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Full text of "Appendix to the Journal of the Assembly"

DOCUMENTS DZrA^TMENf. 



m 



SAN FRANCISCO 
PUBLIC LIBRARY 




REFERENCE BOOK 



Not to be taken from the Library 



AUG 5 1988 



SAN FRANCISCO PUBLIC LIBRARY 



3 1223 90138 4538 



DOCUMENTS DEPARTMENT 



VOLUME TWO 



Appendix to the Journa 
of the Assembly 



LEGISLATURE OF THE STATE OF CALIFORNIA 
1967 REGULAR SESSION 



REPORTS 

January 2, 1967-September 8, 1967 




HON. JESSE M. UNRUH 
Speaker 

HON. GEORGE ZENOVICH 
Majority Floor Leader 



HON. CARLOS BEE 
Speaker pro Tempore 

HON. ROBERT MONAGAN 
Minority Floor Leader 



JAMES D. DRISCOLL 
Chief Clerk of the Assembly 



68 15 



SAN FRANCISCO 
PUBLIC LIBRARY 



VOLUME TWO 

Government Organization 

y Volume 12, Number 12 — Organization of the Executive Branch 

Finance and Insurance, Interim Committee on 

Volume 15, Number 28 — Part I : Workmen's Compensation ; Unemployment Insur- 
ance for Farm Workers 
' Volume 15, Number 29 — Part II : Various Subjects 
Public Utilities and Corporations, Interim Committee on 
y Volume 16, Number 10 — Final Report 
Social Welfare, Interim Committee on 

S Volume 19, Number 14 — A Review of Rehabilitation Policies and Programs 
Ways and Means, Interim Committee on 

.^-"Volume 21, Number 15A — Proposed California World's Fair at Corona in 1969 
^y Volume 21, Number 16 — The California Buy American Act 
^Volume 21, Number 17 — Leasing of Del Mar Track 
^ Volume 21, Number 18 — Drug Prices 

^Volume 21, Number 19 — Services for Handicapped Children 
^ Volume 21, Number 20 — Costs of Medical Education 
^r Volume 21, Number 21 — Report of Subcommittee on Indian Problems 
Criminal Procedure, Interim Committee on 
* Volume 22, Number 9 — Narcotics Control 

olume 22, Number 10 — Delinquency Control 
Volume 22, Number 12 — Search and Seizure, Preemption, Watts, Firearm Control 

Judiciary, Interim Committee on 

^Volume 23, Number 8 — Final Report of the Subcommittee on Free Press-Fair 
Trial 

Military and Veterans Affairs, Interim Committee on 

/ Volume 24, Number 4 — California's Civil Defense and Natural Disaster Program 
Volume 24, Number 5 — California Veterans Benefits 

Water, interim Committee on 
/ Volume 26. Number 15 — Recreation Costs at Water Projects 

/ Volume 26, Number 17 — State and Local Responsibilities for Water Resources 

Constitutional Amendments, Assembly Interim Committee on 

/ Volume 27. Number 4 — Constitutional Revision in California 

/ Volume 27, Number 5 — The Initiative and the Effective Dates of Statutes 

SUPPLEMENT TO ASSEMBLY JOURNAL APPENDIX 

Social Welfare, Interim Committee or 

Volume 19, Number 15 — Protective Services for Children 
Natural Resources, Interim Committee on 

Volume 25, Number 5 — Conflict in the Redwoods 

Volume 25, Number 6 — Highway Beautification 
Water, Interim Committee on 

Volume 26, Number 16 — New Horizons in California Water Development 
Joint Legislative Retirement Committee 

Management Survey of the State Teachers' Retirement System 



( 3 ) 



VOLUME TWO 



Appendix to the Journa 
of the Assembly 



LEGISLATURE OF THE STATE OF CALIFORNIA 
1967 REGULAR SESSION 



REPORTS 

January 2, 1967-September 8, 1967 




HON. JESSE M. UNRUH 
Speaker 

HON. GEORGE ZENOVICH 
Majority Floor Leader 



HON. CARLOS BEE 
Speaker pro Tempore 

HON. ROBERT MONAGAN 
Minority Floor Leader 



JAMES D. DRISCOLL 
Chief Clerk of the Assembly 



VOLUME TWO 

Government Organization 

Volume 12, Number 12 — Organization of the Executive Branch 
Finance and Insurance, Interim Committee on 

Volume 15, Number 28 — Part I : Workmen's Compensation ; Unemployment Insur- 
ance for Farm Workers 

Volume 15, Number 29 — Part II : Various Subjects 
Public Utilities and Corporations, Interim Committee on 

Volume 16, Number 10 — Final Report 
Social Welfare, Interim Committee on 

Volume 19, Number 14 — A Review of Rehabilitation Policies and Programs 
Ways and Means, Interim Committee on 

Volume 21, Number 15A — Proposed California World's Fair at Corona in 1969 

A T olume "21, Number 16 — The California Buy American Act 

Volume 21, Number 17 — Leasing of Del Mar Track 

Volume 21, Number 18 — Drug Prices 

Volume 21, Number 19 — Services for Handicapped Children 

Volume 21, Number 20 — Costs of Medical Education 

Volume 21, Number 21 — Report of Subcommittee on Indian Problems 
Criminal Procedure, Interim Committee on 

Volume 22, Number 9 — Narcotics Control 

Volume 22, Number 10 — Delinquency Control 

Volume 22, Number 12 — Search and Seizure, Preemption, Watts, Firearm Control 
Judiciary, Interim Committee on 

Volume 23, Number 8 — Final Report of the Subcommittee on Free Press-Fair 
Trial 
Military and Veterans Affairs, Interim Committee on 

Volume 24, Number 4 — California's Civil Defense and Natural Disaster Program 

Volume 24, Number 5 — California Veterans Benefits 
Water, Interim Committee on 

Volume 26, Number 15 — Recreation Costs at Water Projects 

Volume 26, Number 17 — State and Local Responsibilities for Water Resources 
Constitutional Amendments, Assembly Interim Committee on 

Volume 27, Number 4 — Constitutional Revision in California 

Volume 27, Number 5 — The Initiative and the Effective Dates of Statutes 

SUPPLEMENT TO ASSEMBLY JOURNAL APPENDIX 

Social Welfare, Interim Committee on 

Volume 19, Number 15 — Protective Services for Children 
Natural Resources, Interim Committee on 

Volume 25, Number 5 — Conflict in the Redwoods 

Volume 25, Number 6 — Highway Beaufification 
Water, Interim Committee on 

Volume 26, Number 16 — New Horizons in California Water Development 
Joint Legislative Retirement Committee 

Management Survey of the State Tenchers' Retirement System 



( 3 ) 



CALIFORNIA LEGISLATURE 

Volume 12 Number 12 

ASSEMBLY INTERIM COMMITTEE 
ON GOVERNMENT ORGANIZATION 



ORGANIZATION OF THE EXECUTIVE BRANCH 



MEMBERS 

MILTON MARKS, Chairman 

WILLIAM T. BAGLEY DON MULFORD 

TOM CARRELL ALAN G. PATTEE 

JACK T. CASEY WALTER W. POWERS 

HARVEY JOHNSON W. BYRON RUMFORD 

LESTER A. McMILLAN EUGENE A. CHAPPIE 
BOB MORETTI 



STAFF 

Judson Clark, Committee Consultant 

Alma Ricker, Committee Secretary 

Doris Barmby, Secretary 



Published by the 

ASSEMBLY 
OF THE STATE OF CALIFORNIA 

HON. JESSE M. UNRUH HON. CARLOS BEE 

Speaker Speaker pro Tempore 

HON. GEORGE ZENOVICH HON. ROBERT MONAGAN 

Majority Floor Leader Minority Floor Leader 

JAMES D. DRISCOLL 

Chief Clerk 



TABLE OF CONTENTS 

Page 

I. Executive Initiated Reorganization Plans 9 

Findings 10 

Recommendations 11 

Separation of Powers Doctrine 14 

Reorganization Objectives 16 

The Federal Precedent 17 

An Enabling Statute . 18 

Limitations on Reorganization Objectives 20 

A Conditional Delegation 21 

An Independent Review 22 

Summary 24 

Appendices 

A. Federal Reorganization Proposals 27 

B. Reorganization in the States 32 

C. Constitution Revision Commission Minority Report 34 

D. Legislative Counsel's Opinion No. 8225 38 

II. The 1961 Reorganization 41 

Findings 42 

Recommendations 43 

The Agency Concept 46 

The Governor's 1961 Message 47 

1961 Legislature 47 

"Little Hoover Commission" Evaluation 49 

The Governor's 1963 Message 50 

The Role of the Agency Administrator 51 

Summary 53 

The Executive Office Proposal 54 

The 1961 Reorganization 55 

Summary 57 

Appendices 59 

A. The Executive Office of the President 61 

B. The Office of Governor in California 63 

III. Department of Revenue 69 

Appendix 75 

IV. Department of General Services 81 

Summary 87 

Appendices 89 

A. Letter Addressed to Each Administrator of an 
Operating Agency 91 

B. Letter From Director of General Services Responding 

to Agency Administrators' Letters 127 

C. Newspaper Series 153 



(3) 



LETTER OF TRANSMITTAL 

Honorable Jesse M. Unruh 
Speaker of the Assembly 
and Members of the Assembly- 
Gentlemen : 

Your Interim Committee on Government Organization, in accord- 
ance with your instructions, herewith submits a report on the organiza- 
tion of the executive branch of California state government pursuant 
to House Resolution No. 710 of the 1965 Regular Session of the Legis- 
lature. 

It has been said of the efforts of the last 50 years to reorganize the 
basic structure of the executive branch of government in the various 
states that "the problem of executive organization in state government 
across the nation is as pressing and difficult now as at any time in the 
past half -century of reorganization activity. ' ' x 

It can further be said that similar observations concerning the 
"pressing and difficult" state of state executive organization have been 
consistently repeated with unfailing regularity by each new task force, 
commission or committee of reorganizers from the earliest to the most 
recent. 

The recurring theme which has dominated these studies is (1) con- 
solidation of all administrative agencies into a small number of depart- 
ments organized by function, (2) establishment of clear lines of au- 
thority running from the Governor at the top of the heirarchy through 
the entire organization accomplished by both a shortening of the ballot 
through elimination of most elective administrative officials and giving 
the Governor powers of appointment and removal over all department 
heads, and (3) development of appropriate staff agencies with direct 
responsibility to the Governor. 

The obvious conclusion that can be drawn from such repetition of 
objectives over the years is that state reorganization efforts have either 
been uniformly unsuccessful or proponents of reform have consistently 
overstated both the extent of the reorganization "crisis" and the 
urgent necessity for change. 

Perhaps both conclusions are in large part true. Few observers of 
reorganization activity would take exception to Professor James Bell's 
statement that "those who labor in the administrative reorganization 
vineyard generally receive a meager. harvest. " 2 Yet, there have been 
some important reorganizations of the actual structure of our state gov- 
ernments. 

Perhaps more significant, however, have been accomplishments in 
executive management such as improvements in budgeting procedures, 
accounting and auditing, personnel administration, long-range planning 
and the introduction of data processing as a management tool, and 

1 James R. Bell and Earl L. Darrah, State Executive Reorganization, Bureau of 
Public Administration Legislative Problems series (1961 Legislative Problems 
No. 3), University of California (Berkeley, California: February 19 61), i. 

*IWd., 98. 

(5) 



6 ORGANIZATION OF THE EXECUTIVE BRANCH 

these changes have not been predicated on fundamental alterations of 
the actual structure of the executive branch. And yet, it is these im- 
provements in administration which have been the major reason for 
California's enviable reputation as a leader among the states. 

This conclusion does not diminish the importance of changes in the 
actual structure of the executive branch. In the first place, great satis- 
faction should not necessarily be drawn from comparison of Califor- 
nia's state government administration with the standard of the other 
states; and secondly, strong arguments for specific reorganizations can 
be made. 

This report is not an attempt at a comprehensive survey of all of the 
needed reorganizations of the executive branch. 3 It does not address 
itself to the fundamental policy questions of the growth of services pro- 
vided by state government. Nor is it intended as a directive to the exec- 
utive outlining specific reorganizations which must be undertaken. 

A fundamental premise of our American governmental system is that 
administrative organization is the mutual responsibility and concern of 
both the legislative and executive branches. The committee firmly be- 
lieves that it is imperative that reorganization be viewed as a matter of 
maximum cooperation among the two branches. The greatest service to 
the people can be rendered by enabling both the Legislature and the 
Executive to more effectively perform their constitutional responsibili- 
ties. 

The overwhelming approval by the voters on November 8, 1966, of 
the revision of the California Constitution presented as Proposition 1A, 
has given new emphasis to these objectives. With this in mind, and at 
this particular time of changeover from one administration to another, 
this committee feels compelled to set forth for consideration several 
issues bearing on the organization of the executive branch. These in- 
clude an analysis of the advisability of vesting in the Governor the au- 
thority to propose executive reorganization plans (Part I) ; an evalua- 
tion of the top-level administrative structure of the executive branch as 
embodied in the " agency concept" of the 1961 reorganization (Part 
II) ; a reaffirmation of the often repeated recommendation on the need 
for a central revenue department (Part III) ; and a review of the cen- 
tral staff functions performed by the Department of General Services 
since its creation in 1963. 

All of these studies were conducted under the able chairmanship of 
the Honorable Milton Marks, who resigned as a Member of the Assem- 
bly on October 25, 1966, to assume the duties of Judge of the San Fran- 
cisco Municipal Court. Your committee wishes to acknowledge the long- 
standing efforts of Milton Marks in behalf of a more efficient and 
economical state government and to express its gratitude for the able 
and energetic leadership he contributed to the work of this committee 
during his tenure as chairman. 

The committee also wishes to acknowledge and express its apprecia- 
tion for the excellent work done by the committee staff in the conduct 
of this study and the preparation of this report. In particular, Joe 
Shafer, of the Assembly Legislative Keference Service, who assisted in 

3 For an excellent and comprehensive survey of the development of state reorganiza- 
tion in the 50 states as well as an account of California's organizational history 
see Bell and Darrah, 1-54. 



ORGANIZATION OF THE EXECUTIVE BRANCH 7 

all phases of this study and prepared the excellent background papers 
on the federal experience with executive initiated reorganization and 
the organization of, and development of the executive office of the 
President, is to be commended. 

Legislative Analyst A. Alan Post provided the committee with a 
report on the development of the "agency plan" of organization to- 
gether with his comments. The committee also received a report from 
the office of Auditor General William H. Merrifield on the feasibility of 
combining the tax-revenue auditing of the principal tax administrative 
agencies of state government. 

The committee also wishes to commend the work of the Commission 
on California State Government Organization and Economy, particu- 
larly for their continuing review of the programs administered by the 
Department of General Services. 



Respectfully submitted, 



Eugene A. Chappie * 
Vice Chairman 



William T. Bagley Bob Moretti 

Tom Carrell Don Mulford 

Jack T. Casey Alan G. Pattee 

Harvey Johnson Walter W. Powers 

Lester A. McMillan W. Byron Rumford 



While all of the recommendations included in the report received the support of a 
majority of the members of the committee, the listing of names on the letter of 
transmittal is not intended to infer support of each recommendation by every 
member of the committee. 



I. EXECUTIVE INITIATED 
REORGANIZATION PLANS 



FINDINGS 

1. Organization of the administrative structure of the executive 
branch is a shared responsibility of the Executive and the Legislature. 

2. The administrative structure of California state government has 
not kept pace with the rapid changes in social and economic conditions 
so as to most efficiently and economically meet the needs of its citizens 
for government services. 

3. Since 1933, Congress has delegated to the President authority to 
initiate executive reorganization plans which become effective unless 
specifically disapproved by either house of Congress. 

4. That authority has been used extensively by each of the chief 
executives since President Hoover and has been found to be an effective 
method for making the machinery of the federal government more 
adaptable to the ever-changing requirements of administration. 

5. In November 1966 California voters approved a revision of the 
Constitution, submitted as Proposition 1A, permitting the Legislature 
to vest authority in the Governor to initiate plans for reorganization of 
the executive branch. 

6. Executive-initiated reorganization, if properly structured, can 
afford a method to facilitate the Governor's performance of his respon- 
sibilities with the full cooperation and assistance of the Legislature in a 
more efficient and flexible manner that will significantly promote sound 
organization and management of the executive branch. 



(10) 



RECOMMENDATIONS 

1. The committee recommends the enactment of an enabling statute 
in accordance with Section 6 of Article V of the Constitution to permit 
the Governor to initiate reorganizations of the executive branch which 
would become effective unless disapproved by resolution of either house 
of the Legislature. 

2. The committee supports the inclusion of a two-year limitation in 
any enabling statute granting the Governor reorganization authority so 
that the delegation would not be binding on future Legislatures and 
the decision to continue or terminate that authority may be freely ex- 
ercised. 

3. The concept of executive-initiated reorganization as a cooperative 
approach rests upon the essential element of a subsequent legislative 
determination that the Governor is exercising his delegated authority 
in conformity with the legislative purpose. The committee supports the 
method of disapproval by resolution adopted by simple majority vote of 
either the Senate or Assembly. 

4. The committee also recommends that before the Governor submits 
proposed reorganizations to the Legislature that he first submit them to 
the Commission on California State Government Organization and 
Economy to provide the Governor and the Legislature with a separate 
and independent review. 



(11) 



In November 1966 the voters approved a revision of the California 
Constitution, submitted as Proposition 1A, thereby giving the Legisla- 
ture authority to adopt an entirely new procedure for the enactment of 
executive reorganization plans. 1 The new section added to the Constitu- 
tion specifies that 

Authority may be provided by statute for the Governor to assign 
and reorganize functions among executive officers and agencies and 
their employees, other than elective officers and agencies admin- 
istered by elective officers. 2 

This new constitutional language grants express authority to the Leg- 
islature to permit executive initiated reorganization of all agencies of 
state government other than agencies administered by elective officers. 
The argument for including such a provision in the Constitution was 
debated by the Constitution Eevision Commission at the insistence of 
several commission members. 3 Although unsuccessful in obtaining a 
majority vote on its inclusion, those members speaking for it filed a 
minority report supporting their position as part of the commission's 
report to the Legislature : 

We believe the Legislature should have the authority to enact leg- 
islation which would give the Governor the right to initiate execu- 
tive reorganization subject to subsequent legislative veto. Such 

1 Proposition 1A was approved by 4,129,558 in favor to 1,475,680 opposed. The re- 

vision resulted from a study and report by the Constitution Revision Commission 
and was approved by the Legislature for submission to the electorate as Assem- 
bly Constitutional Amendment No. 13 (1966). 

2 Article V, Section 6, California Constitution. 

3 Minutes of Constitution Revision Commission, December 16, 1965. 

(13) 



14 ORGANIZATION OF THE EXECUTIVE BRANCH 

authority is contained in the model state constitution, in the con- 
stitutions of other states and is substantially the same as that exer- 
cised by the President of the United States. 4 

A 1959 opinion of the Legislative Counsel was also cited in the minor- 
ity report to demonstrate the need for an amendment to the Constitu- 
tion. 5 In the opinion, Legislative Counsel contended that certain provi- 
sions of the California Constitution specify strict requirements for the 
passage of legislation and permitting the Governor to propose reorgan- 
ization plans subject only to legislative disapproval "runs afoul" of 
these constitutional provisions. 

As introduced, Assembly Constitutional Amendment No. 13, which 
provided for submission of the revision of the Constitution to the elec- 
torate, was in accord with the majority recommendation of the com- 
mission and did not contain the language which appears as Article V, 
Section 6, in the version finally approved by the Legislature. Assembly 
Constitutional Amendment No. 13 was amended in the Assembly on 
April 11, 1966, to authorize the enactment of a statute permitting the 
Governor to initiate executive reorganization. 6 

SEPARATION OF POWERS DOCTRINE 

One of the basic tenets of American constitutional law is the doctrine 
of separation of powers. In Article III of the California Constitution it 
is phrased as follows : 

The powers of state government are legislative, executive and ju- 
dicial. Persons charged with the exercise of one power may not 
exercise any of the others except as permitted by this constitution. 

Clearly, the authority for permitting the Governor to "assign and 
reorganize functions among offices and agencies and their employees" 
in conflict with existing statutes has now been incorporated as part of 
the Constitution. As a result, even if such a procedure were deemed to 
be in substantial conflict with the doctrine of separation of powers it 
would stand as a permitted exception. 7 

Nevertheless, in assessing the advisability of enacting the enabling 
statute giving the Governor the authority to initiate reorganizations 
which would have the effect of law unless disapproved by the Legisla- 
ture, the question whether the proposal is violative of the principle 

4 Constitution Revision Commission, Proposed Revision of the California Constitution 

(Sacramento: February 1966), 201. Richard Carpenter, John A. Busterud, Arthur 
F. Corey, Richard J. Dolwig, Mrs. William Irvine, William R. McDougall, George 
W. Rochester, Mrs. Lawrence Spear and John A. Vieg signed the minority 
report. The language suggested by these commission members was more specific 
than that finally included in Assembly Constitutional Amendment No. 13 and 
would have read as follows : 

'Authority may be vested in the Governor by statute to reallocate existing 
functions among and within state executive and administrative agencies and 
offices. If any reallocation affects existing law, it shall be set forth in an 
executive order submitted to the Legislature within 30 days of the opening 
of a general session and, subject to referendum, shall become law on the 91st 
day after adjournment unless disapproved by resolution of either house." 

5 Ops. Legislative Counsel No. 17220, June 2, 1959, to Senator Hugh P. Donnelly 

(see Appendix C for the complete text of the opinion). 

6 Assembly Journal, 1966, 665-667. 

7 In an opinion issued to Hon. Milton Marks (Ops. Legislative Counsel No. 8225, 

October 25, 1966) Legislative Counsel noted that although the new Section 6 of 
Article V is "not explicit in authorizing actions by the Governor in conflict with 
existing statutes . . . neither does it express anything to the contrary." Since 
no new constitutional authority would have been necessary to authorize the 
Governor to reorganize within the framework of existing statutes, Legislative 
Counsel concluded, "the contrary is authorized." (See Appendix D for the com- 
plete text of the opinion.) 



ORGANIZATION OF THE EXECUTIVE BRANCH 15 

that " persons charged with the exercise of one power may not exercise 
any of the others" remains an important factor to be weighed by the 
Legislature. 

The device of executive initiated reorganization was first tried ex- 
perimentally at the federal level in 1933 and has been extended for spe- 
cified periods of time by Congress at regular intervals. 8 During this 
time challenges to the constitutionality of the federal organization acts 
have been thoroughly and vigorously debated. One of the major issues 
has been whether the reorganization procedures provided for in the law 
constitute a valid delegation of the legislative powers of the Congress 
to the President. A minority in the House of Kepresentatives arguing 
against the first Eeorganization Act of 1939 saw the proposed delega- 
tion as a threat : 

Does Congress propose at this time to surrender the American 
form of government and the constitutional method of legislating, 
not for the promoting of efficiency and economy, but for the pro- 
motion of riotous waste and extravagance . . . and the delegation 
of more power to the President. 9 

During the First Session of the 89th Congress, hearings were con- 
ducted by the Subcommittee on Executive Eeorganization of the Com- 
mittee on Government Operations on the question of amending the 
Reorganization Act of 1949 to either extend the President's authority 
under the act for an additional limited period of time (two or four 
years) or to grant the reorganization authority on a permanent basis. 
Senator Abraham Ribicoff, chairman of the subcommittee, commenting 
on the advisability of giving the President permanent authority to sub- 
mit executive reorganization plans to Congress subject only to con- 
gressional veto, indicated his support for the current authority but ob- 
jected to permanently surrendering authority over such important 
matters : 

I think the separation of powers of this Government is one of the 
geniuses of the American Constitution. And I think it would be 
tragic for the legislative branch to abdicate its legislative authority 
in violation of the Constitution. 10 

The concern expressed by Senator Ribicoff did not relate to the cen- 
tral issue of giving the President the authority to propose reorganiza- 
tion plans, which is now commonly accepted by members of Congress, 
but only to the grant of that authority on a permanent basis. The sub- 
committee did consider and affirm its position that the Reorganization 
Act of 1949, as it has been extended for periods of limited duration, 
does not constitute an unlawful delegation of legislative authority. 

