments, either as part of its insurance coverage (§ 11870) or under contract with
the Department of Personnel Administration (§ 11871). Accordingly, we conclude that an agency
or department is required to utilize the services of the Fund in the adjustment and disposition of
claims unless it is established that the Fund is not performing "adequately, competently or
satisfactorily." Only then may these services be rendered for the agency or department by a private
insurance company.

                                              *****




   2
    A separate statutory scheme, Public Contract Code sections 10355-10382, governs consulting
services contracts and has essentially the same requirements. (See Pub. Contract Code, §§ 10360-
10363; California State Employees' Assoc. v. State of California, supra, 199 Cal.3d 840, 852-853,
fn. 5; 73 Ops.Cal.Atty.Gen. 95, 102, fn. 4 (1990).)

                                                  4.                                          91-402