Tracing a long line of Supreme Court cases dating back to 1813, a 
staff memorandum (incorporated as part of the record of the proceed- 

8 The Federal Reorganization Act of 1949 (5 U.S.C.A. Sees. 133z-133z-15) which 

succeeded earlier acts of the same type has been regularly extended for limited 
periods of time by Congress. Efforts to give the President permanent authority 
under the act have thus far failed. For a detailed discussion of the federal 
law see Appendix A. 

9 U.S. Congress, House, Select Committee on Government Organization, Report to 

Accompany H.R. li' { 25, Reorganization Bill of 1939, 76th Con., 1st Sess., 10. 

10 U.S. Congress, Senate, Hearing before the Subcommittee on Executive Reorganiza- 

tion of the Committee on Government Operations, "To Amend the Reorganization 
Act of 1949," 89th Cong., 2nd Sess., March 29, 1965, 20, cited hereafter. 



16 ORGANIZATION OF THE EXECUTIVE BRANCH 

ings of the subcommittee) pointed out that a delegation of legislative 
power was valid if it met the following requirements : 

(1) Congress must itself have jurisdiction over the subject matter; 

(2) The delegation must be made to a public official or agency; 

(3) The statute must contain a definite statement of congressional 
policy, clearly defining the subject and extent of the delega- 
tion; 

(4) If the legislation is to take effect in the future, there must be 
a statement of the facts which must be found to exist before 
the delegation can become operative. 11 

The Reorganization Act of 1949 has been carefully and precisely 
drafted with these requirements in mind and the authority of Congress 
to delegate reorganization authority to the President has never been 
successfully challenged in a court test. Similarly, there does not appear 
to be any serious impairment to the ability of this Legislature to enact 
a statute consistent with the concepts embodied in the separation of 
powers doctrine, yet providing the Governor complete authority for 
reorganization. 

Great care should be exercised, however, in drafting this legislation 
so that the scope and duration of the authority is precisely defined and 
limited. As has already been noted, there is no constitutional issue be- 
cause virtually any procedure for executive-initiated reorganization, 
no matter how broad in scope it might be, could withstand attack as a 
constitutionally permitted exception to the doctrine of separation of 
powers. Nevertheless, the Legislature should not readily depart from 
well-established constitutional principles when delegating authority to 
the Governor. 

REORGANIZATION OBJECTIVES 

What are the arguments for adopting a statute to permit the Gov- 
ernor to propose reorganization plans which would have the effect of 
law unless specifically disapproved by the Legislature, thus substan- 
tially departing from the traditional method of enacting reorganiza- 
tions by statute so that they take effect by legislative act? 

There are several that have been advanced by proponents of execu- 
tive-initiated reorganization. The one most frequently and persistently 
stated is that the organizational structure of the executive branch is 
primarily the responsibility of the Governor and, therefore, the initia- 
tive for proposing and effecting necessary reorganizations should be 
clearly and unequivocally focused upon the chief executive. 

If that were the sole argument, the case for executive-initiated reor- 
ganization would not be a convincing one either in theory or practice. 
From a practical standpoint, it is an easy matter for a Governor to 
take upon himself the initiative for promoting reorganization of the 
executive branch and he would have no difficulty finding a legislator 
willing to sponsor the necessary bills. Similarly, the Legislature would 
have little difficulty in placing the responsibility more directly and spe- 
cifically on the Governor by calling upon him to propose certain reor- 
ganization bills. 

^Ibid., 16-17. 



ORGANIZATION OF THE EXECUTIVE BRANCH 17 

This committee cannot accept the view that thrusting the burden of 
reorganization upon the Governor is an appropriate posture for the 
Legislature to assume. To do so would be to ignore the fact that the 
Legislature itself has both an inherent obligation and a positive respon- 
sibility to assist the executive in matters of reorganization. 

While it is true that the actual structure of administration relates 
more closely to the execution of the law than it does to the determina- 
tion of policy, execution and policy formulation are inevitably so inter- 
woven that it is either impossible or impracticable to separate one from 
the other. 

A more realistic approach is to accept the premise that reorganiza- 
tion is a shared responsibility of the executive and legislative branches 
and to support or reject the concept of executive-initiated reorganiza- 
tion on the basis that it either promotes or impedes this process. 

A second argument for departing from the current procedure of 
enacting reorganizations by legislation is the substantial difficulty found 
in mustering sufficient support for reforms of the structure of admin- 
istration, not because of any concerted opposition, but merely because 
the bills introduced for that purpose must compete for legislative at- 
tention with a myriad of other proposals with major policy implica- 
tions that are inevitably of more immediate interest to the Legislature 
as well as the public. Keversing the procedure by giving reorganizations 
the effect of law, unless specific action is taken by the Legislature to 
disapprove them, requires that immediate attention be given to these 
measures. 

A third and closely related point is the argument that changes in the 
structure of government which do not alter basic policy should be ac- 
complished in a more flexible manner than is afforded by the process of 
enacting statutes so that they can take effect as early as possible. 

In support of this position, it is contended that the administrative 
structure of the executive branch of California state government has 
not kept pace with the rapid changes in social and economic conditions 
so as to most efficiently and economically meet the needs of its citizens 
for government services. The committee feels that executive-initiated 
reorganization can provide a more responsive and effective means for 
undertaking needed changes in the organization of the executive branch. 

THE FEDERAL PRECEDENT 

Since the close of the Hoover administration, our federal chief exec- 
utives have operated under some form of reorganization authority. The 
observation has been made that since the Reorganization Act of 1939 
became law, "virtually the entire structure of the executive branch has 
been reshaped by changes made under the cooperative presidential- 
congressional approach embodied in the Reorganization Act. ' ' 12 

The current Reorganization Act, which has been revised and extended 
continuously since its adoption in 1949, was enacted by the Congress 
following the strong recommendation of the first Hoover Commission on 
Organization of the Executive Branch. 13 Five years later, that recom- 

13 Senate Subcommittee on Executive Reorganization, Hearing, March 29, 1965 
(Statement of Harold Seidman, Assistant Director, Bureau of the Budget), 8. 

13 U.S. Commission on Organization of the Executive Branch of the Government, 
Letter from Chairman (Herbert Hoover) to President pro Tempore of the Senate 
and to the Speaker of the House of Representatives, January 13, 1949, published 
in Commission's report, General Management of the Executive Branch (Wash- 
ington: U.S. Government Printing Office, February, 1949), vii-xii. 



18 ORGANIZATION OF THE EXECUTIVE BRANCH 

mendation was reiterated by the second Hoover commission which 
called for the extension of the expiration date on the reorganization 
authority which had been granted to President Eisenhower. 14 

Congress has responded sympathetically to arguments that a more 
expedient process for effecting reorganization is needed. The Senate 
Committee on Government Operations in its report recommending 
enactment of the Keorganization Act of 1949 concluded : 

. . . experience has demonstrated that substantial progress in re- 
organizing the executive branch can come about only under general 
authorizing legislation enacted by the Congress. The Congress, of 
course, has made and will make selected changes in the organiza- 
tion of the executive branch; but as many Members of the Con- 
gress have stated, it is not feasible to enact far-reaching changes in 
the organization permeating widely through the executive branch 
by means of direct legislation affecting specific agencies. 15 

The support of Congress for the "cooperative executive-legislative 
approach' ' exemplified by the reorganization acts was reached after 
"long experience had demonstrated that improvements in organization 
were difficult to achieve when the sole way of correcting defects was to 
rely upon the passage of specific legislation. Improvements were long 
delayed and often overdue when a reorganization contained in a bill 
had to pursue its course through the legislative machinery and compete 
for attention with urgent substantive legislation. The Reorganization 
Act permits an alternative, or supplemental way of approaching this 
problem, and it does so by clearly placing the responsibility for initiat- 
ing improvements upon the President. ' ' 16 

President Johnson, in his letter to Congress requesting reorganiza- 
tion authority, phrased it another way : 

The people expect and deserve a government that is lean and fit, 
organized to take up new challenges and able to surmount them. 
Reorganization can mean a streamlined leadership, ready to do 
more in less time for the best interest of all the people. 
Reorganization authority is not a whim or a fancy. It is the modern 
approach to the hard, sticky problems of the present and the fu- 
ture. Government has a responsibility to its citizens to administer 
their business with dispatch, enthusiasm, and effectiveness. 17 

AN ENABLING STATUTE 

The California Constitution vests responsibility for seeing that the 
law is "faithfully executed" in the Governor. 18 Implementation of that 
objective rests on the ability of the Governor to exert his influence on 

14 U.S. Commission on Organization of the Executive Branch of the Government, 

Progress Report (Washington: U.S. Government Printing Office, December 31, 
1954), 22. 

15 U.S. Congress, Senate Committee on Government Operations, Report to Accompany 

H.R. 8496: Extending the Reorganization Act of 19^9, 88th Cong., 2nd Sess., 5. 

16 Senate Subcommittee on Executive Reorganization, Hearing, March 29, 19 65, 6. 

17 Letter from President Johnson to Vice President Humphrey and Speaker McCor- 

mack, February 8, 1965, published in Senate Subcommittee on Executive Re- 
organization, Hearing, March 29, 1965, 24. 
18 Article V, Section 1, California Constitution. The entire section reads as follows: 

The supreme executive power of this state is vested in the Governor. He 

shall see that the law is faithfully executed. 
Under existing law the Legislature has provided for limited reorganizations 
within the framework of statutory provisions (Government Code Section 11152). 



ORGANIZATION OF THE EXECUTIVE BRANCH 19 

administration of the executive branch. Eesponsiveness of the structure 
of administration to changing conditions and needs is, therefore, an es- 
sential ingredient to the Governor's ability to perform his constitu- 
tional duties. 

It is the committee's view that executive-initiated reorganization, if 
properly structured, can afford a method to facilitate the Governor's 
performance of his responsibilities with the full cooperation and assist- 
ance of the Legislature in a way that will significantly promote sound 
organization and management of the executive branch. 

Legislation permitting the Governor to formulate reorganization 
plans has been introduced several times in the California Legislature. 
In 1965, Chairman Milton Marks of this committee introduced Assem- 
bly Bill No. 2848 and an accompanying constitutional amendment to 
accomplish this purpose. 19 

The prior bills, with some significant exceptions, have adhered to the 
existing federal legislation. The legislation requires the chief executive 
to examine from time to time the organization of all agencies to deter- 
mine what changes are necessary to implement the specific objectives 
enumerated in the bill. These objectives are : 

(a) To promote the better execution of the laws, the more effective 
management of the executive and administrative branch of 
the state government and of its agencies and its functions and 
the expeditious administration of the public business ; 

(b) To reduce expenditures and promote economy to the fullest 
extent practicable consistent with the efficient operation of the 
state government ; 

(c) To increase the efficiency of the operation of the state govern- 
ment to the fullest extent practicable ; 

(d) To group, consolidate and coordinate agencies and functions 
thereof as nearly as possible according to major purposes; 

(e) To reduce the number of agencies by consolidating those hav- 
ing similar functions under a single head and to abolish such 
agencies or functions thereof as may not be necessary for the 
efficient operation of the state government; 

(f ) To eliminate overlapping and duplication of effort. 20 

When the Governor decides that a change is necessary in the organi- 
zation structure of the executive branch in order to promote one or 
more of the objectives listed above, then he would be permitted to sub- 
mit reorganization plans to the Legislature. 

What constitutes "reorganization" has generally been defined in 
broad terms. It includes the transfer in whole or part of any agency to 
the jurisdiction and control of any other agency; or the consolidation 
in whole or part of one agency with another; or the abolition of the 
whole or any part of an agency when the functions of that agency are 
transferred to another. 

In addition, reorganization plans should make provision for the trans- 
fer of emplo} T ees, the disposition of any records or property affected, 
and the use of any unexpended appropriations. A further requirement 

19 As has been noted, passage of Proposition 1A revising- the California Constitution 

makes an amendment to the Constitution unnecessary. 

20 Public Law 109, 81st Cong-., 1st Sess., Chapter 226, Title I, Section 2 (a) (the 

Reorganization Act of 1949). 



20 ORGANIZATION OF THE EXECUTIVE BRANCH 

is that reorganization plans which conflict with existing statutes must 
list all of the acts which would be suspended if the reorganization plan 
became effective. 

LIMITATIONS ON REORGANIZATION AUTHORITY 

The essence of executive-initiated reorganization is that it is to be 
utilized to effect changes in the actual structure of the organization 
of the executive branch. Therefore, there are severe limitations on the 
use of the reorganization procedure to accomplish changes in policy 
functions vested in the executive branch by the Legislature. For exam- 
ple, a reorganization plan may not have the effect of continuing any 
agency or function beyond the period authorized by law for its exist- 
ence. Neither can the procedure be used to create new functions not 
performed by any agency of the executive branch at the time the plan 
is submitted to the Legislature, nor may they extend a term of office 
beyond that prescribed by law. 

Since 1939, 80 plans have been submitted to Congress by the Presi- 
dent and 59 have been approved. Phrased in another way — one out of 
every four has been rejected. Where approval has been withheld, there 
frequently are indications that the House of Representatives or the 
Senate held that "they were not in accord with the basic purposes of 
the act, going beyond reorganizations into areas of policy, which was 
in conflict with intent of Congress in approving the act in 1949." 21 

One of the most notable instances was the reaction to President Ken- 
nedy 's attempt in 1962 to create by reorganization plan, a Department 
of Urban Affairs and Housing — a move that was defeated by a resolu- 
tion of disapproval in the House of Representatives. 

In 1964, Congress provided a further limitation by specifying that 
no reorganization under the act shall have the effect of creating any 
new executive department, or abolishing or transferring an executive 
department or all of its functions, or consolidating any two or more 
executive departments. Apparently Congress felt that the reorganiza- 
tion authority was intended primarily as a device for making changes 
within existing agencies and that any reorganization creating or abolish- 
ing an executive department had inherent policy implications so that 
effecting such changes by reorganization plan was improper and incon- 
sistent with the purpose of the Reorganization Acts. 

Another important feature of the federal Reorganization Act which 
has been jealously protected by Congress is the limitation on the dura- 
tion of authority vested in the President. After a short-lived grant of 
permanent power to the President in 1932, Congress has provided 
limitations of one to four years for the termination of the President's 
authority. 

This committee supports the inclusion of a two-year limitation in any 
enabling statute granting the Governor reorganization authority so 
that the statute would not be binding on future Legislatures and the 
decision to continue or terminate that authority may be freely exer- 
cised. 

A further limitation is embodied in the California Constitution 
which specifies that the Governor cannot be given authority to assign 
and reorganize functions among elective officers and agencies admin- 

21 Senate Committee on Government Operation, Report, 88th Cong., 2nd Sess., 4. 



ORGANIZATION OF THE EXECUTIVE BRANCH 21 

istered by elective officers. 22 The enabling statute should also specifi- 
cally exclude any agency whose primary function is service to the 
legislative or judicial branches. 

A CONDITIONAL DELEGATION 

Under the federal Reorganization Act, a plan is submitted simul- 
taneously to the Senate and the House of Representatives by the Presi- 
dent and takes effect upon the expiration of 60 calendar days of con- 
tinuous session of the Congress from the date of transmittal unless 
either of the two houses passes a resolution stating that the house does 
not favor the reorganization plan. 

Several methods of congressional disapproval have been utilized. 
Under the original act of 1933, Congress could prevent presidential 
orders from taking effect only by enacting specific legislation. The 1939 
act provided for disapproval by concurrent resolution and in 1949 this 
was changed to permit a resolution adopted by a majority of the auth- 
orized membership of either house of the Congress to defeat a proposed 
reorganization. Since 1959, a simple majority of either house has been 
able to defeat a reorganization plan. 23 

This committee supports the method of disapproval by resolution 
adopted by a simple majority vote of either the Senate or Assembly. 
Any enabling statute should be drafted to specifically set forth the 
procedure for disapproval. 

The procedure for disapproval, frequently referred to as the "con- 
gressional veto," has been challenged on the basis that Congress, in 
disapproving a reorganization plan, is exercising a legislative function 
in a manner not authorized by the Constitution. 

The constitutionality of the ' ' congressional veto ' ' has been thoroughly 
and repeatedly defended by the Congress and remains unimpaired 
despite several court tests. 

Attorney General Tom C. Clark was asked by Senator John L. Mc- 
Clellan, chairman of the Committee on Government Operations, to 
advise his committee on this question, and in a memorandum to the 
committee, the Attorney General pointed out that the Congress was 
not exercising a legislative function when approving or disapproving 
a reorganization plan : 

. . . the Congress exercises its full legislative power when it passes 
a statute authorizing the President to reorganize the executive 
branch of the government by means of reorganization plans at that 
point the Congress decides what the policy shall be and lays down 
the statutory standards and limitations which shall be the frame- 
work of Executive action under the reorganization act. If the 
legislation stops there without future reference to the Congress, 
the President's authority to reorganize is complete. 24 

Attorney General Clark informed the committee that the reservation 
by the Congress of the right to disapprove action taken by the Presi- 

22 Article V, Section 6, California Constitution. 

23 Senate Subcommittee on Executive Reorganization, Hearing; March 29, 1965, 7. 

24 U.S. Congress, Senate, Committee on Government Operations, Report Accompany- 

ing S. 526, 81st Cong., 1st Sess., 15. 



22 ORGANIZATION OF THE EXECUTIVE BRANCH 

dent under the statutory grant of authority is not a legislative act or 
encroachment upon executive functions delegated by Congress: 

In this procedure there is no question involved of the Congress 
taking legislative action beyond its initial passage of the reor- 
ganization act. Nor is there any question involved of abdication by 
the Executive of his executive functions to the Congress. It is 
merely a case where the Executive and the Congress act in coop- 
eration for the benefit of the entire Government and the Nation. 25 

An opinion requested of the Legislative Counsel by Chairman Milton 
Marks as part of this study addressed itself to the question of the Legis- 
lature 's right to require the submission of reorganization plans to the 
Legislature for possible disapproval. The Legislative Counsel arrived 
at a conclusion contrary to that reached by Attorney General Clark 
that the right to disapprove does not involve a legislative act. 

The Counsel based this opinion on the assumption that effecting a 
reorganization in conflict with existing statutes is ' ' legislation ' ' and 
taking into account the constitutional requirement for legislation 
(e.g. enactment by bill), making the effectiveness of the plan con- 
tingent on adoption or nonadoption of a . . . resolution by the 
Legislature would go beyond the authorization of new Section 6 
of Article V and be legislation not meeting constitutional require- 
ments. 26 

Viewing the Legislature's enactment of reorganization authority as 
a conditional delegation is, of course, essential to the whole concept of 
executive-initiated reorganization as a cooperative approach. To pre- 
vent a subsequent legislative determination that the Governor is exer- 
cising his delegated authority in conformity with the legislative purpose 
is to eliminate a basic ingredient. 

This committee would not favor adopting enabling legislation under 
authority vested in the Legislature by Section 6 of Article V of the 
revised Constitution to permit the Governor to initiate reorganization 
of the executive branch unless the requirement that the proposed reor- 
ganization be submitted to the Legislature for possible disapproval 
remained unimpaired. 27 

AN INDEPENDENT REVIEW 

Another step in the process of developing reorganizations of the 
executive branch by the executive reorganization plan method was 
contemplated by the Legislature. 

In 1961, legislation authored by Chairman Milton Marks which 
created the Commission on California State Government Organization 
and Economy (popularly referred to as " California's Little Hoover 
Commission") as a permanent, independent reviewing agency to ad- 
vise the Governor and the Legislature on reorganization, anticipated the 

^Ibid., 16. 

26 Ops. Legislative Counsel No. 8225, October 25, 1966, to Hon. Milton Marks (see 

Appendix D for the complete text of the opinion). 

27 Any possible uncertainty as to the constitutionality of the reserved right to dis- 

approve a reorganization plan could be resolved to the satisfaction of the Legis- 
lature in granting the authority by including a section in the enabling act that 
would have the effect of making the entire act invalid (as well as any reorgan- 
ization submitted pursuant to it) if the section setting forth the legislative 
approval or disapproval were found to be unconstitutional. 



ORGANIZATION OF THE EXECUTIVE BRANCH 23 

enactment of an executive-initiated reorganization statute. The legisla- 
tion provided that : 

Before the Governor submits any reorganization plan to the Legis- 
lature ... he shall first submit such plan to the commission for 
its consideration and recommendation. The commission shall sub- 
mit to the Governor and to the Legislature a report on its recom- 
mendations concerning such plan on or before the 10th legislative 
day of the first succeeding regular session of the Legislature after 
transmission of the plan to the commission. 28 

However, since the executive reorganization act requested by the 
Governor was not enacted, the provision for submitting reorganization 
plans to the commission was deleted from the Government Code. 29 

This committee supports the contemplated method of submitting pro- 
posed reorganizations to the "Little Hoover Commission." Such a 
procedure is totally consistent with the commission's responsibilities in 
1 ' promoting economy, efficiency and improved service in the transaction 
of the public business in the various departments, agencies and instru- 
mentalities of the executive branch of the state government. ' ' 30 The 
advantage of a separate review would be highly beneficial to both the 
Governor and the Legislature. 

It is the view of this committee that the commission has made a 
significant contribution to economy and efficiency in state government 
in its nearly five years of existence, and that an affirmative reply can 
be made to the commission's request that 

The commission should itself be independently evaluated after 
sufficient time has elapsed for appraisal, to determine whether its 
contributions are significant and whether its continuance is justi- 
fied. 31 

This committee feels that the l ' Little Hoover Commission ' ' can bring 
the same independent review to assist the Governor and the Legislature 
in evaluating proposed reorganization plans, and recommends only that 
the commission's independence of the executive branch be clarified. 

It was the intent of the sponsors of the statute creating the commis- 
sion that an essential element to the commission's effectiveness was its 
independence of the officers and agencies of the executive branch so 
that review of possible reorganization could be accomplished impar- 
tially. For housekeeping purposes the commission was placed in the 
Department of Finance with the provision that "the commission shall 
not be subject to the control or direction of the director . . ." 32 When 
the Department of General Services was created in 1963, the commis- 
sion was transferred to that agency for housekeeping purposes with the 
result that the statutory independence of the commission from the Di- 
rector of Finance was brought into question. 

This could easily be resolved by clarifying the statutory placement 
of the commission within the executive branch. Some further changes 

28 Statutes of 1961, Chapter 2038 (Assembly Bill No. 1510, authored by Assemblyman 

Milton Marks, approved by unanimous vote of the Legislature). 
28 Statutes of 1965, Chapter 159, repealed Government Code Section 8522 

80 Government Code Section 8521. 

81 Commission on California State Government Organization and Economy, Findings 

and Recommendations Concerning Reorganization of the Executive Branch of 
California State Government, December 31, 1962, 9. 

82 Government Code Section 8526. 



24 ORGANIZATION OF THE EXECUTIVE BRANCH 

in its composition would improve the commission's independent role 
and could be undertaken at the same time that the duty of reviewing 
reorganization plans was imposed upon the commission. 33 

SUMMARY 

In summary, this committee feels that the process of executive- 
initiated reorganization can be properly denned and specifically limited 
in a manner that will be consistent with the proper exercise of execu- 
tive and legislative responsibilities by the respective branches so that 
a more efficient and flexible method of reorganizing the executive 
branch can be initiated. 



33 Appointment of citizen members to the commission are made on the following 
basis : five by the Governor, one by the Senate Rules Committee and one by the 
Speaker of the Assembly. Since the contribution of its citizen members is so 
important to the work of the commission, the executive-legislative relationship 
might be improved by the addition of one more appointee of the Senate and 
Assembly. In this same connection, it would seem more appropriate for the 
commission to select its own chairman and vice chairman, rather than to have 
the Governor appoint them. 



APPENDICES 






APPENDIX A 

FEDERAL REORGANIZATION PROPOSALS 

While the United States Constitution vests in the President the 
responsibility to oversee the operation of the executive department 
(Article II, Section 1), it has only been since the end of the Hoover 
administration that the chief executive has had the statutory authority 
to initiate and submit to Congress proposals for the reorganization of 
the executive branch. All Presidents since that time have operated with 
similar grants of power. 

The first reorganization authority was given to the President by the 
Executive Reorganization Act of 1932. 1 In its original form, while it 
enabled the President to consolidate, redistribute, and transfer various 
agencies and functions by executive order, it did not permit him to 
abolish a department or agency which had been created by statute or 
to either transfer or eliminate its functions. Congressional rejection 
of a reorganization plan under this act could be accomplished by a 
negative vote in either house, and required only a simple majority of 
those present and voting. This power to initiate executive reorganiza- 
tion was, under the original act, a permanent authority. This was the 
only reorganization act which granted this power on a permanent basis, 
although Presidents Truman and Johnson have requested it, and Presi- 
dents Eisenhower and Kennedy stated that it should be granted. 2 

This permanent authority was short lived. On March 3, 1933, the 
authority was limited to a two-year period. 3 At the same time, however, 
the 1933 act broadened the scope of the presidential power and, in 
addition, made no provision for congressional disapproval : 4 it was 
necessary to enact legislation in order to prevent a reorganization 
proposal from going into effect. 

Subsequent Reorganization Acts of 1939 5 and 1945, 6 plus the War 
Powers Act of 1941, 7 developed reorganization laws along the lines that 
exist today. All of these acts contained specific time limits on the grant 
of authority (generally two years) and all provided for congressional 
rejection of any plan submitted by a concurrent resolution. In addition, 
they all prohibited the abolishment or transfer of executive departments 
or their functions and they tended to exempt specific agencies from the 
operation of the acts; 21 agencies were exempted under the 1939 act 
and 11 agencies were exempted under the 1945 act. 

REORGANIZATION ACT OF 1949 

Currently, the President's authority to initiate executive reorganiza- 
tion stems from the Reorganization Act of 1949, as amended, 8 and this 
power has been used extensively since its inception. 

The Reorganization Act of 1949 both enables and requires the Presi- 
dent to "from time to time reexamine the organization of all agencies 

M7 Stat. 413. 

2 U.S. Code Congressional and Administrative News, 1965, 88th Cong-.. 2nd Sess 1634 

3 47 Stat. 1517. 

* U.S. Code Congressional and Administrative News, 1965, 1636. 

5 53 Stat. 561. 

6 59 Stat. 61S. 

7 55 Stat. 838. 

8 63 Stat. 203; 5 U.S.C.A. Sec. 113z-133z-U. 

(27) 



28 ORGANIZATION OF THE EXECUTIVE BRANCH 

of the government ' - in order to further stated objectives. The objectives, 
as enumerated in the act are as follows : 

1. Promote the better execution of laws, the more effective manage- 
ment of the executive branch and its functions, and the expedi- 
tious administration of public business. 

2. To reduce expenditures and promote economy in the operation 
of the government. 

3. To increase the efficiency of the government to the fullest extent 
practicable. 

4. To group, coordinate, and consolidate agencies and functions of 
the government, as nearly as may be, according to major pur- 
poses. 

5. To reduce the number of agencies by consolidating those having 
similar functions under a single head, and to abolish such 
agencies and functions thereof as may not be necessary for the 
efficient conduct of the government. 

6. To eliminate overlapping and duplication of effort. 

Obviously these objectives are ambiguous enough to lay the basis for 
wide discretionary power on the part of the chief executive. This grant 
of authority, moreover, is extended by the inclusive nature of the 
definition given to the term ' ' agency. ' ' 

Section 7. When used in this act, the term " agency " means any 
executive department, commission, council, independent estab- 
lishment, government corporation, board, bureau, division, service, 
office, officer, authority, administration, or other establishment, in 
the executive branch of the government, and means also any and 
all parts of the municipal government of the District of Columbia 
except the courts thereof. 

Excluded from his definition are the Comptroller General of the United 
States and the General Accounting Officer, both of which are part of 
the legislative branch of the government. 

Whenever the President finds that the economy and efficiency of the 
executive branch may be promoted by restructuring the agencies within 
the branch, he may draw up a reorganization plan to that effect and 
submit it to the Congress, stating his findings and his justifications for 
the reorganization. 

The delivery of the reorganization plan must be made to both the 
Senate and the House of Representatives on the same day. In addition, 
the President : 

. . . shall specify with respect to each abolition of a function in- 
cluded in the plan the statutory authority for the exercise of such 
function, and shall specify the reduction of expenditures (itemized 
as far as practicable) which it is probable will be brought about 
by the taking effect of the reorganizations included in the plan. 

Despite the fact that the total grant of authority is quite permissive 
and the discretionary power of the President is greatly enhanced, there 
are, even so, several specific limitations contained in the Reorganization 
Act which hedge the power of the President. 



ORGANIZATION OF THE EXECUTIVE BRANCH 29 

The proposed reorganization plan may not provide for any of the 
following : 

1. It may not create, abolish or transfer an executive department 
or all of its functions, or consolidate any two or more executive 
departments or their functions. 

2. It may not continue any agency beyond the period authorized 
by law for its existence or beyond the time it would have termi- 
nated if the reorganization had not been made. 

3. It may not continue any function beyond the period authorized 
by law for its exercise, or beyond the time it would have termi- 
nated if the reorganization had not been made. 

4. It may not authorize any agency to exercise any function which 
is not expressly authorized by law at the time the plan is sub- 
mitted to Congress. 

5. It may not increase the term of any office beyond the time which 
is authorized by law. 

6. It may not transfer to or consolidate with any other agency the 
municipal government of the District of Columbia or all of its 
functions, or abolish this government or its functions. 

Unless the reorganization proposal provides for a later date, the 
plan goes into effect 60 days after it is presented to the Congress, but 
only if, during the 60-day period, neither the House of Representatives 
nor the Senate has passed a resolution stating that the body does not 
favor the reorganization plan. Such a resolution, in order to pass, must 
receive the affirmative vote of a simple majority of those present and 
voting. 

The Reorganization Act of 1949 has, since its enactment, been used 
extensively while at the same time undergoing continuous modification. 
The excerpt reproduced below from the U.S. Code Congressional and 
Administrative News, 1965, outlines the major changes and amendments 
to the act. In addition, it charts the use which successive presidents 
have made of this authority and the fate of the many reorganization 
proposals which have been put forward. 

The Reorganization Act of 1949 (Public Law 109, 81st Cong.) 
was originally enacted as a means of expediting reorganizations in 
the executive branch, following submission of its reports and recom- 
mendations by the first Commission on Organization of the execu- 
tive branch of the government (Hoover commission). Since it was 
designed primarily as a means of enabling the implementation of 
these recommendations, it gave the President much greater latitude 
than the 1939 or 1945 acts by eliminating exemptions of specified 
agencies and authorizing him to submit reorganization plans pro- 
viding for the creation of new departments at the cabinet level. 
Rejecting the two-year time limit of the 1939 and 1945 acts and 
the President's request for permanent authority, the committee 
approved a four-year period terminating on April 1, 1953. This 
was based on the ground that a two-year period would not allow the 
President sufficient time to prepare and submit reorganization 
plans to the Congress, in view of the very extensive work of the 
Hoover commission. The method of congressional rejection was 
also modified by providing for such action by the adoption of a 



30 ORGANIZATION OF THE EXECUTIVE BRANCH 

resolution of disapproval by a majority of the authorized member- 
ship of either house of the Congress, rather than by the earlier 
requirement of a concurrent resolution which necessitated action 
by both Houses. Under the original 1949 act, the President sub- 
mitted 41 plans, of which 30 became effective and 11 were rejected. 

The Reorganization Act of 1949 was subsequently extended for 
two-year periods in 1953, 1955, 1957, and 1961. In 1959, this com- 
mittee reported a bill extending its provisions for two additional 
years, or to June 1, 1961. The House of Representatives approved 
an identical bill but both measures died on the Senate Calendar at 
the end of the 86th Congress. The 1949 Reorganization Act was 
extended again for one year in 1964. Reorganization authority thus 
lapsed from June 1, 1959, to April 7, 1961, and from June 1, 1963, 
to July 2, 1964. 

In the 1957 extension, the method of congressional rejection was 
again amended to provide disapproval of reorganization plans by 
either house of the Congress by a simple majority of those present 
and voting, and the 1964 extension eliminated the authority of the 
President to submit plans proposing the creation of new cabinet 
departments. 

As previously noted, during the four-year period of the original 
Reorganization Act of 1949, 41 reorganization plans were sub- 
mitted, of which 30 became effective and 11 were rejected. Under 
the subsequent extensions, a total of 27 plans were submitted, of 
which 20 became effective and seven were rejected. Thus, between 
the effective date of the 1949 act and June 1, 1963, the termination 
date of the President's reorganization authority under the 1961 
extension, a total of 68 plans were submitted, of which 50 became 
effective and 18 were rejected. Between the effective date of the 
Reorganization Act of 1939 and June 1, 1963, a total of 80 plans 
were submitted, of which 59 became effective and 21 were rejected. 
No reorganization plans were transmitted in 1964 and plan No. 1 
of 1965, submitted under the 1964 extension, is not included in this 
compilation. 

From the foregoing, it appears that during the entire history of 
executive reorganization, covering a period of more than 30 years, 
with the exception of the initial act, the act of June 30, 1932, every 
subsequent act has granted reorganization authority to the Presi- 
dent for a limited period of time, varying from one to four years, 
despite the fact that three Presidents have either requested or 
recommended the granting of permanent authority. Although the 
1932 act granted permanent authority, nine months later it was 
amended and superseded by a rider to an appropriation act which 
limited the President's authority to a period of two years. 9 

The following tables provide an analysis of the various reorganization 
statutes (Table I), a summary of the action taken by Congress (Table 
II), and the use of the reorganization authority by the various Presi- 
dents who have operated under it (Table III). 

•U.S. Code Congressional and Administrative News, 1965, 1635-1638. 



ORGANIZATION OF THE EXECUTIVE BRANCH 



31 



TABLE I 
Statutes providing reorganization authority 



Duration of authority 
and termination date 



Reorganization authority 



Method of disapproval 



Permanent 



Two years (March 20, 1935) 



Two years (Jan. 21, 1941) 

Duration of war, plus six 
months, or such earlier time 
as designated by Congress. 

Two years and three months 
(April 1, 1948) 

Four years (April 1, 1953) 



Two years (April 1, 1955) 
Two Years (June 1, 1957) 
Two years (June 1, 1959) 
Two years (June 1, 1963) 
One year (June 1, 1965) 



Reorganization Act of 1932; Title IV of the 
Legislative Appropriations Act for fiscal year 
1933, Public Law 212, 72nd Congress. 
Acts of March 3 and March 20, 1933: 
Amending and superseding the act of June 
20, 1932. 

Reorganization Act of 1939: Public Law 19, 
76th Congress (act of April 3, 1939). 

Title I of War Powers Act of 1941 (act of 
Dec. 18, 1941). 

Reorganization Act of 1945: Public Law 
263, 79th Congress (act of Dec. 20, 1945). 
Reorganization Act of 1949: Public Law 
109, 81st Congress (act of June 20, 1949). 

1953 amendment: Public Law 3, 83rd 
Congress (act of Feb. 11, 1953). 
1955 amendment: Public Law 16, 84th 
Congress (act of March 25, 1955). 
1957 amendment: Public Law 86-286 (act 
of Sept. 4, 1957). 

1961 amendment: Public Law 87-18 (act 
of April 7, 1961). 

1964 amendment: Public Law 88-351 (act 
of July 2, 1964) (no authority to create 
new executive departments). 



Simple resolution of either 
house. 

No provision (enactment of 
law required). 

Concurrent resolution. 

No provision. 

Concurrent resolution. 

Majority of authorized mem- 
bership of either house: Sen- 
ate, 49; hosue, 218. 
Same as 1949 act. 

Do. 

Simple resolution of either 

house. 

Do. 

Simple resolution. 



SOURCE: U.S. Code 
2nd Sess., 1638. 



Congressional and Administrative News, 1965, 88th Cong., 



TABLE II 
Summary of action on reorganization plans submitted between 1939 and 1963 

The following table shows the actions under the Reorganization Acts 
of 1939, 1945, and 1949. The actions under the 1949 act are indicated 
by dates of extensions and amendments : 



Rejected 



Reorganization acts extensions Plan Became 

and amendments submitted effective 

1939 5 

1945 7 

1949 41 

1953 12 

1955 2 

1957 3 

1961 10 

Total 80 59 



5 





4 


3 


30 


11 


12 








2 


2 


1 


6 


4 



21 



TABLE III 

Number of reorganization plans submitted by each President and 

duration of reorganization authority 

The following table shows the number of reorganization plans which 
were submitted by each of the Presidents who have been granted 
reorganization authority since 1939 and the period of time during 
which they had such authority : 

Roosevelt 5 plans in 7 years 

Truman 48 plans in 8 years 

Eisenhower 17 plans in 8 years 

Kennedy 10 plans in 3 years 

SOURCE: U.S. Code Congressional and Administrative News, 1965, 88th Cong., 
2nd Sess., 1638. 



APPENDIX B 
REORGANIZATION IN THE STATES I 

Despite a high level of enthusiasm, among academicians and admin- 
istrators, for the concept of executive initiated reorganization, only a 
handful of states have seen fit to follow the lead of the federal govern- 
ment in allowing their chief executives wide discretionary powers to 
reorganize the executive branch of government. 

Where this power does exist, the impetus for its creation has come 
largely from students of public administration and "Little Hoover 
Commissions. ' ' The recommendations of these groups generally mirror 
those contained in the sixth edition of the Model State Constitution, 
prepared by the National Municipal League. Section 5.06 of Article V 
of the model constitution states in part : 

. . . the legislature shall by law prescribe the functions, powers 
and duties of the principal departments and of all other agencies 
of the state and may from time to time reallocate offices, agencies 
and instrumentalities among the principal departments . . . ; 
but the governor may make such changes in the allocation of such 
functions, powers and duties, as he considers necessary for effi- 
cient administration. If such changes affect existing law, they shall 
be set forth in executive orders, which shall be submitted to the 
Legislature while it is in session, and shall become effective, and 
shall have the force of law, 60 days after submission, or at the 
close of the session, whichever is sooner, unless specifically modified 
or disapproved by a resolution concurred in by a majority of all 
the members of each house. 

The Alaska Constitution provides for executive initiated reorganiza- 
tion in the following words : 

The Governor may make changes in the organization of the executive 
branch or in the assignment of functions among its units which 
he considers necessary for efficient administration. Where these 
changes require the force of law, they shall be set forth in execu- 
tive orders. The Legislature shall have 60 days of a regular session, 
or a full session if of shorter duration, to disapprove these execu- 
tive orders. Unless disapproved by resolution concurred in by a 
majority of the members in joint session, these orders become 
effective at a date thereafter to be designated by the Governor. 1 

Both of these represent fairly wide grants of power with no neces- 
sary time limitations on the grant of authority. Both the State of New 
Hampshire and the Commonwealth of Puerto Rico adopted similar 
plans in 1949, but for limited period of time. In 1955, the Governor of 
Pennsylvania was granted this power also. According to the Penn- 
sylvania act, the chief executive may initiate reorganization plans 
affecting only units of bureau size or smaller. If neither house of the 

1 Alaska Constitution, Art. Ill, Sec. 23. 

(82) 



ORGANIZATION OF THE EXECUTIVE BRANCH 33 

State Legislature exercises a veto over the proposal within 30 days, 
the proposals become effective. 2 

Units below the department level can be consolidated, abolished or 
transferred to other departments, but no changes can be made which 
alter the departmental function. According to one source, this type of 
plan combines the merits of executive reorganization flexibility with 
the adequate protection of the overall administrative departmental 
pattern established by the Legislature : 

While this program restricts the Governor's actions to shifts of 

bureaus or smaller units, even within these limitations much can 

be done to improve the state's administrative structure. 3 

The State of Michigan in 1958, and the State of Oregon in 1959, also 

adopted broad reorganization acts patterned after the federal model. In 

the case of Oregon, the grant of power was limited to a short period 

while in Michigan the idea was to establish a permanent reorganizing 

procedure. 4 

a Bell, James R., and Earl L. Darrah, State Executive Reorganisation (Berkeley: 

University of California, 1961), 26-27. 
8 Ibid., 27. 
* Ibid. 



2— L-418 



APPENDIX C 
CONSTITUTION REVISION COMMISSION 

MINORITY REPORT RE: LEGISLATIVE AUTHORIZATION 
OF EXECUTIVE REORGANIZATION 

The undersigned members of the California Constitution Kevision 
Commission believe that the Legislature should be granted express au- 
thority to provide for executive reorganization of all agencies of state 
government other than agencies created by the Constitution which the 
Legislature itself cannot change. In an opinion dated June 2, 1959, the 
Legislative Counsel (Ralph Kleps) declared that the Legislature could 
not enact a bill which would authorize the Governor to prepare reorga- 
nization plans to achieve greater efficiency by transferring all or part 
of an agency or its functions to another agency, by abolishing the 
functions of an agency or by consolidating agencies. The bill referred 
to required the plan would have gone into effect unless disapproved by 
concurrent resolution. Effecting a reorganization plan in such manner 
runs afoul of several provisions of the Constitution according to the 
Legislative Counsel. 

The 1959 opinion of the Legislative Counsel is attached. We believe 
it demonstrates both the need for such a constitutional provision as well 
as the nature of the proposal supported by the undersigned members 
of this report. 

We believe the Legislature should have authority to enact legislation 
which would give the Governor the right to initiate executive reorga- 
nization subject to subsequent legislative veto. Such authority is con- 
tained in the model state constitution, in the constitutions of other 
states and is substantially the same as that exercised by the President 
of the United States. The present provisions of the California Consti- 
tution prevent the Legislature from delegating this power to the chief 
executive even though the plan as submitted to the Legislature cannot 
become effective if disapproved by either house of the Legislature. 

Our proposal which can be added either to Article IV or Article V 
would read as follows : 

Authority may be vested in the Governor by statute to reallocate 
existing functions among and within state executive and adminis- 
trative agencies and offices. If any reallocation affects existing law, 
it shall be set forth in an executive order submitted to the Legisla- 
ture within 30 days of the opening of a general session and, subject 
to referendum, shall become law on the 91st day after adjournment 
unless disapproved by resolution of either house. 

We, respectfully, disagree with a majority of the members of the 
commission who rejected giving the Legislature this power and urge 
its inclusion in any revision of the Constitution submitted to the voters. 
Richard Carpenter Mrs. William Irvine 

John A. Busterud William R. MacDougall 

Arthur F. Corey George W. Rochester 

Richard J. Dolwig Mrs. Lawrence Spear 

John A. Vieg 
(34) 



ORGANIZATION OF THE EXECUTIVE BRANCH 35 

State of California 
OFFICE OF LEGISLATIVE COUNSEL 

Sacramento, California 
June 2, 1959 

Hon. Hugh P. Donnelly 

Senate Chamber 

Government Reorganization — #17220 

Dear Senator Donnelly : 

You have asked that we consider the constitutionality of a bill relating 
to reorganization of the state government, which provides, in essence, 
as follows : The bill declares a state policy that state agencies shall be 
so organized as (1) to reduce expenditures to the fullest extent con- 
sistent with efficiency, (2) to group, coordinate, and consolidate agencies 
and functions according to major purposes, (3) to reduce the number 
of agencies by consolidating those having similar functions under a 
single head and to abolish such agencies and functions as are not 
necessary for the efficient conduct of government, and (4) to eliminate 
overlapping and duplication of effort. 

The Governor is authorized to prepare reorganization plans to effec- 
tuate these purposes by transferring all or part of an agency or its 
functions to another agency, by abolishing the functions of an agency, 
and by consolidating agencies. The plan may not change the functions 
of agencies created by the Constitution or extend the life of an agency 
beyond any previously prescribed termination date, or continue a func- 
tion beyond any such termination date. 

A reorganization plan is required to be submitted to both houses of 
the Legislature simultaneously and the plan goes into effect 30 days 
after submission, or at such later date as is specified in the plan, unless 
the Legislature by concurrent resolution adopted within the 30-day 
period, disapproves it. 

We note, at the outset, that the suggested bill is very similar to the 
Federal Reorganization Act of 1949 (5 U.S.C.A. Sees. 133z-133z-15), 
which succeeded earlier acts of the same type dating back to 1933 (see 
1945 U.S. Code Cong. Serv., p. 918, and 1949 U.S. Code Cong. Serv., 
Vol. 2, p. 1381). Many reorganization plans have been placed in effect 
under that legislation and its predecessors. 

Insofar as such legislation merely authorizes executive reorganization 
within the framework of existing statutes we see no problem.* The 
constitutional difficulty arises in connection with reorganizations which 
are in conflict with statutes previously enacted by the Legislature. On 
this point, so far as we have been able to determine in the time allowed, 
the constitutionality of the federal reorganization legislation has not 

* It should be noted that there are, at present, provisions in California law author- 
izing- limited reorganizations by the executive branch of the state government. 
Section 11152 of the Government Code provides as follows: 

Subject to the approval of the Governor, the head of each department may 
arrange and classify the work of the department and consolidate, abolish, or 
create divisions thereof. So far as consistent with law the head of each 
department may adopt such rules and regulations as are necessary to 
govern the activities of the department and may assign to its officers and 
employees such duties as he sees fit. For the betterment of the public 
service, he may reassign to any employees under the chief of any division 
such duties as he sees fit. . . 

See also, Sec. 13005, Gov.C, making the same provision with respect to the 
Department of Finance. 



36 ORGANIZATION OF THE EXECUTIVE BRANCH 

been passed upon specifically. The Supreme Court of the United States, 
however, in dealing with this question has chosen to solve the problei 
by relying upon the fact that Congress has ratified the particular reor- 
ganization by later legislation, including appropriation acts. (Swaynt 
and Hoyt v. U.S., 300 U.S. 297, 301-302, 81 L. Ed. 659, 663 ; Isorandt- 
sen-Meller Co. v. U.S., 300 U.S. 139, 148, 81 L. Ed. 562, 569 (1948) ; 
40 Cal. L. Kev. 1211, 1222.) We note, also, that Congress has taken the 
precaution in several instances of enacting statutes which placed certain 
of the reorganization plans into effect (5 U.S.C. 133s, 133u, 133v). 

Assuming the constitutionality of the federal precedent, under the 
United States Constitution, it does not follow, of course, that such a 
procedure would satisfy the requirements of the California Constitution 
which contains detailed provisions as to the enactment of laws (Calif. 
Const., existing Art. IV). We have found no California cases in which 
the courts have had to consider such a sweeping authorization to the 
executive branch as is involved here. 

There is, however, authority which can fairly be said to be "on all 
fours." In Opinion of the Justices, 83 Atl. 2nd 738, the Supreme Court 
of New Hampshire held legislation almost identical to the bill in ques- 
tion here to be unconstitutional. The majority of that court evidently 
had no doubt that placing such a reorganization plan in effect amounted 
to legislating, and, this being the case, it was necessary that the re- 
quirements of the New Hampshire Constitution for enactment of legis- 
lation be complied with. The procedure in question did not meet those 
requirements, specifically, because concurrence of both houses in the 
approval of the plan was not necessary, i.e., the plan would go into 
effect though one house had expressly indicated its disapproval. 

If it be assumed that effecting a reorganization plan pursuant to the 
provisions of this bill is legislating, the bill runs afoul of several pro- 
visions of the Constitution. Section 15 of Article IV provides that no 
law shall be passed except by bill, that any bill may be rejected by 
either house, and that no bill shall become law without concurrence of 
a majority of the members elected to each house. We further note that, 
in general, no act passed by the Legislature shall go into effect until 
90 days after final adjournment of a session of the Legislature, with 
exceptions for urgency measures and with certain other exceptions not 
relevant here. However, measures creating or abolishing an office or 
changing the salary, term, or duties of an officer cannot be urgency 
measures (Art. IV, existing Sec. 1, Calif. Const.). The bill contemplates 
reorganizations making changes of this nature, yet provides that the 
plan shall go into effect 30 days after submission to the Legislature, 
absent prior disapproval. 

It is basic, of course, that the power to legislate reposes in the Legis- 
lature and cannot be delegated (Art. Ill, existing Sec. 1; Art. IV, 
existing Sec. 1, Calif. Const.). If the power to abolish statutory agencies 
and functions is involved, it is difficult, if not impossible, to escape the 
conclusion that the contemplated reorganization is legislation and must 
meet constitutional requirements for legislation (see Re Opinion of the 
Justices (Mass.), 52 NE 2nd 974, 150 A.L.E. 1432). Under these cir- 
cumstances, we think that the only safe procedure is one in which the 
Legislature, by statute adopts any reorganization plan submitted to it 
by the Governor so that is takes effect by a legislative act. 



ORGANIZATION OF THE EXECUTIVE BRANCH 37 

It is true that the Legislature can, without divesting itself of the 
legislative power, delegate to an executive agency the power to "fill in 
the details" under sufficiently definite standards. Thus, if the Legisla- 
ture should repeal the existing statutory provisions which set the struc- 
ture of state government, we have no doubt that it could delegate 
authority to the Governor under appropriate standards to create a new, 
and more efficient, framework of government. Any bill setting the stage 
for such an exercise of power by the Governor would have to meet the 
specific requirements of the California Constitution, of course, includ- 
ing the provision that amended or revised laws must be set forth at 
length and must deal with a single subject (Const., Art. IV, existing 
Sec. 24). We have serious doubts, however, that the bill which you 
have suggested would meet these requirements. 

Very truly yours, 

Ealph N. Kleps 
Legislative Counsel 

By Terry L. Baum 
Deputy Legislative Counsel 



APPENDIX D 

State of California 
OFFICE OF LEGISLATIVE COUNSEL 

Sacramento, California 
October 25, 1966 

Honorable Milton Marks 

Russ Building 

San Francisco, California 94104 

Reorganization of Executive Branch 
of State Government— #8225 

Dear Mr. Marks : 

You have pointed out that in an opinion of the Legislative Counsel, 
dated June 2, 1959, prepared under Request No. 17220, printed on 
pages 201-203 of the February 1966 Report of the Constitution Revi- 
sion Commission, we expressed serious doubts about the constitutionality 
of a bill described as follows, insofar as it authorized reorganization in 
conflict with existing statutes : 

. . . The bill declares a state policy that state agencies shall be 
so organized as (1) to reduce expenditures to the fullest extent 
consistent with efficiency, (2) to group, coordinate, and consolidate 
agencies and functions according to major purposes, (3) to reduce 
the number of agencies by consolidating those having similar func- 
tions under a single head and to abolish such agencies and func- 
tions as are not necessary for the efficient conduct of government, 
and (4) to eliminate overlapping and duplication of effort. 

The Governor is authorized to prepare reorganization plans to 
effectuate these purposes by transferring all or part of an agency 
or its functions to another agency, by abolishing the functions of 
an agency, and by consolidating agencies. The plan may not change 
the functions of agencies created by the Constitution or extend the 
life of an agency beyond any previously prescribed termination 
date, or continue a function beyond any such termination date. 

A reorganization plan is required to be submitted to both houses 
of the Legislature simultaneously and the plan goes into effect 
thirty days after submission, or at such later date as is specified 
in the plan, unless the Legislature by concurrent resolution adopted 
within the 30-day period, disapproves it. 

The opinion noted that the constitutionality of similar federal legisla- 
tion had not been determined by the courts and that a decision of the 
New Hampshire Supreme Court had held a similar bill unconstitutional 
on the ground that it purported to authorize what amounted to legisla- 
tion without compliance with constitutional requirements for legislation, 
and concluded that, assuming that this was legislation, various require- 
ments of the California Constitution for enactment of legislation would 
not be met, e.g., the plan would go into effect although one house did 
not approve it. 

(38) 



ORGANIZATION OF THE EXECUTIVE BRANCH 39 

You ask whether such a bill would be constitutional if Proposition 1A 
on the November 1966 ballot is adopted by the people. 

Section 6 of Article V in the revision contained in Proposition 1A 
reads as follows : 

Sec. 6. Authority may be provided by statute for the Governor 
to assign and reorganize functions among executive officers and 
agencies and their employees, other than elective officers and 
agencies administered by elective officers. 

Comparing this provision with the bill considered in our earlier 
opinion, we observe first that this provision is not explicit in authoriz- 
ing actions by the Governor in conflict with existing statutes. However, 
neither does it express anything to the contrary. This provision is one 
not found in the present Constitution. No new authority would have 
been necessary to authorize the Governor to reorganize within the 
framework of existing statutes, as, indeed, he is now authorized, to a 
considerable extent, to do (see Gov.C. Sec. 11152). In our opinion it 
would be held that under this new provision the Governor could be 
authorized to effect reorganization differing from the organization then 
provided by statute. 

The bill described in our prior opinion would have authorized re- 
organization plans "transferring all or part of an agency or its func- 
tions to another agency . . . abolishing the functions of an agency, 
and . . . consolidating agencies." The proposed new constitutional 
provision speaks of authorizing the Governor "to assign and reorganize 
functions among the executive officers and agencies and employees. " 
We note, at this point, that we do not understand the bill considered 
in our opinion, in providing for "abolishing the functions of an 
agency," to mean that the reorganization could provide that a service 
that the Legislature has required to be performed shall not be per- 
formed (as contrasted with providing that such a service shall be per- 
formed under a new scheme of organization). Neither do we understand 
the constitutional provision to empower the Legislature to authorize 
the Governor to make such changes. With this understanding it is our 
opinion that Section 6 is broad enough to encompass all of the types of 
changes in organization of the executive branch authorized by the bill. 

The bill discussed in our prior opinion required submission of a plan 
to the Legislature for possible disapproval by concurrent resolution. 
Under the new constitutional provision the Legislature could authorize 
the Governor to make such changes without any requirement of sub-' 
mission of the plan to the Legislature for possible disapproval. The 
provision makes no reference to such submission to the Legislature, and 
we think that it is doubtful that this feature of the bill would, if 
Proposition 1A is adopted, be constitutional. That is, assuming that 
effecting a reorganization in conflict with existing statutes is "legisla- 
tion, ' ' and taking into account the constitutional requirements for legis- 
lation (e.g., enactment by bill), making the effectiveness of the plan 
contingent on adoption or nonadoption of a concurrent resolution by 
the Legislature would go beyond the authorization of new Section 6 of 
Article V and be legislation not meeting constitutional requirements. 

We thus conclude that if Proposition 1A is adopted, the bill, as we 
understand it, discussed in our prior opinion, would be constitutional, 



40 ORGANIZATION OF THE EXECUTIVE BRANCH 

except that insofar as the bill requires submission of a plan to the 
Legislature for possible disapproval by concurrent resolution we would 
have serious doubts as to its constitutionality. 

Very truly yours, 

George H. Murphy 
Legislative Counsel 

By Terry L. Baum 
Principal Deputy 



II. THE 1961 REORGANIZATION 

The Development of the Agency Concept 
and the Executive Office Proposal 



FINDINGS 

1. The 1961 Legislature approved the last major reorganization of 
the administrative structure for top-level management of the executive 
branch. That reorganization was popularlv referred to as the "Agency 
Plan." 

2. The Agency Plan was to place most of the departments, boards 
and commissions of state government under one of eight agencies ac- 
cording to function under the supervision of an agency administrator 
who was to serve in the dual capacity of advisor to the Governor and 
coordinator of programs within the agency. 

3. From its inception the Agency Plan did not develop uniformly. 
The original recommendation was that eight agencies be created; only 
four were given statutory status and the remaining four were created 
by executive order of the Governor. In addition, specific changes have 
taken place, both by legislative directive as well as informal means, 
which have had the effect of creating even greater variances in the 
operations of the different agencies. 

4. One of the direct results of these changes in the Agency Plan has 
been to give the administrator greater direction and control over the 
functions of the departments within the agency in direct contradiction 
of the original concept of the 1961 reorganization as submitted to the 
Legislature. 

5. Another feature of the Agency Plan was the creation of an execu- 
tive department and reassignment of the functions of the Department 
of Finance to an integrated executive office of the Governor and a new 
Department of General Services. Only the portion of this recommenda- 
tion pertaining to the creation of a Department of General Services has 
been implemented. 

6. No serious study has subsequently been undertaken to determine 
the feasibility of a formal reorganization of the executive office of the 
Governor. It is possible that an integrated Governor's office would per- 
mit a fuller realization of those objectives of the Agency Plan which 
were associated with improved communication of the Governor's poli- 
cies to the departments. 



(42) 



RECOMMENDATIONS 

1. The Agency Concept deserves reevaluation to determine whether 
those changes which have occurred, by statutory enactment and infor- 
mal means, demonstrate the need for formal reorganization of certain 
of the agencies into "full-blown" departments. 

2. This committee also supports a full exploration of the potential 
improvement which might result from the establishment of an execu- 
tive office in California. Such a review should give serious consideration 
to the fixing of responsibility for the fiscal and policy-management 
functions now vested by law in the Director of Finance. 



(43) 



In 1961, Governor Edmund G. Brown submitted to the Legislature 
a proposal for reorganizing the administrative structure of the execu- 
tive branch of California State Government. That proposal, referred 
to as the "Agency Plan," culminated a study which had begun two 
years earlier with the creation by executive order of the "Governor's 
Committee on Reorganization of California State Government." 

A tentative reorganization proposal was drafted by the Governor's 
committee calling for a regrouping of various departments, boards and 
commissions and a strong executive office. This proposal was the subject 
of a special two-day conference of selected state and local government 
officials meeting at the Davis campus of the University of California in 
September of 1959. Following this conference, the Governor assigned 
the reorganization proposal to nine task forces and an executive com- 
mittee representative of the affected units of government. 

In December of the same year, the Governor's Committee on Organi- 
zation of State Government * issued its final report entitled ' ' The 
Agency Plan for California." The committee identified five glaring 
defects inherent in the existing structure : 

(a) The Governorship in California had been weakened by diffu- 
sion of authority. 

(b) Department directors and boards and commissions were unable 
to communicate directly with the Governor. 

1 The Governor's Committee on Reorganization of State Government was composed 
of all of the members, except one, of the original committee which had submitted 
the tentative reorganization proposal two months earlier. 

(45) 



46 ORGANIZATION OF THE EXECUTIVE BRANCH 

(c) Departments, boards, and commissions did not have adequate 
communication with each other. 

(d) The Governor lacked an effective means for the formulation 
and execution of unified, coordinated policies. 

(e) There was not enough high-level attention to program plan- 
ning and evaluation. 2 

THE AGENCY CONCEPT 

In order to overcome these deficiencies, the committee proposed the 
''Agency Plan," a structure that would place most of the departments, 
boards, and committees under one of eight agencies to provide the basic 
framework for the over-all organization. As nearly as possible, units 
were to be grouped logically according to function. At the head of each 
agency was an agency administrator who was to serve in the dual 
capacity of advisor to the Governor and administrator of one of the 
major functions of state government. In addition, the committee recom- 
mended that an executive department be created which would provide 
the Governor with highly qualified technical assistance in planning, 
budgeting and management. 

Such an organization, according to the report, would serve the fol- 
lowing purposes : 

1. Reduce the excessive array of separate organization units re- 
porting to the Governor. 

2. Give the Governor an improved organization structure for carry- 
ing out his general management responsibilities, particularly for 
executive planning and coordination. 

3. Improve management by establishing cohesive groups of activi- 
ties with strong staff and technical services. 

4. Retain the advantages of citizen participation in state govern- 
ment through the use of advisory boards and quasi-legislative 
and quasi- judicial bodies where appropriate, but minimize the 
administrative functions of such boards and commissions and 
locate them organizationally within the basic structure of the 
executive branch. 

5. Decentralize administrative service and control activities to ex- 
ecutive agencies insofar as possible to permit flexible and effi- 
cient performance under broad over-all policies established by 
the Governor and his principal officers. 

6. Bring all agencies into a closer relationship with the Governor 
so that he could more effectively exercise his executive power for 
which he is politically and legally responsible. 3 

Taken in its entirety, the proposed organization represented a tradi- 
tional approach to the solution of the problem of executive department 
structure. 4 While recognizing the necessity for the separation of gov- 
ernmental powers, it emphasized a strong and unified executive branch 
in which administrative authority and responsibility are focused in the 
chief executive. The grouping of government activities into departments 
based on function, the removal of administrative duties from the vari- 

2 Governor's Committee on Organization of State Government, The Agency Plan for 

California, December 1959, 3-6. 
*Ibid. 3 7-8. 
4 Bell, James R., and Earl L. Darrah, State Executive Reorganization, Bureau of 

Public Administration, University of California, Berkeley, February 1961, 61. 



ORGANIZATION OF THE EXECUTIVE BRANCH 47 

ous boards and commissions, and the coordination of administrative 
staff services, 5 were all designed to emphasize the authority of the 
Governor : 

. . . grouping, taken in this way, means that the individual depart- 
ments retain their separate identities and functions, but are 
brought together under an over-all agency for various purposes 
. . . Unless the agency is given by law the functions of the sub- 
ordinate organizations, it does not have the usual responsibilities 
of a governmental operating unit. It does not build roads, license 
vehicles or run prisons. These functions remain those of the consti- 
tuent departments. ' ' 6 

THE GOVERNOR'S 1961 MESSAGE 

Governor Brown called for the adoption of the agency plan in his 
message to the 1961 Legislature. The Governor's reorganization was 
based on the creation of eight agency groups, each responsible for its 
own internal coordination under one head who could report directly to 
the Governor: 

There is no intention of upsetting the internal structures of the 
departments in these initial steps. It may well be that such changes 
should come in some departments, boards or commissions, but only 
after the new agency groupings have been tested by experience. 
Our first task is to modernize and streamline administration so 
as to define lines of responsibility more clearly and to obtain better 
executive control over segments of the executive branch of govern- 
ment which now receive little direction. 

We can then proceed to better employment of the modern tools of 
administration such as performance and program budgeting, work 
standards, the optimum employment of electronic data processing 
equipment and more effective, more efficient record keeping. 7 

The Governor suggested that a gradual, rather than a drastic, ap- 
proach be adopted toward reorganization, arguing that pioneering 
should be done in "less sensitive areas." 8 Consequently, the Governor 
suggested that only four agencies be created at that time : 

(1) Youth and Adult Corrections Agency 

(2) Health and Welfare Agency 

(3) Agriculture and Resources Agency 

(4) Transportation Agency 

A small staff was suggested for each agency administrator until such 
time as experience developed a clearer idea of the agency's exact role. 

1961 LEGISLATURE 

Two bills were passed by the 1961 Legislature creating four agen- 
cies; 9 two of these agencies had been proposed in the original "Agency 

5 Ibid. 
°Ibid., 63. 

7 Statement of Governor Edmund G. Brown on "Reorganization of the State Govern- 

ment," transmitted to the California Legislature, February 13, 1961. 

8 Ibid. 

9 AB 159 3 (Winton), creating- the Health and Welfare Agency, Youth and Adult 

Corrections Agency, and the Resources Agency, and SB 699 (Collier), creating 
the Highway Transportation Agency. 



48 ORGANIZATION OF THE EXECUTIVE BRANCH 

Plan" report; one, the existing Transportation Agency, had been in- 
cluded as a result of legislative initiative; and the Kesources Agency, 
as finally created, failed to include a Department of Agriculture due to 
opposition, which had developed within the agricultural industry, on 
the basis that the industry would be downgraded by such a combina- 
tion. 10 

Subsequently, Governor Brown set up four additional, nonstatutory 
agencies by executive order : 

1. Public Safety Agency 

2. Employment Relations Agency 

3. Business and Commerce Agency 

4. Revenue and Management Agency 

In April 1962 the legal issue of the Governor's power to carry out 
these actions was raised by Insurance Commissioner F. Brinton McCon- 
nell, based on a contention that the " shadow" administrators had no 
official status or powers because the Governor had not acted officially, 
and that the Governor had neither the legislative authority nor the 
inherent power to take such action. 11 

In response, an Attorney General's Opinion of October 3, 1962, de- 
clared that the Governor does have such inherent authority, but that 
it extends only to ministerial functions, not to the delegation of the 
Governor 's discretionary powers : 

. . . the basic functions, duties, and responsibilities of departments, 
boards, and commissions are unchanged as a result of the reorgan- 
ization whether such department, board or commission is assigned 
to a particular agency by statute ... or by executive action. 
Where the department, board or commission is assigned to an 
agency by statute, . . . the agency administrator is not only the 
coordinator, but is also the liaison man between each such depart- 
ment, board or commission and the Governor; and he also is 
charged with the duty of reporting to the Governor on over-all 
policy . . . and also has general supervision over and is directly 
responsible to the Governor for the operations of the departments, 
boards and commissions within the agency ... It is impossible 
to delineate the scope of the term general supervision, but it is 
believed to embrace only that authority to supervise those activities 
of a department, board or commission which are purely admin- 
istrative in scope and not specifically conferred upon such depart- 
ment, board or commission by constitution or statute . . . 12 

According to the Attorney General, this is in contrast to the situation 
11 where a department, board, or commission is assigned to an agency 
by executive action, the agency administrator is merely a coordinator 
for all such departments, boards, and commissions." However, the 
agency administrator does not have the authority 

to annul, amend, revise, or modify any legal action of a depart- 
ment, board or commission any more so than the Governor himself 

10 Office of the Legislative Analyst, Some Observations on the Agency Concept in 

California State Government, September 6, 1966, 6. 

11 Brief of F. Brinton McConnell in opposition to the actions of the Governor. April 

5. 1962. 

12 J, Ops. Atty. Gen., 148. 



ORGANIZATION OF THE EXECUTIVE BRANCH 49 

does. Any supervisory powers the Governor possessed with respect 
to the various state department heads prior to the reorganization, 
whether by statute or executive action, were neither increased nor 
diminished by the reorganization. An executive reorganization 
which requires various department heads to coordinate the ac- 
tivities of their departments through a coordinator, as in the 
instant case, does not constitute a delegation of the Governor's 
supervisory power. 13 

Commenting on this, the Legislative Analyst wondered how a posi- 
tion can be created by executive order and not be an official position. 14 
In addition, he noted that it was 

. . . interesting . . . that a degree of institutionalization has 
since transpired within the structure of the nonstatutory agencies 
which is evidenced by such things as letterhead stationery, identifi- 
cation in the state telephone directory, identification in the 
State Administrative Manual, official use of the title "adminis- 
trator," and, in at least one instance, by a state official being addi- 
tionally designated as "Deputy Administrator, Revenue and Man- 
agement Agency" . . . 15 

"LITTLE HOOVER COMMISSION" EVALUATION 

The only formal evaluation of the "Agency Plan" in operation was 
undertaken by the Commission on California State Government Or- 
ganization and Economy (the "Little Hoover Commission") which 
was also established by the 1961 Legislature. The first report of the 
commission, based on an evaluation of testimony from over 90 expert 
witnesses includes 

the commission's observations on the "agency" concept of organ- 
izational structure, implemented in part by the Governor and the 
Legislature in 1961, together with recommendations for executive 
and legislative considerations in 1963. 16 

Much of the commission's evidence on the workings of the plan was 
derived from responses to a letter sent by its chairman, Eugene Lee, 
to all agency administrators. 17 

In presenting its findings, the commission stated the difficulty of 
evaluating the reorganization so soon after it was put into effect : 

The state reorganization program commenced in 1961 is in mid- 
stream, and an evaluation of progress in such a case is both specu- 
lative and subjective. Nevertheless, judgments must be made and 
decisions reached as to whether to turn back, to modify or to con- 
tinue as originally proposed. The commission does not pretend 
that it has found the answers. 18 

The commission concluded that the initial action taken by the Gov- 
ernor and the Legislature had met a pressing need for reorganization; 

15 Ibid. 

14 Legislative Analyst, September 6, 1966, 9. 

15 Ibid. 

16 Commission on California State Government Organization and Economy, Findings 

and Recommendations Concerning Reorganisation of the Executive Branch of 
California State Government, December 31, 1962. Also, Findings, and Recom- 
mendations Concerning Organization for Central Staff Services, March 11, 1963, 5. 

17 Ibid., 22-23. 
w Ibid., 9. 



50 ORGANIZATION OF THE EXECUTIVE BRANCH 

it summarized the major accomplishments of the reorganization after 
one year of operation : 

(1) Made the Governor's responsibility as chief executive more 
manageable and more effective ; 

(2) Filled a needed, but previously missing, level of political-ad- 
ministrative leadership created by the size and complexity of 
California state government; 

(3) Provided a potentially greater opportunity for more effective 
legislative review and improved communication with the exec- 
utive branch ; 

(4) Produced specific and tangible benefits of program coordina- 
tion among related departments, the elimination of overlap- 
ping services, and more effective utilization of manpower, 
space, and financial resources. 19 

Finally, the commission recommended that steps be taken by the Gov- 
ernor and the Legislature in 1963 to strengthen and carry forward 
this reorganization program : 

(1) Extension of statutory status to the Business and Commerce 
Agency; 

(2) Establishment of statutory agency administrators on a full- 
time basis without concurrent responsibility for serving as 
departmental directors ; 

(3) Provision of a minimal staff (four-six professional positions) 
to assist each statutory administrator ; 

(4) Decentralization of such management and staff controls as 
can be exercised more effectively at the agency and depart- 
mental level; 

(5) Continuation of studies evaluating the inclusion within the 
agency concept of all operating functions of state administra- 
tion responsible to the Governor. As a general rule, all such 
executive departments should be integrated in some fashion 
within the agency framework. 20 

THE GOVERNOR'S 1963 MESSAGE 

In his message to the 1963 Legislature, the Governor continued to 
stress reorganization as a series of gradual steps. He indicated that the 
partial plan in operation thus far was fulfilling the high hopes held 
for it, and that a large saving had been derived from the existence of 
the agency administrators. The Governor submitted reorganization 
proposals : 

(1) Creation of Department of General Services, including the 
Division of Architecture ; 

(2) Remove the office of State Fire Marshal from the Public Safety 
Agency and place it in the General Services Department; 

(3) Statutory status for the Business and Commerce Agency; 

(4) Consolidate gains already made in existing statutory agencies: 

19 Ibid., 13. 

*>Ibid., 7. 



ORGANIZATION OF THE EXECUTIVE BRANCH 51 

(a) Establish new Department of Rehabilitation (consisting 
of a number of units then in the Department of Educa- 
tion) in the Health and Welfare Agency; 

(b) Place the Citizens' Advisory Committee on Aging in the 
same agency ; 

(c) Place the Office of Coordinator of Atomic Energy Devel- 
opment and Radiation Protection in the Department of 
Public Health ; 

(d) Legislation for Highway Transportation Agency, to (1) 
rename it Highways and Transportation; (2) change name 
of Department of Public Works to Department of High- 
ways; (3) place the State Aeronautics Board and the 
Division of Aeronautics as integral parts of the agency 
rather than as a part of Public Works; 

(e) Give the Board of Corrections separate status within the 
Youth and Adult Corrections Agency. 

(5) Give the Governor authority to develop reorganization plans 
along the following lines: 

(a) Transfer of any unit of government, or its functions, to 
the jurisdiction and control of another; 

(b) Consolidation or integration of the functions within a 
unit; 

(c) Consolidation or integration of the functions of various 
units; 

(d) Abolition of part or all of the functions of any jurisdic- 
tion; 

(e) Abolition of any unit whose functions have been found 
obsolete ; 

(f ) Authorization for an officer to delegate any of his func- 
tions. 21 

THE ROLE OF THE AGENCY ADMINISTRATOR 

The function of the agency administrator, as described by the 1959 
report of the Governor's Committee on Organization of State Govern- 
ment, was to act as an extension of the Governor's personality: 

Each agency is headed by an administrator who serves as an out- 
post of the Governor in the broad area of state government, func- 
tioning as both his policy and managerial representative and ad- 
visor. He is responsible to the Governor for the performance of 
the departments within the agency. He is concerned primarily 
with major policy and program matters and does not impair his 
own usefulness or that of department directors by taking over 
activities that can be done as well or better at the department level. 
General administration of the agency's budget is one of his basic 
responsibilities. 22 

As the committee noted, the general administration of the agency's 
budget was to be one of the administrator's chief duties. In this con- 

21 "Message to the California Legislature" by Governor Edmund G. Brown, January 
5, 19 63. Recommendations one and two were adopted along- with portions of 
four, but the extension of the agency concept to include a statutory Business 
and Commerce Agency was rejected as was the executive initiated reorganization 
proposal. 

- The Agency Plan for California, 11. 



52 ORGANIZATION OF THE EXECUTIVE BRANCH 

text, the submission to the Legislature of the 1966-67 Budget raised 
some further questions about the agency administrator's role. One of 
the pertinent items involves the housing of federally funded programs 
(with their staff or board) in the agency administrator's office, without 
their attachment to any other unit in the agency. 23 

It is quite likely that because of the nature of the agencies, they may 
assimilate more and more responsibility for administering programs, 
notwithstanding the statutory definition of purpose adopted in 1961. 
This could well lead to the eventual conversion of the "agency" into 
large, integrated "departments." Due to this development during the 
five years of operation under the agency plan, it appears quite appro- 
priate at this time to reevaluate the organizational needs of the state 
and whether they are being met through the agency concept. 

In fact, the Legislature has already taken some actions which have 
specifically modified the statutory authority of the agency administra- 
tors. In 1963, the Administrator of Highway Transportation was given 
the authority to "issue such orders as he deems appropriate to exercise 
any power or jurisdiction, or to assume or discharge any responsibility 
to carry out or effect any of the purposes vested by law in a department 
in the agency. ' ' 24 While this authority may be tempered in practice by 
the exercise of a general accepted pattern of operation by the agency 
administrator, it is clear that this is a statutory authorization for the 
exercise of those powers of a department head which were specifically 
denied to the office of the agency administrator under the original 
statute. 

During the 1965 Second Extraordinary Session, another departure 
was made when the Legislature delegated to the Health and Welfare 

23 Analysis of the Budget Bill, 1966-1967, 1966 Regular Session, Report of the Legis- 
lative Analyst to the Joint Legislative Budget Committee, 494ff and 712ff, out- 
lining two of the specific instances noted by the Legislative Analyst : 

(a) In the Health and Welfare Agency: Medicare 

Chapter 4, Statutes of 1965, Second Extraordinary Session, also made the 
administrator responsible for the administration of the state's new health 
care program, effecting a basic change in the statutory agency administrator 
concept. Details concerning the administrative staff for this function are 
not available at the present time, but will be submitted to the Legislature 
in a separate addendum to the budget . . . requesting one additional position 
to assist in handling the increasing administrative responsibilities in the 
agency. 

This budget does not include $546,000 appropriated to this agency . . . for 
the purpose of developing and administering the state's new health care 
program. 

Approximately six positions are located in this agency at the present time 
for this purpose. There are also approximately 95 positions temporarily 
located in mental hospitals, paid for out of this appropriation, for the pur- 
pose of qualifying mental patients for welfare assistance under this new 
legislation. There will be permanent staff located in the agency for the 
purpose of implementing this new medical program and that staff along 
with the $54 6,000 appropriated for administration should be accounted for 
in this budget in the future regardless of the final decision with regard to 
budgeting for the medical care program itself. 

(b) In the Resources Agency: A bevy of grants with related staffs, and a 
commission. 

When the Resources Agency was established, the Legislature did not con- 
template a new office to administer action programs. Thus, Government Code 
Section 12850 states: "The administrator of each agency has the power of 
general supervision over, and is directly responsible to the Governor for, 
the operations of each department, office, and unit within the agency." 
Section 12851 states: "Each administrator shall develop and report to the 
Governor on legislative, budgetary, and administrative programs to accom- 
plish comprehensive, long-range, coordinated planning and policy formula- 
tion in matters of public interest related to his agencies, employ staff and 
consultants, and appoint advisory and technical committees to assist in 
the work." 
s* 63 Stat. 136$. 



ORGANIZATION OF THE EXECUTIVE BRANCH 53 

Agency Administrator the powers and duties conferred by law upon 
the Director of the Department of Social Welfare to administer the 
health care programs. 25 

In a report submitted to this committee by Legislative Analyst A. 
Alan Post, these changes in the role of the agency administrator are 
noted and the following conclusion is drawn : 

... it is evident that the original concept of the statutory agency 
administrators as instruments of communication between the Gov- 
ernor and the departments is being changed both by statutory 
authorization and by informal means. There is a growing tendency 
for agency administrators to concern themselves with detailed 
programming and budgeting and, to the extent that such inte- 
grated planning is implemented, it raises questions as to statutory 
authority of individual departments over functions which overlap 
department lines under the coordinated planning of the agency 
administrator. 

It seems inevitable, therefore, and necessary that modifications in 
departmental authority will be made to implement more fully the 
agency concept of coordinated planning and operations. It likewise 
seems desirable that because of the complexities requiring coordi- 
nation and planning, any modifications in the statutory structure 
of the agencies should be based on organization studies in depth. 26 

SUMMARY 

With sufficient foresight the changes which have taken place in the 
agency concept during its six years of operation should have been ap- 
parent to the proponents of the 1961 reorganization. They should have 
been foreseen as the logical result of inserting the agency administrator 
at a level in the administrative structure which requires him to per- 
form two greatly different and often competing roles. 

The agency administrator is placed in a position to serve as coordina- 
tor of related programs among departments within his agency on the 
one hand, with every likelihood that line authority will develop as 
problems which exceed the bounds of the existing department structure 
demand the kind of administrative coordination that is normally exer- 
cised by department heads. 

At the same time the administrator is supposed to serve as the Gov- 
ernor 's source of communication to the departments to assist the Gover- 
nor in performing the broad policy responsibilities of chief executive. 
To the extent that the administrator becomes immersed in the day-to- 
day administrative responsibilities and becomes an advocate of depart- 
ment programs, his ability to serve as the Governor 's ' ' outpost ' ' to the 
departments is substantially diminished. 

It is possible to agree with the ' ' Little Hoover Commission 's ' ' evalua- 
tion that agency administrators are not providing "just another level 
of government but rather a missing level, ' ' 27 but to that conclusion 
must be added the observation that the conflicting nature of the respon- 
sibilities suggests that the "missing level" of administration that the 

»1965 2nd Ex. Sess., Chapter 4. 

26 Legislative Analyst, Some Observations on the Agency Concept in California State 

Government (September 6, 1966), 13. 

27 Findings and Recommendations Concerning Reorganization of the Executive Branch 

of California State Government, 13. 



54 ORGANIZATION OF THE EXECUTIVE BRANCH 

statutory agency administrator has been asked to fill may, in fact, con- 
sist of two separate and incompatible roles. 

The conclusion drawn by this committee is that the agency concept 
deserves reevaluation to determine whether those changes which have 
occurred, by statutory enactment and informal means, demonstrate the 
need for formal reorganization of certain of the agencies into "full 
blown ' ' departments. Where there is a demonstrated need for coordina- 
tion of programs which overlap existing departments by an administra- 
tor exercising line authority, this should be undertaken to avoid 
duplication and inefficiency resulting from similar administrative 
staffing at both the department and agency level. 

THE EXECUTIVE OFFICE PROPOSAL 

The second major function of the agency administrator as an "out- 
post" of the Governor to the departments perhaps suggests deficiencies 
in the structure of the office of the Governor itself, which deserve 
serious attention. In this connection, it is noteworthy that proponents 
of the "agency plan" also called for substantial changes in the Gov- 
ernor's office to pattern it after the executive office of the President. 
"While discussion of this proposal paralleled establishment of the agency 
plan, no concrete legislative proposals were advanced. 

No man, no matter how energetic or brilliant, can perform the 
administrative role of the chief executive if he relies purely on his own 
faculties. In order to insure that the administration of the government 
is performed adequately, the chief executive must have the necessary 
staff assistance. Moreover, in order to insure that the integrity and the 
unity of the executive office are maintained, this staff must be person- 
ally loyal and under his direct supervision. 

The natural growth of the federal government plus the impact of the 
depression upon the governmental machinery, forced the issue of admin- 
istrative reform of the office of the President in the 1930 's. 

The 1937 report of the President's Committee on Administrative 
Management called particular attention to the need to reform the 
presidential staffing : 

The President needs help. His immediate staff is entirely inade- 
quate. He should be given a small number of executive assistants 
who would be his direct aides in dealing with the managerial 
agencies and administrative departments of government. These 
assistants would be in addition to his present aides who deal with 
the public, with the Congress, and with the press and radio . . . 
They would remain in the background, issue no orders, make no 
decisions, emit no public statements. Men for these positions should 
be carefully chosen by the President from within and without the 
government . . . They should be possessed of high competence, 
great physical vigor, and a passion for anonymity. They should 
be installed in the White House itself, directly accessible to the 
President. 28 

This was the genesis of the Executive Office of the President. Congress 
acted almost immediately to implement the organizational recommenda- 
tions of the committee, and President Franklin D. Roosevelt, acting 

28 Report of the President's Committee on Administrative Management,, 1937, 5. 



ORGANIZATION OP THE EXECUTIVE BRANCH 55 

under his reorganization powers, for the first time gave official counte- 
nance to the Executive Office of the President. 29 

THE 1961 REORGANIZATION 

The Governor's Committee on Organization of State Government 
recommended a similar proposal for California when they called for 
the creation of an executive department "directly under the Govern- 
nor. ' ' 30 Referring to the federal model, the committee observed : 

It is well to recall that this report is concerned with reorganization 
of the unique California state government. There are few prece- 
dents on which to rely ; no other state has so large a budget ; Cali- 
fornia has long had and effectively used organizational devices 
which smaller, less experienced states are now only trying. It may 
well be asked, "Is our state government at that stage of develop- 
ment which characterized the federal government in 1937?" That 
year was the threshold for changes which have . . . improved the 
operation of the federal executive branch and in no small measure 
lightened the potential burden of the President. 31 

The development of the Governor's office in California has been in- 
fluenced by three significant developments : 

1921 — The formal creation of the Department of Finance. 

1934 — The establishment of the State Personnel Board and present 

civil service system. 
1943 — The first steps in the formal organization of the Governor's 
personal staff under Governor Earl Warren. 32 

The Governor 's committee proposed a strengthening of the Governor 's 
office by the creation of an executive department headed by an execu- 
tive officer. This new department, directly responsible to the Governor, 
was to be staffed by career specialists in management, budgeting and 
planning and would provide for 

. . . continuity in the management of state government and give 
the Governor the help he needs to do the planning, budgeting, 
organizing, evaluating and coordinating that are all part of the 
complex job of managing state government. 33 

In addition, recognizing the nonadministrative functions of the Gov- 
ernor (his ceremonial and political duties), the committee proposed to 
retain his immediate staff of secretaries under the over-all supervision 
of an executive secretary. 34 

The following units were to be established within the executive de- 
partment : 

1. Budget Unit 

2. Management and Organization Unit 

3. Program Unit 

4. Physical Planning Unit 

29 Reorganization Plan No. I of April 25, 1939. 

30 The Agency Plan for California, 13. 
ai Bell and Darrah, 93. 

**Ibid., 94. 

83 The Agency Plan for California, 13. 

^Ibid. 



56 ORGANIZATION OF THE EXECUTIVE BRANCH 

5. Economic Development Unit 

6. Consumer Counsel 

7. Atomic Coordinator 

The intended effect was to more sharply define the role of the Gov- 
ernor 's office as the focal point for the management of state govern- 
ment. 35 As far as the Governor 's office was concerned, the emphasis was 
to be on the coordinative and advisory functions of the staff: "It is 
concerned with improving the management of state government, but it 
does not itself do the managing. ' ' 36 

The principal objections raised to the committee's proposed reorga- 
nization of the Governor's office centered on the fact that acceptance 
of the recommendations would result in the abolition of the Department 
of Finance. It was over this issue that Bert W. Levit, chairman of the 
Governor's committee and a former director of the Department of 
Finance, dissented from the committee report : 

At present, while the Director of Finance is directly responsible 
to the Governor, is appointed by him, and is subject to removal at 
any time, the director and finance department staff are effectively 
insulated from constant political pressures and manifestations by 
members of the personal staff of the Governor. 37 

The other members of the committee responded to the criticism and 
reasserted their position that the functions performed by the Depart- 
ment of Finance should be reassigned in the following manner : 

(a) Top policy-management to the executive department of the 
Governor ; 

(b) Housekeeping to the new Department of General Services; 
and 

(c) Continue budget and fiscal controls decentralized to agencies. 38 

This approach was needed in the committee's view to insure mainte- 
nance of executive control : 

Top policy decisions should be made in the Governor's office. 
Through the executive department the Governor will have adequate 
control of fiscal policies and the execution of programs, and in all 
ways will provide fiscal and management leadership. He will have 
. . . the top personnel of the existing Department of Finance to 
help him develop budget expenditure guide lines and to judge 
administrative performance in the departments and agencies. 39 

The Governor's 1961 Reorganization Message did not include a dis- 
solution of the Department of Finance or reassignment of functions. 
The following year a further postponement was suggested by the ' ' Lit- 

35 Ibid. 

86 In this connection, the committee recommended that the executive department 
should not include functions that jare "operational or ministerial." With 
specific reference to the Economic Development Unit, the Consumer Counsel, 
and the Atomic Energy Coordinator, the committee suggested these functions 
should remain in the executive department only so long as they are essentially 
developmental and coordinative in nature. 

37 Letter from Bert W. Levit to Hon. Edmund G. Brown, December 9, 1959, pub- 

lished in The Agency Plan for California, 63, 64. 

38 Letter from the majority of the members of the Committee on Organization of 

State Government (excluding Bert W. Levit) to Hon. Edmund G. Brown, De- 
cember 15, 1959, published in the Agency Plan for California, 65, 66. 

39 Ibid. 



ORGANIZATION OF THE EXECUTIVE BRANCH 57 

tie Hoover Commission, ' ' and accepted by the Governor, that action on 
the executive office proposal await an evaluation of the effectiveness of 
the proposed Department of General Services — a commission-endorsed 
reorganization which was favorably received by the 1963 Legislature. 40 
The establishment of the Department of General Services, and the 
transfer to the new department of the housekeeping duties formerly 
the responsibility of the Director of Finance means that the establish- 
ment of an integrated executive office, as it has been proposed, could 
be undertaken with fewer reassignments of finance department func- 
tions. 

No serious dialogue has taken place since the 1963 reorganization 
made this change in the operations of the Department of Finance and 
no additional impediment to the executive office proposal has been ad- 
vanced to suggest the necessity for further delays. 

SUMMARY 

This committee review of the background of proposed reorganizations 
of the Governor's office has not been undertaken to bolster a recom- 
mendation to the Legislature. Rather, it is intended to call attention 
to the fact that it has been supported in the recent past as a means of 
improving the Governor's ability to coordinate programs administered 
by agencies over which he has direct responsibility. It is possible that 
an integrated Governor's office would permit a fuller realization of 
those objectives of the Agency Plan which were associated with im- 
proved communication of the Governor's policies to the departments. 

This committee supports a full exploration of the potential improve- 
ment which might result from the establishment of an executive office 
in California. None of the previous studies have reviewed in any depth 
the specific statutory functions performed by the Director of Finance 
and the anticipated result of the transfer of these functions. One of the 
advantages which accrues to the existing structure in the way in which 
it fixes responsibility for fiscal and policy management in one individual 
and the potential diffusion of this responsibility could well have a detri- 
mental effect on administration. At the other extreme, the disollution of 
the Department of Finance in favor of an Executive Office could mean 
little more than a name change of questionable value. 

While it would seem to matter little whether that name change is 
made, if, in fact, all of the functions continue to be performed by an 
executive officer rather than a director of finance, the ramifications 
associated with this proposed reorganization could well have far-reach- 
ing effects depending not only on the manner in which the executive 
office is formally structured by law but also the informal means which 
may be utilized to exercise authority. The committee would, therefore, 
strongly urge a critical examination of the operation of the Governor's 
office and the desirability of implementing by legislative action any 
such reorganization which would serve to assist the Governor in the 
performance of his constitutional duties. 

40 Commission on California State Government Organization and Economy, Findings 
and Recommendations Concerning Organization for Central Staff Services, March 
11, 1963, 2. 



APPENDICES 



APPENDIX A 
THE EXECUTIVE OFFICE OF THE PRESIDENT 

The concept of an executive office originated, as did the idea of exec- 
utive initiated reorganization, in the desire to give the chief executive 
an administrative structure which would enable him to fulfill his con- 
stitutional responsibilities. 

The executive office was conceived of as the central organ for the 
provision of staff services to the President. The units which comprise 
the office have undergone a number of changes since 1939, reflecting 
the growth of the administrative structure. Currently, the Executive 
Office of the President is composed of the following units: 

1. The White House Office (1939) 

2. The Bureau of the Budget (1921) 

3. The National Security Council (1947) 

4. The Council of Economic Advisors (1946) 

5. The Office of Emergency Planning (1962) 

6. The National Aeronautics and Space Council (1958) 

7. The Office of Science and Technology (1962) 

Obviously, all these units are of critical importance in the determina- 
tion of policy. The first two, however, the White House Office and the 
Bureau of the Budget, represent probably the two most decisive voices 
in overall policy formulation. 

The White House Office was a direct response to the recommendations 
of the 1937 report of the President's Committee on Administrative 
Management, and, in the executive order which created it, was described 
as an office "in general, to serve the President in an intimate capacity 
in the performance of the many detailed activities incident to his im- 
mediate office." 41 The chief staff assistance is performed, currently, by 
a special counsel to the President, a press secretary, a number of special 
assistants to the President for designated areas of concern, and aides 
which represent the various branches of the military. These represent 
the inner core of the presidential "family." 

The Bureau of the Budget is the largest single unit in the executive 
office. Its role within that structure is defined by Executive Order 
8248 of 1939 : 

— (a) To assist the President in the preparation of the budget 
and the formation of the fiscal program of the government. 

(b) To supervise and control administration of the budget. 

(c) To conduct research in the development of improved plans 
of administrative management, and to advise the executive depart- 
ments and agencies of the government with respect to improved 
administrative organization and practice. 

(d) To aid the President to bring about more efficient and 
economical conduct of government service. 

(e) To assist the President by clearing and coordinating depart- 
mental advice on proposed legislation and by making recommenda- 

a Executive Order 8248 of 1939. 

(61) 



62 ORGANIZATION OF THE EXECUTIVE BRANCH 

tions as to presidential action on legislative enactments, in ac- 
cordance with past practice. 

(f) To assist in the consideration and clearance and, where 
necessary, in the preparation of proposed executive orders and 
proclamations, in accordance with the provisions of Executive 
Order No. 7298 of February 18, 1936. 

(g) To plan and promote the improvement, development, and 
coordination of federal and other statistical services. 

(h) To keep the President informed of the progress of activities 
by agencies of the government with respect to work proposed, work 
actually initiated, and work completed, together with the relative 
timing of work between the several agencies of the government; 
all to the end that the work programs of the several agencies of 
the executive branch of the government may be coordinated and 
that the moneys appropriated by the Congress may be expended 
in the most economical manner possible with the least possible 
overlapping and duplication of effort . . , 42 

The objectives which gave rise to the creation of the executive office, 
plus the necessity of maintaining a unified executive office, made it im- 
perative that the office be developed along the lines that it has : 

While the number of staff assistants and agencies in the executive 
office was increasing, their functions were also evolving — from 
handling records, to supplying information, to reviewing and an- 
alyzing documents (and situations), to advising, to negotiating, and 
to following up decisions or actions. A full-blown staff has de- 
veloped. 43 

The effect "is to cause the office of chief executive in its actual oper- 
ations to reflect the functioning of many minds. ' ' 44 

42 Ibid. 

43 The Brookings Institution, "The Formulation and Administration of United States 

Foreign Policy," United States Foreign Policy: Compilation of Studies, Number 
9, Senate Committee on Foreign Relations 86th Cong., 2nd Sess. (Washington, 
D.C., Government Printing Office, 1960), Vol. 2, 844. 
* 4 Kallenbach, 444. 



APPENDIX B 
THE OFFICE OF GOVERNOR IN CALIFORNIA 

The same considerations which gave rise to the creation of the execu- 
tive office of the President are relevant to an examination of the struc- 
ture of California's chief executive. 

While there is currently not an integrated executive office, the office 
has developed over the years. Its present structure reflects changes 
proposed during the last effort to reorganize the executive branch, an 
attempt which took place in 1961. 

At that time, it had been 30 years since the last reorganization of 
the executive branch and the contention was made that the problems 
which confronted the California Governor were analogous to those 
faced by the President during the 1930 's. Consequently, in 1959, Gov- 
ernor Brown appointed a Committee on the Organization of State 
Government. 

The committee proposed to strengthen the Governor's office by the 
creation, directly under the Governor, of an executive department 
headed by an executive officer. Within the executive department were 
established the following units : 

1. Budget unit 

2. Management and organization unit 

3. Program unit 

4. Physical planning unit 

5. Economic development unit 

6. Consumer Counsel 

7. Atomic Coordinator 

The functions of the units, according to the committee, are outlined in 
the excerpt reproduced below from the committee report. 

Budget Unit 

The key to successful application of the agency concept and to 
best use of the executive department is placement of management 
responsibility, and the necessary controls, more clearly in the Gov- 
ernor and his key program officials, the administrators. One of the 
most important and difficult areas is that of budgetary control. 
The best way to explain the administration of this control is to 
describe briefly the committee 's thinking with respect to budgeting. 

General budget policy is determined by the Governor with con- 
sultation and advice from his cabinet, one member of which is the 
executive officer. The budget unit will be of considerable assistance 
by preparing revenue estimates, policy objectives, and procedural 
instructions. When these have been considered by the cabinet, and 
the Governor has made the necessary decisions, the budget unit 
issues instructions reflecting these decisions. Each administrator 
then prepares the program budget for his agency, not a detailed 
budget but one based on a broad definition of functions and activ- 
ities. It is the administrator's proposal as to what should happen 

(63) 



64 ORGANIZATION OF THE EXECUTIVE BRANCH 

to those programs for which he is responsible. The budget unit 
conducts hearings to review these proposals, with major decisions 
referred to the Governor. When these decisions have been made 
and overall dollar limits assigned, the agency administrator is 
responsible for preparing his detailed budget within these deci- 
sions and limits. This detailed budget focuses attention on the 
purposes for which money is appropriated. These detailed budgets 
are reviewed in the executive department to see that they are 
within previous understandings and then collated into a single 
Governor's Budget. While the executive department makes a gen- 
eral presentation of the Governor 's Budget to the Legislature, each 
agency is responsible for explaining its program. After the budget 
bill has been enacted into law, administration of the budget is a 
basic responsibility of the administrator; however, major modifi- 
cations require approval of the budget unit. 

Management and Organization Unit 

The purpose of this unit is to perform the necessary research 
upon which to base sound policies and practices for the manage- 
ment and organization of state government. It serves as a man- 
agement consultant to the Governor and to agency administrators. 
In so doing it conducts studies of major management problems and 
recommends solutions and provides leadership and coordination 
for similar units in the agencies. As a major part of its function, 
the management and organization unit develops standards and 
guides in such important management areas as organization, ac- 
counting systems, internal auditing, and records management, and 
provides personnel management liaison with the State Personnel 
Board. It guides and encourages the development of workload 
standards, work measurement practices, improved procedures, and 
staffing ratios. 

This unit also has responsibility for establishment of rules and 
regulations for the reimbursement of claims against the state, and 
for the administration of the employee suggestion system and work 
improvement programs. It provides leadership in the development 
of improved administrative techniques and operational procedures. 

In all of its areas of responsibility it tries to have the manage- 
ment research work done at agency or department level, perform- 
ing itself only those tasks which are of a statewide nature or 
involve more than one agency or, for other reasons, cannot be 
adequately performed at operating levels. 

Program Unit 

This unit assures the development, coordination, and evaluation 
of operational programs. It has responsibility for continuous re- 
view of current programs and for the assessment of new or pro- 
posed programs in terms of social and economic effect. It is at this 
point that a balance will be maintained among such diversified 
programs as the conservation of natural resources, treatment of 
the mentally ill, and the construction of major public works. 

The work of the unit will require close coordination with pro- 
gram agencies and with fiscal, management, and physical planning 
units. In common with other units in the executive department, 



ORGANIZATION OF THE EXECUTIVE BRANCH 65 

the program unit will provide leadership and coordination of pro- 
gram planning at the agency level. 

Physical Planing Unit 

This office acts as the principal staff agency in matters concern- 
ing the physical growth and development of the state and its 
resources and is responsible for accepting and allocating or ex- 
pending grants and gifts for the financing of state, regional, and 
local planning. 

Two primary features of this broad program are local planning 
assistance and the preparation and maintenance of a comprehen- 
sive, long-range, general plan for the physical growth and develop- 
ment of the state. The latter is accomplished in cooperation with 
state, local, regional, and federal agencies and utilizes the physical 
development plans prepared by such agencies. 

This office assists the budget division in the preparation of the 
capital improvement sections of the annual budget. It is a central 
repository for state, federal, regional, and local research studies, 
plans, and project proposals relating to existing and future physi- 
cal growth and development of the state and to the conservation, 
use, and development of its resources. 

Economic Development Unit 

The function of this unit, as defined by the Legislature, is to 
provide the leadership and coordination of public and private 
effort necessary to the full realization of the economic potential 
of the state. In discharge of this function the unit serves as a 
central clearinghouse for economic information compiled or de- 
veloped by other public and private agencies, makes such infor- 
mation available to local organizations and industrialists, assists 
local communities and organizations in assessing their economic 
potential, and actively promotes the development and expansion 
of business and industry within the state. 

The chief of the unit serves as the Governor's principal staff 
advisor on economic matters and as an ex officio member of the 
Governor's Business Advisory Council. 

Consumer Counsel 

The Consumer Counsel is responsible for advising the Governor 
on all matters affecting the people of the state as consumers and 
for recommending to the Governor and the Legislature the enact- 
ment of legislation necessary to protect and promote the interests 
of the people as consumers. In carrying out his functions, the 
Consumer Counsel may appear before government commissions, 
departments, and agencies on behalf of consumers' interests, make 
such studies and investigations as appear appropriate, and issue 
reports to the people. 

Atomic Coordinator 

The Atomic Coordinator is responsible for advising the Governor 
with respect to atomic development within the state and coordi- 
nates the activities of the state relating to atomic energy and other 

3— L-418 



66 ORGANIZATION OF THE EXECUTIVE BRANCH 

forms of radiation. This involves cooperation with other states and 
with the federal government. 

The Atomic Coordinator also serves as the principal member 
of the Governor 's Committee on Atomic Activities. 45 

The overall effect was to more sharply define the role of the Gov- 
ernor's office as the focal point for the management of state gov- 
ernment. 46 

This is one approach to organization of the executive office. It is to 
be contrasted with the existing structure under which many of the 
responsibilities which are to be vested directly in the Governor's office, 
other than the personal staff, have been assigned by law to the Depart- 
ment of Finance. 

ACTIVITIES OF THE DEPARTMENT OF FINANCE 

The Department of Finance has statutory responsibility for all mat- 
ters concerning the financial and business policies of the state (Section 
13070, Government Code). Under this authority, the director is 
responsible for: 

Financial planning and economic forecasting. 

Formulation through the executive budget of the state's annual 
operating program. 

Development of an adequate revenue structure and necessary use 
of bonded debt to meet the expenditure obligations of state gov- 
ernment. 

Control of fiscal operations through program review, budgetary 
restraints, and internal audits to conserve the fiscal integrity of the 
state. 

Coordinating and stimulating the development of new programs 
and operational systems to meet public needs within the fiscal 
ability of the state, and encouraging more efficient and economical 
government operations and the obsolescing of unproductive pro- 
grams to conserve state funds. 

Coordinating of physical and economic planning at all levels of 
government in California. 

Managing and developing the public lands of the state. 

In the administration of his fiscal and management responsibilitie 
the director is necessarily an active member of 28 boards and commis 
sions. 

To accomplish its primary role of seeing that the Governor's pro- 
grams and policies are put into effect in the most efficient and economi- 
cal manner, the Department of Finance is organized into eight separate 
units : 

1. The budget division prepares the annual budget for presenta- 
tion to the Legislature. After budget enactment, this division 
maintains continuous surveillance over the operations of state 
agencies to assure that programs are conducted in accordance 
with legislative and executive intent. 

45 Governor's Committee on Organization of State Government, The Agency Plan 

for California, December 1959, 15-17. 
« Ibid., 14. 



> 



ORGANIZATION OF THE EXECUTIVE BRANCH 67 

2. The audits division conducts a postaudit of all state agencies 
to discover and report unauthorized, illegal or irregular expendi- 
tures, or unsound financial practices, and make sure state agen- 
cies are faithfully discharging their responsibilities. 

3. The program and policy evaluates state programs and policies 
in order to eliminate obsolete programs and develop new pro- 
grams to meet emerging public needs. This office also assists 
the Governor's legislative secretary in the preparation of the 
Governor's legislative program and serves as a special con- 
sultant staff to the Governor's office, the Director of Finance, 
the cabinet, and the agency administrators. 

4. The special assistant to the director for systems and ADP : Ad- 
vises the director on the status of systems studies proposed and 
under contract; develops policy guidance on requirements for 
management information and control systems; represents the 
Director of Finance in formulation of policies and plans in- 
volving other states, federal, and local jurisdictions ; and serves 
as executive secretary to the Governor's Automatic Data Proc- 
essing Advisory Committee. 

5. The Office of Planning is responsible for preparation and main- 
tenance of a comprehensive state development plan, and the 
coordination of public works programs undertaken by the state 
with federal and local agencies. This office also provides plan- 
ning assistance to local and other public agencies. 

6. The Economic Development Agency provides leadership and 
coordination of public and private efforts to promote industrial 
and commercial expansion in California. To this end, the agency 
studies business conditions and provides an information service 
to prospective businesses and industries which may be con- 
sidering locations within the state. 

7. The State Lands Division administers approximately 3,500,000 
acres of public lands in accordance with policies established by 
the State Lands Commission. This activity includes leasing these 
lands for oil, gas, and mineral exploitation, which provides a 
major source of state revenue. 

8. The department also maintains an office in Washington, D.C., 
to represent the state 's interests before the federal government. 47 



7 The above material on the Department of Finance is derived from a memorandum 
dated December 21, 1966, prepared by the department's program and policy 
office at the request of the committee. 



. DEPARTMENT OF REVENUE 



Two years ago this committee reported to the 1965 Legislature on the 
need for a Department of Revenue with responsibility for tax collection 
| functions currently divided among the State Controller, the Board of 
Equalization and the Franchise Tax Board. 48 

This proposal did not originate with the committee. "For more than 
35 years legislative committees and special commissions have consist- 
ently recommended unification of revenue collection ' ' 49 and legislation 
to effect those recommendations has been unsuccessfully placed before 
the Legislature with unfailing regularity. 

The Revenue Department which was envisioned by the committee in 
the 1965 report did not include all tax collection functions. No change 
was recommended in the constitutional responsibility of the Board of 
Equalization for equalizing county assessment levels and valuation of 
public utility property for local tax purposes. There was also no change 
recommended in the Controller's responsibility for supervision of de- 
linquent and tax-deeded properties. 50 

Also excluded were the tax collecting functions of the Department of 
Motor Vehicles, the Department of Employment and the Horse Racing 
Board in the proposed department. The administration of some taxes, 
the committee stated, was so ' ' closely integrated with other administra- 
tive functions as to make their consolidation of questionable value." 

48 Assembly Committee on Government Organization, California's Tax Administration: 
The Need for a Central Revenue Department, January 1965. The committee re- 
port contains a brief review of the history and development of California's tax 
administration, a summary of the organization of the existing structure, a sur- 
vey of developments in other states, a review of the findings of previous studies 
and the committee's arguments in support of revenue consolidation. 

*IMd, 9. 

60 Ibid, 45. 

(71) 



72 ORGANIZATION OF THE EXECUTIVE BRANCH 

Included in this category, along with the three units mentioned above, 
was the "revenue collected by virtually every agency through issuing 
licenses or charging fees. ' ' 51 

The distribution of revenue-collecting functions among several agen- 1 
cies reflects the product of an administrative structure that developed i 
in response to specific fiscal crises. The 1965 committee report concluded \\ 
that significant economies would result from consolidation because the 
present structure "has perpetrated inefficient and uneconomical use of 
personnel and facilities. ' ' 52 

Without exception, every state official with major responsibilities for 
tax administration testified that substantial savings would be realized 
through unification of most tax collection functions. 

Even Board of Equalization member John W. Lynch, who favors 
consolidation under the board rather than a director appointed by the i 
Governor, agreed that consolidation would save money : 

It would save a great deal of money. It would be more efficient and 
more economical. No one on the board quarrels with that . . . Any 
consolidation would be more efficient, more economical. 53 

The only disagreement expressed by those testifying before the com- 
mittee on the potential economies which could be anticipated from 
consolidation of revenue-collecting functions, related to the amount of l! 
savings involved and whether it was likely that administrative reorga- 
nization could advance beyond the consolidation of different taxes • 
within a central agency to include integration of tax-collecting activities 
common to more than one tax. 

The potential for savings from an integrated approach to administra- 
tion has been the subject of some differences of opinion, particularly as 
it applies to specific functions of administration, such as auditing. Dur- 
ing the interim period prior to the 1967 Legislature, the committee 
requested, through the auspices of the Joint Legislative Audit Com- 
mittee, a report of the office of the Auditor General on the feasibility of 
combining the work of tax auditors. 

Auditor General William H. Merrifield 's conclusion was that it would I 
be beneficial to integrate the field auditing activities of the Franchise \ 
Tax Board, the Board of Equalization and the State Controller. 54 The \ 
conclusion was based on the following findings : 

1. The existing separate tax administrative agencies each have a i 
history of field auditing integration. 

2. The audit selection process could be coordinated and improved 
upon through the use of a combined management information 
system. 

3. A more economical use of personnel could be developed under a 
combined management. 

4. The same administration that is responsible for the collection of 
the revenue should also be responsible for the audit of that 

61 Jbid. 

62 Ibid, 10. 
™Ibid, 32. 

64 Letter report from the office of the Auditor General to members of the Joint Legis- 
lative Audit Committee, December 2, 1966. For a complete copy of the report, 
see Appendix. 



ORGANIZATION OF THE EXECUTIVE BRANCH 73 

revenue; therefore a department of revenue would provide a 
means for the integration of the field auditing activities. 55 

Auditor General Merrifield also pointed out that ' ' combined manage- 
ment must exist before the field auditing activities of the Franchise Tax 
Board, the Board of Equalization and the Controller's office can be 
integrated/' 56 

In the view of this committee, the conclusion that combined manage- 
ment is necessary before certain of the functions of tax administration 
can be successfully integrated is well justified. In many areas, and per- 
haps auditing is one, the full integration of these activities may not be 
achieved until after long experience and extensive planning. But it is 
equally valid to note that the experience and planning which are neces- 
sary won 't be begun until a Department of Revenue is adopted. 

Even before a Department of Revenue begins to function, detailed 
management planning is necessary to insure an orderly transaction and 
development of a plan for organization of the department, appropriate 
staffing, budget and many other considerations. For this reason, there 
should be a transition period provided in the statute creating the new 
department. 

In addition to the potential economies which will result from con- 
solidation, the committee support of the Department of Revenue pro- 
posal was based on the taxpayer convenience which would result from 
being able to deal with one agency rather than the confusing situation 
of having to deal with as many as four separate agencies in the payment 
of taxes. A Department of Revenue would also concentrate responsi- 
bility for administration in the chief executive through his Director of 
Revenue and an administrative appeals procedure could be established 
independently from other administrative functions of tax collection. 

In recognition of these arguments, the committee continues to endorse 
the recommendations contained in the 1965 report : 

(1) That a Department of Revenue be established with responsi- 
bility for the statutory state tax collection functions presently 
exercised by the State Controller, the Board of Equalization, 
and the Franchise Tax Board. 

(2) That the Department of Revenue be administered by a Di- 
rector of Revenue appointed by the Governor with Senate 
confirmation and removable by the Legislature for cause. 

For many years one of the most sensitive and controversial areas of 
tax administration has been the appraisal procedures involved in the 
administration of the inheritance and gift taxes. Since the committee 
recommendation included the transfer of the administration of these 
taxes from the State Controller to the Department of Revenue, con- 
sideration has been given to alternatives to the existing method of 
assessment and collection of these taxes. The 1965 report favored mov- 
ing toward a system of self assessment. The committee position was 
based on the fact that certain assets have a fairly exact and easily 
ascertainable market value. The consequences of this approach present 
a number of alternatives in the administration of the Inheritance and 
Gift Tax Law. While the committee supports reform of the existing 

"Ibid. 
"Ibid. 



74 ORGANIZATION OF THE EXECUTIVE BRANCH 

system, it is recognized that various alternatives might be pursued as 
improvements. It is also clear that none of the changes need await the 
establishment of a Department of Revenue. 

In conclusion, there is little which can be added to the findings and 
conclusions of past studies. The committee agrees with the observation 
of the Commission on California State Government Organization and 
Economy : 

It is clear that further documentation of the conclusive evidence 
on record would be repetitious — the logic of a . . . Department of 
Revenue for California has been well established . . . Clearly, the 
time has come to set aside those considerations that have blocked 
constructive action in the past. 57 

67 Commission on California State Government Organization and Economy, Letter re- 
port to Hon. Edmund G. Brown, Hon. Hugh M. Burns and Hon. Jesse M. Unruh, 
December 28, 1964. 



APPENDIX 



December 6, 1966 
Honorable Milton Marks, Chairman 
Assembly Committee on Government 
Organization 

State Capitol 
Sacramento, California 

Dear Milton : 

Please find enclosed a letter report from the office of the Auditor 
General covering the feasibility of combining the work of government 
tax auditors. This report is furnished at your request. 

Our report states its conclusion that if a Department of Revenue 
were created, it would be beneficial to integrate the auditing activities 
of the major tax collection agencies which are the Board of Equaliza- 
tion, the Franchise Tax Board and the State Controller. 

We are pleased to provide this information for your committee and 
I trust you will not hesitate to call upon us again whenever we can be 
of service. 

With my warm best wishes, 

Sincerely 

Vincent Thomas 



December 2, 1966 
Members of the Joint Legislative 
Audit Committee 

State Capitol 
Sacramento, California 

Gentlemen : 

We have reviewed the organization, scope, and procedures of tax 
revenue auditing in the State of California's principal tax administra- 
tive agencies, consisting of the Board of Equalization, the Franchise 
Tax Board, and the State Controller. 

The purpose of our review was to determine the feasibility of com- 
bining the tax auditing in such a way as to reduce the number of 
separate audits being made by the state of a taxpayer's records. 

This review was undertaken in accordance with a request made of 
you by the Assembly Committee on Government Organization. 

CONCLUSION 

It is our conclusion that if a Department of Revenue were created, 
it would be beneficial to integrate the field auditing activities of the 
Franchise Tax Board, the Board of Equalization and the State Con- 
troller. 

Our conclusion is based on the following findings. 

FINDINGS 

1. The existing separate tax administrative agencies each have a 
history of field auditing integration. 

(77) 



78 ORGANIZATION OF THE EXECUTIVE BRANCH 

2. The audit selection process could be coordinated and improved 
upon through the use of a combined management information 
system. 

3. A more economical use of personnel could be developed under 
a combined management. 

4. The same administration that is responsible for the collection 
of the revenue should also be responsible for the audit of that 
revenue; therefore a department of revenue would provide a 
means for the integration of the field auditing activities. 

COMMENTS 

HISTORY 

The Franchise Tax Board, the Board of Equalization, and the State 
Controller have made substantial organizational changes in their own 
auditing activities over a period of years. 

For example, at one time the Franchise Tax Board had two divisions, 
the personal income tax division and the corporation tax division, which 
operated independently of each other. The two divisions now have been 
fully integrated. 

Likewise, a similar change has been made by the Board of Equaliza- 
tion in the sales tax, the transportation tax and the use fuel tax audits. 
Those taxes are now audited concurrently. The excise taxes that the 
Board of Equalization administers such as the motor vehicle fuel tax, 
the beverage taxes, and the cigarette tax are audited independently of 
the sales and use taxes. However, excise taxpayers, while few in num- 
ber, do pay other state taxes such as income taxes; therefore, excise 
taxes should be included in any further consideration of integrating 
tax audits. 

The Controller's office also has made organizational changes in both 
the inheritance and gift tax division and the tax collection and refund 
division. 

Even though each agency has successfully taken steps to upgrade its 
own auditing activities, no attempts have been made to integrate the 
auditing activities of the respective agencies. 

In 1964 an interdepartmental tax committee was organized with the 
main purpose being to review and increase the cooperation among the 
participating agencies. (Agencies involved are the Franchise Tax 
Board, the Board of Equalization, the Department of Employment, and 
the State Controller. Because of the federal participation, the Depart- 
ment of Employment has been purposely excluded from this report.) 
However, that committee has not considered any integration of the 
auditing activities. 

AUDIT SELECTION 

The audit selection process could be improved upon through the use 
of a combined management information system. Such a system could 
be developed if the tax collecting agencies were combined into a de- 
partment of revenue. 

Regardless of the classification of a taxpayer, having all of the differ- 
ent types of tax returns filed available in a central location would give 
an auditor a better insight into the taxpayers ' operations. In some cases 
it may not be economically feasible to audit a taxpayer for all of the 



ORGANIZATION OF THE EXECUTIVE BRANCH 79 

taxes paid, but having a complete tax history readily available would 
be helpful in determining the audit scope of any particular tax under 
review. 

A combined management information system could provide for both 
an office and a field determination as to which taxes should be audited. 
Also a field determination could be made as to what other types of tax 
returns should have been filed by the taxpayer. 

The collection and the compliance activities could be coordinated and 
improved upon through this combined management information system. 
Collection and compliance activities are directly related to auditing; 
the compliance unit is responsible for informing the taxpayers of the 
various provisions of the tax laws, and the collection unit is responsible 
for following up the audit findings. 

PERSONNEL 

In order to make the determinations previously mentioned, all per- 
sonnel involved would have to have at least a general knowledge of all 
applicable tax statutes. 

Management of a department of revenue, by the use of pilot studies, 
in both the rural and metropolitan areas, could develop the most eco- 
nomical methods of auditing the different taxes. When two or more of 
a taxpayers ' taxes are selected for audit the number of auditors and 
the number of visits to a taxpayer's office necessary to complete the 
assignment would be contingent upon, but not necessarily restricted to, 
the complexities of the taxes involved, previous experience with the 
taxpayer, and the location of the records to be audited. 

Furthermore, in order to develop an effective supervisory level in a 
combined tax agency, staff men should gain proficiency in the applica- 
tion of all pertinent tax statutes. 

ADMINISTRATION 

The same management that is responsible for the revenue collection 
activities should be responsible for the audit of that revenue. This is 
essential in any operation so that the audit selection, the audit scope, 
and the audit findings can effectively be coordinated and controlled. 
This, in essence, describes the present organizational arrangement. We 
believe that a combined management must exist before the field auditing 
activities of the Franchise Tax Board, the Board of Equalization and 
the Controller's office can be integrated. 

Sincerely yours, 

William H. Merrifield 
Auditor General 



IV. DEPARTMENT OF GENERAL SERVICES 



On October 1, 1963, the Department of General Services officially 
began functioning as a separate entity within the excutive branch of 
California state government. The legislative authorization for the estab- 
lishment of a separate department with responsibility for the central 
staff or "housekeeping" functions of government followed many years 
of studies suggesting the need for such an agency. 

Since the creation of the department by the 1963 Legislature, a 
number of legislators have expressed concern over the manner in which 
the department has carried out its responsibilities. Legislation was even 
placed before the 1965 session which questioned the necessity of the 
Department of General Services as a separate entity and proposed that 
these functions be placed back under the supervision of the Director of 
Finance. 

As a result of this concern, this committee was authorized to proceed 
with a comprehensive review of the programs administered by the 
Department of General Services. This study is in accord with the major 
responsibility of the Legislature to undertake periodic review of the 
reorganizations it enacts to determine whether further improvements 
in organization are possible and to evaluate the extent of accomplish- 
ments. 

The first issue before this committee is whether the concept of a 
central staff services department performing the so-called "housekeep- 
ing" functions for the various state agencies was administratively and 
organizationally sound. 

A Department of Finance intradepartmental communication dated 
October 3, 1962, from Eobert L. Harkness to Director of Finance Hale 

(83) 



84 ORGANIZATION OF THE EXECUTIVE BRANCH 

Champion outlined the proposal for creation of the Department of Gen- 
eral Services and set forth the advantages and objectives which could 
reasonably be expected to result from centralizing the staff services : 

1. Permit application of uniform standards and policies in ad- 
ministrative matters common to state government. 

2. Promote economy through large-scale buying of materials and 
supplies. 

3. Provide the highly qualified specialists that individual agencies 
cannot justify on their own staffs. 

4. Enable management personnel responsible for major program 
areas to devote their time to the principal mission of their units 
rather than to housekeeping services. 

5. Provide the economies of mechanized mass handling. 

On December 30, 1965, the Department of General Services published 
a report ("Progress Report: First Two Years of Operation") which 
was designed to indicate the accomplishments made by the agency in 
achieving its objectives. 58 "Progress," the report indicated, "has been 
made in a number of different ways, such as handling increased work- 
load without adding staff, raising the quality level of services rendered, 
introducing improvements resulting in a substantial savings to other 
departments and to the state as a whole, and improvements in manage- 
ment and internal administration." During three days of hearings of 
the committee, 59 representatives of the department appeared before the 
committee to present detailed information on the action taken by the 
department to improve central staff services. 

In the course of the committee inquiry, selected areas of department 
activity were given specific attention. 60 The first of these reviewed was 
property acquisition and leasing procedures of the Department of Gen- 
eral Services as outlined in a report of the office of Auditor General to 
the Joint Legislative Audit Committee. While the report found prop- 
erty acquisition procedures and controls to be " generally satisfactory, ' ' 
many specific deficiencies were noted. 

One of the specific leases cited which resulted in a law suit against the 
State of California for breach of contract was the lease for the Criminal 
Identification and Investigation Building in Sacramento. The low bid- 
der on October 10, 1960, was J. Keith Kenworthy at $16,000 per month. 
Charles E. Brown was the second lowest bidder at $18,000. The leasing 
unit experienced considerable trouble with Kenworthy and at the end 
of March, 1961, Kenworthy still had not started construction and was 
asking for a two-month extension. The leasing unit refused to grant the 
extension and requested new proposals from various Sacramento real- 
tors for construction of the C.I. & I. building. Charles E. Brown sub- 
mitted a proposal of $17,000 per month, but a lower proposal of $16,500 
was also received. 

The Auditor General's report indicates that the records do not show 
what further negotiations took place but that Charles E. Brown was 

68 Department of General Services, Progress Report: First Two Years of Operation 
(Sacramento), December 30, 1965. 

69 February 16, 17 and March 2, 1966, in Sacramento. For a review of the depart- 
ment's presentation, see the Progress Report and the transcripts of the commit- 
tee hearings. 

60 An excellent series of newspaper articles by Lou Cannon, which were published by 
the San Jose Mercury, are included as Appendix C. 



ORGANIZATION OF THE EXECUTIVE BRANCH 85 

awarded the lease at $16,000 per month. The comments of the Auditor 
General on the Criminal Identification and Investigation Building lease 
are as follows : 

1. The financial ability of Kenworthy should have been more thor- 
oughly reviewed and a performance bond obtained. 

2. The files are inadequate with regard to the soliciting procedures 
of the second lease proposals in March 1961. Apparently, the 
proposals were requested orally, no deadline was mentioned, no 
correspondence requesting proposals was written, and no news- 
paper advertisements were used. 

3. The files do not indicate whether the March, 1961 bidders were 
all given the same treatment. Charles E. Brown submitted a 
proposal of $17,000 per month but signed a lease for $16,000 per 
month. 

The files do not show whether any negotiations were made with the 
persons submitting the proposal of $16,500 per month. Any de- 
parture from the acceptance of the lowest proposal should be 
thoroughly justified in the files. 61 

In a letter to Assemblyman Vincent Thomas, chairman of the Joint 
Legislative Audit Committee, dated December 31, 1965, from Eobert L. 
Harkness, Director of the Department of General Services, he indicated 
that the department was taking ''positive steps " to implement the rec- 
ommendations of the Auditor General. Director Harkness also re- 
sponded that the seven leases that were cited by the Auditor General 
to illustrate poor procedures were negotiated prior to the creation of 
the Department of General Services. With respect to the specific lease 
for the Criminal Identification and Investigation building, the response 
was simply that "the appellate court made an award in favor of the 
state and that therefore the actions of state officials have been found 
proper by the courts.' ' 

The Auditor General also criticized the lease for the Mental Health 
Building which was also awarded to Charles E. Brown. The principal 
objection was that "there was inadequate competition ' ' for the lease. 
The director's reply to this criticism was that "there was adequate 
competition which is borne out by the excellent rate obtained. Offers 
submitted by the successful lessor . . . were voluntary offers and were 
considerably higher than the final bid. The area of search was, in our 
opinion, limited only as necessary to assure efficient operations of the 
tenant agency. The minor changes in the specifications were made neces- 
sary by recent experience in another locality and it was certainly not 
desirable to go ahead with construction which had proven unsatisfac- 
tory elsewhere. ' ' 

A second area of criticism of departmental activity has focused on 
the Office of Procurement's purchasing of new automobiles. The de- 
partment's Progress Report indicates that following through on a rec- 
ommendation made by the Commission on California State Government 
Organization and Economy, sizeable cost reductions were made in the 
purchase of new automobiles by changing the time for bid submission 
to more closely match the time when new vehicles are actually delivered 

61 Office of the Auditor General Report on Review of Property Acquisition and Leasing 
Procedures, 5. 



86 ORGANIZATION OF THE EXECUTIVE BRANCH 

and placed in service. The report cites a reduction in the unit cost of 
1965 models of $197 per car as compared to the low bid for the previous 
year for a total saving of $123,125 for the cars purchased. 

A further investigation by the ' ' Little Hoover Commission ' ' revealed 
that specifications for California Highway Patrol cars favored Chrysler 
Corporation. All of the cars furnished the California Highway Patrol 
since 1958 (except 1962) were supplied by a single Dodge dealer, John 
Drew of Sacramento. 

The commission study produced revisions in the 1967 specifications. 
The recent purchase of highway patrol vehicles under the new specifi- 
cations resulted in savings of nearly $600,000 for the current fiscal year 
and even the bid submitted by John Drew was lower than his bids of 
previous years. 

A further criticism of departmental policies has resulted from the 
difficulty of obtaining adequate information on past leasing and pro- 
curement records. Under the department's records management pro- 
cedures, records relating to leasing and purchases are being removed as 
early as two years after they are filed. This policy make adequate in- 
quiry into department procedures most difficult and conflicts with the 
generally prevailing practice in private industry where such records 
must be kept for tax purposes. 

The committee also reviewed the facts surrounding the storage of 
vehicles seized by the state under the narcotics seizure program. The 
department, following the suggestions that such confiscated cars be 
stored under the freeway to release valuable undercover auto parking 
area in downtown Los Angeles contracted with a private individual 
(Vierters Automotive Service) who leased the space under the freeway 
from the Division of Highways for $350 per month with a rebate for 
improvements of $110 per month. The Department of General Services 
then paid storage costs to the lessee of approximately $2,500 per month. 

The committee evaluation of Department of General Services accom- 
plishments as set forth in their Progress Report, along with a survey of 
criticisms leveled at departmental operations by such independent ob- 
servers as the Auditor General and the ''Little Hoover Commission, ' ' 
was supplemented by responses from each agency administrator to a 
letter from committee chairman Milton Marks. 62 The purpose of the 
committee letters was to elicit responses from the agencies relying on 
the department for performance of central staff services to assist the 
committee in evaluating the level of service offered by the department 
by "comparisons to the operational levels which had previously ex- 
isted" and to call attention to any problem areas where there had been 
difficulties in the "transition to the present central staff services sys- 
tem." 63 

One of the recurring problem areas evident in the responses to the 
committee letter involved the approval of contracts by General Services. 
Director Harkness indicated that the Governor's cabinet was aware of 
the problem and was undertaking a reevaluation of the legal processes 
involved in contract approval. He also indicated that the statutory Gen- 

62 Letter from Hon. Milton Marks to each administrator of an operating agency, 

October 19, 1965 (the letter and the responses are included as Appendix A). 

63 Ibid. 



ORGANIZATION OF THE EXECUTIVE BRANCH 87 

eral Services advisory council, composed of members nominated by- 
agency administrators, was involved in a similar study. 64 

With respect to most of the other agency comments, Director Hark- 
ness indicated that "they seem to revolve around level of staffing and 
inability to render all of the services desired, ' ' which he indicated was 
"a budget problem and as we are able to anticipate workload increases 
and adequately present them in the budget, improvements in service 
will result." 65 

SUMMARY 

This survey of the performance of the Department of General 
Services is not intended as a comprehensive analysis of the adequacy 
of all of the central staff services for which the department has a 
responsibility. In this connection, continued review of specific pro- 
grams by the Assembly Ways and Means and Senate Finance Com- 
mittees and the Legislative Analyst as part of the analysis of the 
Budget Bill, as well as special studies of certain programs by the 
Auditor General or the "Little Hoover Commission, ' ' should be a sig- 
nificant factor in providing a continuing evaluation of those programs. 

The principal issue before the committee was whether the existing 
structure of a separate department for central staff services as enacted 
by the Legislature in 1963 is organizationally sound. To the extent 
that criticisms of department activity have shown the need for im- 
proving procedures, the committee encourages such improvements. The 
illustrations of specific examples included in this report relate almost 
entirely to management and demonstrate both the need for reforms in 
such areas of responsibility as property acquisition and leasing, pur- 
chasing and contract approval, as well as an acknowledgment by the 
department of the need to undertake those reforms. 

With respect to the main issue of the appropriateness of the organi- 
zational structure itself, it is essential to note that many of the criti- 
cized activities took place prior to the creation of the Department of 
General Services and that since 1963, these programs have been han- 
dled by many of the same people who had similar responsibilities 
when they were administered within the Department of Finance. 

The committee concludes that the premises upon which the creation 
of the Department of General Services was established are valid objec- 
tives and are results which can be expected from the current organi- 
zational structure. 

The positive result has been the fact that the Director of Finance has 
been relieved of many administrative responsibilities which were not 
related to his primary budgeting and program and policy functions. 

The committee further concludes that the criticism of specific opera- 
tions of the department relate almost entirely to management rather 
than the organizational structure itself. In this respect, placing these 
responsibilities under a single director appointed by the Governor 
encourages greater responsibility to both the Governor and the Legis- 
lature. When these services were provided as a part of the Depart- 
ment of Finance, they were not receiving the attention which the 
Legislature has focused upon them since the department was created. 
This alone has been a significant result of the reorganization. 

•* Letter from Hon. Robert L. Harkness, Director of General Services, to Hon. Milton 

Marks, March 1, 1966 (see Appendix B for full text of letter). 
"Ibid. 



88 ORGANIZATION OF THE EXECUTIVE BRANCH 

It is the conclusion of the committee that the establishment of a de- 
partment with responsibility for administration of the many "house- 
keeping" functions of state government has made it possible for the 
Legislature to more closely fix responsibility for these functions. The 
fact that many of the activities complained of had their origins within 
the Department of Finance and prior to the creation of the new De- 
partment of General Services went unnoticed, supports this conclusion. 

The conclusion that the action of the Legislature creating a Depart- 
ment of General Services was based on sound organizational principles 
which should provide a more efficient and economical administration 
of central staff functions cannot be taken as an unqualified endorse- 
ment of the administration of the department. It is clear that ineffi- 
ciencies in administration can exist despite the soundness of the or- 
ganizational structure. Continued vigilance by the Governor and the 
Legislature are necessary to insure improvements in the management 
of the Department of General Services. 

The greatest difficulty encountered by the committee in this evalua- 
tion was determining specific cost comparisons on programs as they 
were administered both prior to and following the establishment of 
the department. The committee has been unable to develop any reliable 
data to afford such comparisons. For the most part, this results from 
the method of funding General Services programs. In most cases a 
program is funded in part by a charge to other agencies which are 
appropriated from that agency 's budget, and the cost of the remainder 
of the program is accounted for by a direct appropriation to the De- 
partment of General Services. Examples of this method of funding to 
a greater or lesser degree are: Building Maintenance and Protection, 
Communication Maintenance and Service, Transportation Services, 
Office of Procurement, Property Acquisition Service, Office of Local 
Assistance, Office of Administrative Procedure, Administrative Serv- 
ices, Central Office Services, Facilities Planning Service and Legal 
Services. The funds for Systems Analysis, Management Planning, the 
Building Standards Commission, Insurance Office and Merit Award 
Board are completely funded from direct appropriations to General 
Services and two programs — the Office of State Printing and the 
Office of Architecture and Construction — are funded entirely from 
appropriations to the user agencies. 

This shared approach of funding makes comparisons much more 
complicated because fluctuations in the charges to the user agencies 
may not accurately reflect the cost of the program. The committee sug- 
gests serious study be given to completely funding General Services 
programs from appropriations to the user agencies. 



APPENDICES 



APPENDIX A 

LETTER ADDRESSED TO EACH ADMINISTRATOR 
OF AN OPERATING AGENCY 

October 19, 1965 
Dear Agency Administrator : 

The Assembly Committee on Government Organization has been au- 
thorized by the Assembly Rules Committee to proceed with a compre- 
hensive review of the programs administered by the Department of 
General Services. As you know, the department was created as a result 
of legislation enacted by the 1963 Legislature following many years of 
study and recommendations supporting the creation of a single agency 
with the responsibility for central staff services. 

It is our intention to review the reorganizational changes enacted in 
1963 to determine whether further improvements are possible and to 
evaluate the extent of present accomplishments. In order to facilitate 
our study we would appreciate it if you would provide the committee 
with your comments on the central staff services provided by the de- 
partment to the agencies under your supervision. With this in mind, 
enclosed is a copy of a memorandum prepared by Robert L. Harkness 
titled " Proposal for Creation of a General Services Department" (Oc- 
tober 3, 1962), which was presented as a justification for the 1963 re- 
organization and the report of the Department of General Services 
which was submitted to a subcommittee of Ways and Means (April 6, 
1965) in response to the committee's request for specific material to 
provide a basis for evaluating the activities of the department. 

Obviously the committee is anxious to evaluate specific improvements 
measured by comparison to the operational levels which had previously 
existed and examples from the experience of your agency would be 
most helpful. In addition, the committee would appreciate your sug- 
gestions as to any improvements which are necessary or areas where 
you have experienced problems in transition to the present central staff 
services system. Your comments and suggestions will be useful to the 
committee in outlining a specific course for study. 

If you have any questions or wish additional information, Mr. Judson 
Clark, the committee consultant, will be available to discuss them with 
you. 

Sincerely, 

Milton Marks 



(91) 



BUSINESS AND COMMERCE AGENCY 
EDMUND G. BROWN 
Department of Banking Governor 

Division of Corporations Stafe of California 

Department of Insurance 

Division of Real Estate BOARD OF INVESTMENT 

Division of Savings and Loan 



January 24, 1966 
Assembly Committee on Government Organization 
State Capitol 
Sacramento, California 

Attention: Judson Clark 
Dear Mr. Clark : 

Attached is the Business and Commerce Agency report on the sub- 
ject of Government Organization — Department of General Services. 

The departments within the Business and Commerce Agency were 
asked to provide comments on the central staff services provided by the 
Department of General Services. They were also asked to submit sug- 
gestions as to any improvements which are necessary or areas where 
problems have been experienced in the transition to the present central 
staff services system. 

If we can be of any further assistance, please let us know. 

Sincerely, 

Milton G. Gordon, Administrator 
Business and Commerce Agency 

By: John E. Hempel 

Chief Assistant Keal Estate Commissioner 




(02) 



itate of California Department of Alcoholic Beverage Control 

Memorandum 

To : Hon. Milton G. Gordon Date : November 8, 1965 

Administrator File No. : 

Business and Commerce Agency- 
Ill Capitol Mall 
Sacramento, California 

From : James 0. Keimel 

Subject : Department of General Services. 

The principal divisions of the Department of General Services with 
which the Department of Alcoholic Beverage Control has dealings are : 

1. Office of Administrative Procedure 

2. Transportation Service 

3. Fiscal — Accounting Office 

4. Facilities Planning 

5. Office of State Printing 

6. Property Reutilization, Office of Procurement 

7. Office of Procurement (purchasing) 

8. Legal Services 

9. Property Management and Services 

1. Office of Administrative Procedure 

The Legislature transferred our hearing officers and hearing report- 
ers to the Office of Administrative Procedure in 1961. At the time of 
the transfer, this department had four hearing officers and four report- 
ers in southern California. The Office of Administrative Procedure had 
three hearing officers there. They now have 13 hearing officers and 11 
hearing reporters in southern California. Our caseload has remained 
fairly static for several years. We are not aware of the number of hear- 
ings conducted for other agencies. 

2. Transportation Service 

This Division of General Services has been quite cooperative and 
helpful. It appears to be curtailed in its operations by budget limita- 
tions in 1965-1966. This department is turning its undercover cars over 
to General Services by legislative request. The freezing of funds for re- 
placement cars prevents Transportation Service from making cars 
available to outlying offices on a permanent assignment. This results in 
some expenses carried by Transportation Service previously passed on 
to operating agencies. 

3. Fiscal — Accounting 

This office does not, in our opinion, operate as well as it did under the 
Department of Finance. It appears there may be a lack of communica- 
tion between operating units and accounting office. 

(93) 



94 ORGANIZATION OF THE EXECUTIVE BRANCH 

4. Facilities Planning 

Service received from both Leasing and Long Eange Planning and 
Current Space Planning have generally been good both before and 
after the Department of General Services was formed. Their difficulty 
in maintaining a full staff of lease agents has been detrimental in cer- 
tain instances. 

5. Office of State Printing 

Service is good but sometimes slow. This is undoubtedly because of 
certain work peaks. 

6. Property Beutilization, Office of Procurement 

This organization is cooperative and helpful, but, apparently, has no 
trucks of its own. Property it desires to obtain frequently remains in 
our offices for extended periods of time. 

7. Office of Procurement (Purchasing) 

The service from this office is generally excellent. This office has saved 
us considerable money by combining our orders with like ones from 
other departments. 

8. Legal Services 

Service continues about the same as when in the Department of Fi- 
nance. 

9. Property Management and Services 

Service at headquarters level has been good. There are sometimes 
indications of lack of communication between building managers and 
headquarters. 

James Reimel 
Director 



>tate of California 

Memorandum 

To : Mr. Milton G. Gordon, Date : November 8, 1965 

Administrator File No. : 

Business and Commerce Agency 
111 Capitol Mall 
Sacramento, California 95814 

From : California Districts Securities Commission 

Subject : Committee on Government Organization 

This will acknowledge receipt of your memorandum dated November 
1, 1965, in which you requested comments and/or suggestions on the 
central staff services provided by the Department of General Services. 
This agency has experienced no problems in connection with the 
present central staff services system, and so far as we are concerned, 
find the system satisfactory. 

T. P. Stivers 
Executive Secretary 



(95) 



STATE OF CALIFORNIA 
Los Angeles 12 

INTERDEPARTMENTAL COMMUNICATION 



To : Mr. Milton G. Gordon, Administrator November 5, 1965 

Business and Commerce Agency 
Board of Investment 
Division of Real Estate 
111 Capitol Mall 
Sacramento, Calif. 

From : California Horse Racing Board 
State Building 908 
Charles L. Harman, Secretary 

Subject: Assembly Committee on Government Organization 

This is in reference to your letter dated November 1, 1965, regarding 
the central staff services now being provided by the Dept. of General 
Services. 

To date, the California Horse Racing Board has not experienced 
any problems generally in the transition of the present central staff 
services. The purchasing function in our department appears to be 
efficient, and we are receiving good service. Therefore, our current 
experience indicates a very satisfoctory working relationship with this 
system. 

We will continue to evaluate the present accomplishments and, if 
further improvements are possible, we will advise. 

Vincent Santopietro 
Assistant Secretary 



(96) 



State of California 
Memorandum 



Date : November 16, 1965 
To : The Honorable Milton G. Gordon 

Administrator 

Business and Commerce Agency 
1015 "L" Street 
Sacramento, California 95814 

From : Department of Insurance — Chatham F. Odum 
1407 Market St., San Francisco 94103 

Subject : Committee on Government Organization 

Reference is made to your November 1, 1965, letter concerning a 
comprehensive review by the Assembly Rules Committee of the pro- 
grams administered by the Department of General Services. 

Our San Francisco and Sacramento offices are located in leased build- 
ings, and our Los Angeles and San Diego offices occupy space in state- 
owned buildings. The only recurring central staff services provided in 
leased quarters is custodial and we have not noticed any appreciable 
change since activation of the Department of General Services. In both 
Los Angeles and San Diego, central staff services provide both custodial 
and telephone switchboard support. We have not experienced any ap- 
preciable change in custodial services; however, reduction in the level 
of telephone service in our Los Angeles office has seriously hampered 
our operation and we plan to request authority to reestablish our own 
switchboard in the near future. 

For your added information, we now make limited use of the central 
records storage area in San Francisco and plans are underway to take 
advantage of the storage area in the basement of the state building in 
Los Angeles. 

Chatham F. Odum 
Administrative Service Officer 



(97) 

4— L-418 



JOHN A. O'KANE 
Superintendent of Banks 

JAMES AHLF 
Chief Deputy 



EDMUND G. BROWN 
Governor 




State of California 
STATE BANKING DEPARTMENT 



111 SUTTER STREET 

Suite 2125 

San Francisco 94104 

YU kon 1-8530 

107 SOUTH BROADWAY* 

Suite 6105 

Los Angeles 90012 

MA dison 0-4760 



San Francisco 4, California 
November 5, 1965 
Mr. Milton G. Gordon, Administrator 
Business and Commerce Agency 
111 Capitol Mall 
Sacramento, California 95714 

Be: Committee on Government Organization 

Dear Mr. Gordon : 

This is in reply to your letter of November 1, 1965, requesting gen- 
eral comments on the programs administered by the Department of 
General Services since it was created by the 1963 Legislature. 

Our principal contact with General Services has been in manage- 
ment planning. We have found General Services in this area to be 
cooperative and helpful. 

As a general comment, it is our feeling that a considerable amount of 
unnecessary work and expense in various agencies can be eliminated by 
limiting General Services' approval and supervision to major matters. 



Yours very truly, 



John A. O 'Kane 
Superintendent of Banks 

Albert L. Cryor 
Chief Bank Examiner 



(98) 



STATE OF CALIFORNIA-BUSINESS AND COMMERCE AGENCY 



EDMUND G. BROWN, Governor 



DEPARTMENT OF INVESTMENT 

DIVISION OF CORPORATIONS 



SACRAMENTO 95814-PRINCIPAL OFFICE 
1020 N STREET 

SAN FRANCISCO 94103 
1460 MISSION STREET 

LOS ANGELES 90012 
107 S. BROADWAY 

SAN DIEGO 92101 

5068 STATE OFFICE BLDG. 



CHARLES E. RICKERSHAUSER, JR. 
Commissioner 




Los Angeles, California 
November 9, 1965 



Honorable Milton G. Gordon 

Administrator 

Business and Commerce Agency 

111 Capitol Mall 

Sacramento, California 95814 



Be: Committee on Government Organization 
Dear Milton : 

This is in reply to your memorandum of November 1, 1965, request- 
ing material for submission to the Assembly Interim Committee on 
Government Organization. 

Our division traditionally deals with the Department of General 
Services only in the areas of automobile assignments, physical facili- 
ties for division offices, procurement of office supplies and procurement 
of office equipment. I am advised by our staff that we have not en- 
countered any substantial changes in these areas as a result of the 
reorganization of the Department of General Services by the 1963 
Legislature. Those on our staff who deal more directly with these 
problems have advised me, however, that they have found more clear- 
cut definitions as to which offices should be contacted in order to ac- 
complish certain objectives, and I have been given to understand that 
this is the result of the 1963 legislation. 

We have found two areas recently where our relationships with the 
Department of General Services indicate a need for improvement, but 
these areas are not such as may be compared with how they might 
have been handled under the pre-1963 organizational structure. The 
two areas to which I refer are as follows : 

1. We have attempted to project, for budget purposes and other- 
wise, the space needs of the division in its various offices for the next 
few years. In doing so we find that the coordination has not been 
entirely satisfactory even among the members of the Board of Invest- 
ment and the Department of Finance was not able to indicate with 
any certainty the coordinated plans for the movement or enlarging of 
offices in the immediate future. This is a problem which may bear dis- 



(99) 



100 ORGANIZATION OF THE EXECUTIVE BRANCH 

cussion among the Division of Keal Estate, the Department of Insur- 
ance and the Division of Corporations, with respect to our Los Angeles 
facilities, and where it would appear that the Department of General 
Services might give more direction. 

2. The Division of Corporations is presently involved in a program 
for the modification of the facilities which house its Los Angeles office. 
This program has consumed a period of approximately nine months 
so far, and we are not yet ready to request bids. Although the . co- 
operation which we have received during the past month has been most 
helpful, an inordinate amount of time was required during the early 
development of this program. In addition, the Department of General 
Services was unable to make preliminary estimates of the costs which 
might be encountered so as to give the necessary guidance to the divi- 
sion in making its budget arrangements. Preliminary estimates of the 
modification were made, but the final estimates showed an increase of 
approximately 144%, rendering the initial estimates useless and com- 
plicating the division's budgeting for the current year. This may rep- 
resent an isolated instance not worthy of note, but discussions with 
the Department of General Services indicated that the problem may 
be more widespread. 

In view of your request for only general comments at the present 
time, the foregoing specific recommendations may be premature. They 
are included here as the only contribution which the division has to 
offer in response to your memorandum of November 1. If we may fur- 
nish additional information, please do not hesitate to call upon us. 

Sincerely, 

Jerald S. Schutzbank 
Chief Deputy Commissioner 



State of California Division of Real Estate 

R/E Form 703 

Memorandum 



To : Milton G. Gordon January 25, 1966 

Commissioner 

From : John E. Hempel 

Chief Assistant Commissioner 

Committee on Government Organization 

This is in response to the letter regarding the central staff services 
provided by the Department of General Services. 

The key members of the Division of Real Estate's staff in regulatory 
operations, licensing and accounting agree the separation of General 
Services from the Department of Finance has generally been good. The 
new procedures adopted regularly show they are alert to improving 
services. For example, pool cars are kept in good shape, they are now 
available at airports and there are better controls over possible areas 
of abuse. 

The Office of Administrative Procedure under the Department of 
General Services is well-organized and gives better overall service. 

The billing methods followed by the O.A.P., for their hearing serv- 
ice, could be modified so that the total bill is not submitted to the 
agency at the end of the fiscal year. If billed quarterly, we could plan 
better within our hearing budget allotment. 

The methods used for arranging leases for quarters should be re- 
viewed. 

John E. Hempel 

Chief Assistant Commissioner 



(101) 



State of California 

Memorandum 



To : Milton Gordon Date : November 10, 1965 

Department of Keal Estate File No. : 
111 Capitol Mall 
Sacramento, California 

From : Division of Savings and Loan 

540 Van Ness Avenue, San Francisco 94102 

Subject : General Comments Re Operations of General Services 

At the operational levels, the Division of Savings and Loan has been 
generally dealing with the codification officer of Administrative Pro- 
cedure, Insurance Officer, Facilities Planning, Legal Services, Office of 
Procurement, Systems Analysis, Printing Office and Transportation 
Services. 

From the division's viewpoint, the common characteristic of per- 
formance shared by many of these agencies is the slowness in getting 
things done. For items of special interest, the division almost always 
has to keep a check with the agency concerned so that the action re- 
quested will be performed within time limits. This characteristic pre- 
dates the establishment of the Department of General Services, but still 
is in evidence. The outstanding exceptions are the codification officer 
and the insurance officer who provide timely and thorough advice and 



assistance when called upon. 
Very truly yours, 



Gareth W. Sadler 

Savings and Loan Commissioner 

Frederick M. Eammler 
Administrative Assistant 



(102) 




EDMUND G. BROWN 
enry W. Simonsen Governor Virginia Danielson, Secretary 

President ^^ EX brook 7-2253 

:. L. Gartland, Jr. 
avid N. Lillevand 



OFFICE OF 

State Board of Pilot Commissioners 

World Trade Center, Room 321 
SAN FRANCISCO 11, CALIFORNIA 

November 4, 1965 
Mr. Milton G. Gordon, Administrator 
Business and Commerce Agency 
1015 L Street 
Sacramento, California 95814 

Dear Mr. Gordon : 

We have received your memorandum of November 1st concerning the 
projected study by the Assembly Committee for Government Organiza- 
tion of services provided by the Department of General Services. 

Our board maintains a contractual arrangement with the Depart- 
ment of Professional and Vocational Standards for fiscal and personnel 
services, including assistance in transactions with the Department of 
General Services. We therefore cannot make comments or recommenda- 
tions as requested. 

We have brought this matter to the attention of our fiscal officer, Mr. 
Donald 0. Otten, and believe he will incorporate our board's answer 
with his department's reply to the Assembly Committee. 

Very truly yours, 

Board of Pilot Commissioners 

By Virginia Danielson 
Secretary to the Board 



(103) 



State of California Department of Professional and Vocational Standards 

Memorandum 



To : Hon. Milton G. Gordon Date : November 10, 1965 

Agency Administrator 
Business and Commerce Agency 
111 Capitol Mall, Room 324 

From : Division of Administration 

Subject: Committee on Government Organization — General Services 

To provide the Committee on Government Organization with the in- 
formation requested by your memo of Nov. 1, 1965, I contacted various 
members of our staff who have knowledge of the subject matter. Areas 
where improvement would be helpful are : 

Leasing Services 

Property Management Services 

Printing Plant Services 

Management Consultant and Data Processing Services 

Automotive Management Services 

Additionally, improvements should be made in communications, 
Architectural and Office Machine Services. Examples of the kind of 
improvements we feel would be helpful are : 

Leasing Services 
We suggest guidelines be established to permit state agencies within 
perimeters, authority to procure sites for leased quarters, with final 
lease approval to be reserved to the Department of General Services. 

Communication Services 

A review should be made of communications equipment required to 
be registered with the Communication Service Unit. In short, certain 
items now registered should be eliminated and charges made only on 
the basis of services rendered rather than upon items registered. 

Property Management Services 

Review the cost accounting involved in making charges against spe- 
cial fund agencies, particularly the overhead factor and portal-to- 
portal charging. By having tradesmen report directly to and leave di- 
rectly from the actual jobsite, from one-half to one hour a day could 
be gained in productive labor whereas this labor is currently being 
charged for while the time is consumed in traveling to and from the 
job and the headquarters office. 

Services in providing maintenance for leased quarters have deterio- 
rated due, we are told, to budget restrictions. This has lead to our being 
informed that General Services will no longer perform or provide al- 
terations and maintenance to these quarters ; however, they still reserve 
the right to approve the services we must secure for ourselves. This 
leads to inefficiencies and delays in providing such necessary services. 

(104) 



ORGANIZATION OF THE EXECUTIVE BRANCH 105 

We suggest some blanket means of approval be had whereby we would 
be authorized to secure and perform services with such advance author- 
ization. 

Architectural Services 

Provisions are made for contingencies in new construction and in 
major alterations; however, minor change orders require elaborate 
approval procedures; these tend to hold up such construction and 
alterations and result in costs which in many cases more than offset 
the slight additional cost entailed by the change order. We suggest that 
within limits, change orders be permitted to be initiated by preap- 
proval so that work may proceed in a more efficient manner. 

Office Machine Services 

Billings made for these services are in accordance with the number 
of machines rather than on the maintenance services performed. We 
suggest the billing procedure used be re-examined. 

Automotive Management Services 

These services were being steadily improved until the recent budg- 
etary cutback forced restrictions on the use of vehicles and facilities. 
This action has resulted in some operational handicaps. Charges made 
for parking should be re-examined as they often exceed what other 
garaging facilities would cost. We suggest that some maximum be 
established for parking charges for any one vehicle for any one month 
or some other equally acceptable alternate. 

Management Services 

In the past it was possible to obtain management services for special 
projects and for supplementing departmental staffs from manpower 
available within the Division of Organization and Cost Control. The 
change in concept coupled with budget restrictions, no longer makes it 
possible for us to obtain this type of service. We feel a need for a cen- 
tral pool of management specialists who would be available for use for 
special assignments, where due to the "crash nature" of some projects, 
it is not feasible nor practical to try to augment a department's own 
staff. This would especially apply to those smaller units of government 
who have no staff of their own. 

Data Processing Services 

Until the augmentation of staff takes place in the Department of 
General Services, there are not enough persons to assist departments 
in making "in-depth" studies of data processing needs. 

We feel improvements in meeting both data processing and manage- 
ment consultant needs could be had by permitting approval of the use 
of outside qualified consultants within the framework of a blanket 
appropriation for General Fund agencies and authorization for special 
fund agencies (where surpluses exist). 



106 ORGANIZATION OF THE EXECUTIVE BRANCH 

Printing Plant 

We suggest a return to former or some improvement in present 

budget procedures which would permit more flexibility in staffing the 

printing plant. Present budgeting procedures (we are informed) have 

ilted in backlogs and delays detrimental to good service. Quality 

of product is excellent — delivery of average jobs too slow. 

We can furnish specific problems for the committee's consideration 
if they desire them. We are appending some illustrations which may 
serve to point up some of the reasons behind our general comments 
concerning improvements. 

If we can be of any further help to the committee in any of these 
areas, we will be happy to do so upon request. 

Harold J. Powers 
Director 



STATE OF CALIFORNIA EDMUND G. BROWN, Governor 

EMPLOYMENT RELATIONS AGENCY 

SACRAMENTO 14 January 10, 1966 




Honorable Milton Marks, Chairman 

Committee on Government Organization 

California State Legislature 

State Capitol 

Sacramento, California 95814 

Dear Milt : 

Your letter of October 19 states that you are making a comprehen- 
sive review of the programs administered by the Department of Gen- 
eral Services. You ask for comments and suggestions regarding the 
nature of service which has resulted from the reorganization which 
established the Department of General Services and for any sugges- 
tions for future improvements. Staff members of the Department of 
Employment and Industrial Kelations who deal with General Services 
have been consulted for comments and ideas, as requested in your 
letter. 

1. State Administrative Manual 

In the opinion of the fiscal staff, this manual seems to be more 
up to date and responsive to our needs than was true prior to the 
organization of General Services. 

2. Insurance 

We feel that there has been an improvement in relations with the 
insurance adviser's office. Information seems to be ready and avail- 
able more expeditiously than in previous years. 

3. Property Acquisition 

It is our opinion that the work of this group has improved. Ap- 
praisals have been speeded up and other acquisition activities han- 
dled more efficiently. 

4. Budget 

Since the Department of General Services was split out from the 
Department of Finance it has been reported by our staff that the 
budget process works more smoothly. Budget analysts of the De- 
partment of Finance seem to have more time available for review 
and assistance on budget problems. 

5. Overhead 

The cost of services provided seems to be trending upward. We 
have particular reference here to overhead costs that are added to 
services. For example, general overhead costs have increased from 
3 percent to 12 percent over the past several years. In addition, 
certain services include a shop overhead of 18 percent. We know 

(107) 



108 ORGANIZATION OF THE EXECUTIVE BRANCH 

i appreciate that salary and wage costs show an upward trend, 
lo rents, supplies, etc. It may be that these elements of overhead 
increases. However, some review and study of overhead 
would seem to us to be warranted. 

6. Leases 

The Department of Employment has a large number of local offices 
ated in many communities throughout the state. While a number 
of our buildings are state-owned, there are many of our premises 
that are Leased. Therefore, leasing arrangement and clearance with 
the Department of Finance and the Department of General Serv- 
ices are important items to us. With the budget function in Finance 
and the lease function in General Services, clearance with two 
departments is necessary. It is suggested that some improvement 
might be possible in coordinating clearances required with these 
two departments. Some review of the clearance procedures might 
reveal methods of expediting this operation. 

7. Printing 

Our relations with the printing plant have improved. Service is 
good and at the same time unusual job requirements are handled 
more expeditiously. The printing plant staff seems to be more 
understanding of our needs and problems. 

8. Pool Cars 

The Department of Employment has had relatively small need for 
use of cars from the automotive pool. However, in those instances 
where we have had a need, the service has been excellent. The help 
and advice of automotive management people regarding cars per- 
manently owned or assigned to the Department of Employment 
have been very good. 

9. Repairs, Alterations, and Building Maintenance 

We have found the maintenance staff in San Francisco and Los 
Angeles to be very helpful on small alterations and repair jobs. 
It is much better to be able to use this service than to have to make 
contracts with outside contractors for jobs of very limited scope. 
While our overall experience has been very good, we have noted 
instances of inconvenience to ourselves when the mechanics or 
building tradesmen have been called off of our job to work on some 
other building problem with an apparently higher priority. This 
may be unavoidable, but it is nevertheless inconvenient and dis- 
rupting. 

We have some concern over cost accounting and billing methods 
on these jobs. It would be our suggestion that a study be made to 
sec whether streamlining and improvement of the cost accounting 
procedures related to this work would be possible. 

10. Office Machine Repair 

We are very pleased with this service. The work is good and the 

pension to new machine types has improved the service. Our 

procurement -roup feels that where this service is provided, the 

quality of the repair work is better and it is available at lower 



ORGANIZATION OF THE EXECUTIVE BRANCH 109 

cost than is generally true where contracts are made with office 
equipment concerns. Further, the availability of this service elimi- 
nates the preparation and negotiation of numerous small contracts 
for maintenance and repair. The negotiation and preparation of 
the contracts are probably quite costly in comparison to total cost 
of maintenance and repair work when provided by office machine 
companies. 

11. Contracts 

Quite a number of procurement and service contracts are negoti- 
ated each year with outside vendors. Such contracts are cleared 
with the legal staff of the Department of General Services. Our 
experience reflects that this clearance works quite expeditiously, 
and in our opinion, has improved since it has been under the direc- 
tion of the Department of General Services. 

12. Facilities Planning 

The Facilities Planning Section has, within the limited funds and 
personnel available, performed in a most responsible manner. This 
section has provided more services for the Department of Indus- 
trial Kelations than it has for the Department of Employment. 
It is their opinion that more personnel and funds are required by 
the Facilities Planning Section to perform a completely satisfactory 
job. It would appear that the present personnel are most capable, 
but the extremely heavy workload causes delays which are incom- 
patible with an efficient operation. 

If we can be of further assistance, please feel free to call on us. 
Sincerely, 

Albert B. Tieburg 
Administrator 



STATE OF CALIFORNIA 
EDMUND G. BROWN, Governor 



Health and Welfare Agency 




PAUL D. WARD, Administrator 
State Capitol, Room 1020, Sacramento 95814 

Bonorable Milton Marks February 8, 1966 

California State Legislature 
State Capitol Building 

Tamento, California 95814 

Dear Milt: 

This is in reply to your letter of October 19 asking for our comments 

rding the Department of General Services. I am sorry that we 

have delayed so long in replying but we had some question about how 

we should handle this and this resulted in a delay in getting adequate 

information for our reply. 

In general, we believe the new Department of General Services has 
made substantial progress in improving services to our departments. 
We have found that an attitude of cooperation and consideration is 
prevalent in a genuine effort to meet special requests and special re- 
quirements resulting from new programs or emergency situations. 

One area where we continue to have some problems is around the 
approval of contracts. This is not to suggest that there has been no 
improvement in service. If measured by earlier experience, this service 
also has improved. However, the expansion of programs that require a 
variety of contracts appears to have created a substantial additional 
workload and as I am sure you are aware of the number of approvals 
that must be obtained for each contract (Finance, General Services and 
the Personnel Board) make it difficult to gain quick approval except on 
a one-time crisis type of situation. In this type of instance where the 
issue is sufficiently important, exceptional service is the rule. However, 
I am sure you can recognize this cannot happen in too many cases or 
the total process will be bogged down by rushes. Our concern is that 
any speedup in the process of executing contracts can result in a sav- 
ings to the state in that the date of execution frequently determines 
the date in which federal participation in the cost of the contract may 
become available. 

May I suggest two areas for your consideration that might improve 
this seemingly cumbersome process. First, that the legal requirements 
for approval of contracts be examined with the view of simplifying 
them with respect to some of the more routine types of contracts. 
Second, that serious consideration be given to whether adequate legal 
staff is provided the Department of General Services in the light of a 
volume of contracts that appears to be growing more rapidly than 
some other aspects of governmental operations. 

Thank you for giving us an opportunity to express our views on the 
effectiveness of this now department. As you can see, in general, we 
are well satisfied with the results of your legislative efforts in establish- 
ing this agency. 

Sincerely, p AUL jj Ward 

Administrator 
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STATE OF CALIFORNIA EDMUND G. Brown, Governor 

PUBLIC SAFETY AGENCY 

SACRAMENTO 




December 2, 1965 
The Honorable Milton Marks 
California Assembly 
State Capitol 
Sacramento, California 95814 

Dear Milton : 

In reply to your letter of October 19, 1965, I am enclosing herewith 
the comments of the four departments in the Public Safety Agency in 
regard to the staff services provided by the Department of General 
Services. 

Cordially, 

Bradford M. Crittenden 
Administrator 






(111) 



State of California 

Memorandum 

Date : November 16, 1965 

To: The Honorable Bradford M. Crittenden 
dnunistrator, Public Safety Agency 

2 190 First Avenue, Sacramento 

From: California Disaster Office 

Subject : Review of Department of General Services Programs 

Tn response to your memorandum of October 27, 1965, the following 
comments are offered : 

This agency is assisted by the Department of General Services in 
four principal areas: 

1. Executive and Administrative Services (Personnel Office) 

2. Physical Facilities Planning and Development (Office of Architec- 
ture and Construction) 

3. Property Management (Communications Service and Transportation 
Service) 

4. Technical Services (Office of Procurement) 

The level of service provided, as compared to that received from 
other agencies before the Department of General Services was created, 
appears to be much the same, with certain exceptions noted below: 

1. Executive and Administrative Services: 

This agency originally entered into contractual arrangements with 
the Department of Finance to provide civil service employees to this 
agency, as mutually agreed upon between the agencies. There has 
been no significant change in services rendered since this function 
was transferred to the Department of General Services. 

2. Physical Facilities Planning and Development : 

Tli is agency receives engineering reports reflecting damage incurred 
by local political jurisdictions as a result of natural disasters and 
also receives services in connection with construction projects. There 
has been no apparent change in service since these functions were 
transferred from the Department of Public "Works to the Depart- 
ment of General Services. 

3. Property Management : 

a. Vehicles: 

The agency has had difficulty in obtaining sufficient assigned ve- 
hicles from the state vehicle pool for agency operations. This 
shortage of supply of vehicles has occurred since the Department 
of General Services was established. 



(112) 



ORGANIZATION OF THE EXECUTIVE BRANCH 113 

b. Communications: 

This agency has noted two major areas involving services rendered 
with which we have had difficulty : 

(1) The costs of service have been steadily increasing, whereas 
the services rendered have not increased at the same pace. 

(2) It appears that the Communications Service tends to control 
the agency's communications programs, rather than perform 
services. Since the function of the Department of General 
Services in this field is that of service, we believe that the 
control function should be eliminated. 

4. Technical Services : 

The level of service has remained at the same level as that we re- 
ceived prior to the transfer of functions to the Department of Gen- 
eral Services. 

John W. Gaffney, 
Director 



, ^ .., Public Safety Agei* 

State of California 

Memorandum 

Date: November 16, 1965 

To: Bonorable Bradford M. Crittenden 

Administrator, Public Safety Agency 
2490 First Avenue 
tramento, California 

Prom : Department of Veterans Affairs 

Subject: Legislative Review of Department of General Services 
Program 

Ymi have asked for this department's comments and suggestions con- 

rning improvements or areas in which we have experienced problems 
in the recenl transit ion of the Department of General Services to the 
presenl central staff services system. 

As we understand it. the Department of General Services was estab- 
lished in October 1963 for the purpose of centralizing to a greater 
degree service and supply activities separate from program and budget 
planning and fiscal control functions of the state government. "When 
the new department provides services on a centralized basis more effec- 
tively and efficiently than the many operating units can provide such 

rvices for themselves, the basic objective of making maximum contri- 
bution possible toward the operating efficiency and economy of all 
agencies, departments, and other segments of our state government will 
have been achieved. 

Although individual departments, such as ours, will, of course, not 
be directly involved with all the services and activities of the Depart- 
ment of Genera] Services, its influence will indirectly manifest itself in 
diversified areas, such as employee parking facilities, contract pur- 
chased items, economics and increased efficiency in communications, and 
master rental contracts to mention a few. Of course, there is no way 
for us to determine whether any of the improvements that have taken 
place since the new department became operational would or would 
not have occurred even without the change. If some method could be 
devised whereby billings to individual agencies for services such as 
building maintenance, telephone charges, pool car usage, and special 
work order charges could be accelerated to a more current basis, a 
tangible service will have been performed. 

John Handsaker 
Administrative Deputy Director 



(114) 



State of California 

Memorandum 

Date : November 16, 1965 
File No. 
To : Honorable Bradford M. Crittenden 

Administrator, Public Safety Agency 
P.O. Box 898 
Sacramento, California 

Attention Mr. H. A. Rosa, Assistant to the Administrator 

Subject : Legislative Review of Department of General Services Pro- 
grams 

From : State Fire Marshal — Sacramento 



Pursuant to your request, we are submitting a preliminary report 
incorporating comments relating to the present central staff services 
system of the Department of General Services. 

At the outset, it is difficult to properly comment upon problems, 
differences in services, if any, and areas of needed improvement, since 
a relatively short period of time has ensued since inception of the 
organization. In general, and with one exception, there has been no 
noticeable change in services rendered to the State Fire Marshal. 

The single exception is in connection with the functional aspects of 
the Building Standards Commission. The concept of this commission 
is excellent. It is the means by which conflict, duplication, and overlap 
of building regulations within the Administrative Code are eliminated. 
There is little doubt as to the need for the process. 

Due to the framework of the commission, however, state agencies, 
required by statutory provisions to adopt and enforce building regula- 
tions, are finding increasing difficulty in processing proposed regula- 
tions through the commission within reasonable time limitations. This 
is particularly true in cases where the enforcing agency, after making 
a finding of an emergency in accordance with the Administrative Pro- 
cedure Act, is subject to the determination of a commission committee 
whether or not an emergency does in fact exist. 

The net effect of this kind of delay can, in many instances, cause a 
tremendous dollar loss and an unnecessary burden to designers, build- 
ers, and owners affected by the regulation or lack of regulation. 

It is our opinion that the same degree of control over building regu- 
lations can be effected by the commission without maintaining the 
present "red tape" burden. We believe the commission should favor- 
ably consider permissive adoption, repeal, or amendment of any admin- 
istrative building regulation by a state agency after that agency makes 
a finding of an emergency (in accordance with the Administrative 
Procedure Act) without being subject to a prior determination by the 
commission of whether or not an emergency does in fact exist. Such 
emergency adoption, repeal, or amendment would then be made subject 
to the commission 's findings relating to conflict, duplication, or overlap. 

I hope the above comments will serve to assist in the further im- 
provement of the Building Standards Commission's functions. 

Glenn B. Vance 

State Fire Marshal 
(115) 



State of California 

Memorandum 



Public Safety Agei 



To: 



From : 

Subject : 



Date : 16 November 1965 

File No. : 
The Honorable Bradford M. Crittenden 
Administrator 
Public Safety Agency 
P.O. Box 898 
Sacramento, California 

Military Department — Office of the Adjutant General 
P.O. Box 214334— Sacramento, Calif. 95821 

rislative Keview of Department of General Services Pro- 
Lira ms 



The Military Department has not been subjected to any appreciable 
increase or decrease in services nor have any problem areas been en- 
countered by the transition of the Department of General Services to 
the present central staff services system. 

Clarence D. Smith, Jr. 
Brigadier General 
Assistant Adjutant General 



(116) 




EDMUND G. BROWN 
HUGO FISHER GOVERNOR OF OFFICE OF THE ADMINISTRATOR 

ADMINISTRATOR CALIFORNIA RESOURCES BUILDING 

NINTH AND O STREETS 
Department of Conservation 
Department of Fish and Game 
Department of Parks and Recreation 
Department of Water Resources 
State Reclamation Board 
State Water Quality Control Board 
State Water Rights Board 
Regional Water Pollution 
Control Boards 

THE RESOURCES AGENCY OF CALIFORNIA 

Sacramento, California 

January 10, 1966 



Honorable Milton Marks, Assemblyman 

Twenty-First Assembly District 

Chairman, Committee on Government Organization 

504 Buss Building 

235 Montgomery Street 

San Francisco, California 

Attention : Mr. Judson Clark 

Committee Consultant 

Dear Mr. Marks: 

In response to your request I am submitting comments concerning 
programs administered by the Department of General Services. 

In order to prepare an answer in the most meaningful way I con- 
sulted with major units of the Resources Agency and the views ex- 
pressed in this letter are an interpretation of the views held by 
departments, boards, and commissions in the agency. As a general 
comment, I should like to say that the Department of General Services 
has, in many instances, improved on services as they were rendered 
when organizationally attached to the Department of Finance. The 
improvement stems from the increased attentions such functions have 
received as part of the Department of General Services. When these 
same functions were carried on in the Department of Finance they 
were secondary to the fiscal and budget activities and quite naturally 
did not receive the type of management and supervisory attention that 
more pressing responsibilities of the Department of Finance received. 

Increased management attention to general services has improved 
such services. This is not to say that there have not been problems. A 
mistake often made in large organizations is staffing a general service 
function for a minimum rather than a maximum workload. While this 
may seem to be fiscally prudent, actually, minimum staffing has the 
opposite effect. Large backlogs of work build up and operating depart- 
ments, frustrated in their attempts to get work done through central 
services, find other ways of performing their required functions. 
Further, great amounts of employee time is wasted. 

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118 ORGANIZATION OF THE EXECUTIVE BRANCH 

m lei me move to the specific. Functions of General Services as 
provided to tl Agency are discussed in the following para- 

graphs. Tli ^ncnt of these services is made in the light of relation- 

ship of performance to the needs of operating departments in the Re- 
sou _cency. 

Airplane service— Airplane services provided by the Department of 
Genera] Services are excellent but should be expanded. Many hours of 
valuable employee time could be saved by further development of this 
economical type of air transportation. 

Architectural services — Architectural services continue to improve 
under the leadership of the new State Architect. The office is perform- 
ing in a timely way and the work is both imaginative and practical. 

Automotive management — Typically all central motor pools are 
criticized by users. The efficiency of such pools cannot be assessed on 
the basis of such criticism. For the most part, the transportation needs 
of Resources Agency employees seem to be met by transportation man- 
agement, but at least two of the departments in the Resources Agency 
feel that a much better job could be done if employees in automotive 
management could develop a greater attitude of service and an interest 
in program accomplishment. I tend to believe that the automotive serv- 
ices remain at about the same level of effectiveness as in the past. 

Building maintenance — In the Resources Building we have had ex- 
cellent building maintenance. We were moved from previous locations 
with great efficiency and had excellent cooperation from the Depart- 
ment of General Services and all others involved. We have had minor 
complaints but experience seems to indicate that the Resources Build- 
ing is better maintained than other buildings in which the present 
occupants have worked and that the service is effectively and efficiently 
executed. 

Central duplicating — There has been a central duplicating unit in 
the state for many years. The quality of work done by this unit has 
been very satisfactory but the backlog has been so great that only 
materials which have no specific deadline are entrusted to central dupli- 
cating. This unit is a good example of a unit that is managed in a 
"pennywise and pound foolish" manner. The unit should be equipped 
with the most efficient machinery and be staffed with a maximum staff 
in order to provide service in a timely manner. There will always be a 
need for small duplicating services close to the office requiring the 
work. Central duplicating services can be successful, but only if they 
are performed promptly. 

Communication services— Departments in the Resources Agency re- 
quiring large and widespread communication services find this to be 
the greatest area of weakness in the new Department of General Serv- 
We recognize the need for a central communcation service. This 
service should be geared to assisting and improving the communications 
operations, particularly for departments with emergency operations 
such as the Division of Forestry during the fire seasons and the Depart- 
ment ot Water Resources during the flood seasons. Communication 
services should develop standards and be in a position to consult and 
advise operating agencies in the same manner that purchasing now 



ORGANIZATION OF THE EXECUTIVE BRANCH 119 

does. Operating departments should not have to deal with the Depart- 
ment of General Services insofar as budgeting for communications 
requirements are concerned. This is an area that is of great concern 
because of the potential hazard to life and property caused by opera- 
tions geared to the past rather than to the present. A new look at this 
function is in order. 

Data processing — Becently, great improvement has been evidenced 
by General Services in the field of automatic data processing. The 
direction now being taken seems to be the right one. Presently, this 
function is woefully understaffed. The ADP area is one in which the 
state can effect large savings if competent staff and proper equipment 
judicially located can be provided. In the last legislative session moves 
were made to improve the staffing and the services of the ADP func- 
tion. In view of the magnitude of the job that faces the state, continu- 
ing attention should be given to improving automatic data processing, 
particularly in the area of staffing. In the staffing area attention should 
be given to both improved quality and increased quantity of personnel. 

Employee parking — The Kesources Agency moved to its new building 
more than a year ago, bringing a large population to an area of town 
that did not have adequate parking facilities. Many difficulties were 
experienced but in my opinion the Department of General Services did 
an outstanding job in quickly and efficiently solving major parking 
problems faced by occupants of the building. 

Legal services — We have great respect for the chief counsel and the 
majority of staff in the legal section of the Department of General 
Services. Having said this, we must point out that departments, boards, 
and commissions unanimously agree that as presently organized the 
legal section is required to be all things to all people and is one of the 
greatest bottlenecks to action remaining in state service. It should be 
profitable to reexamine the functions of this office. In cases where 
review of contracts, major service agreements, and other legal docu- 
ments is necessary, such review might very well be better performed 
in the Attorney General's office. Greater delegation should be given to 
organizations having their own legal advisers. The placement of the 
function in General Services seems historical rather than logical. The 
Department of General Services has need for a legal staff to assist 
the State Architect and other service units within the department. The 
Director of Finance also has a need for "in house" legal assistance 
but the legal services in the department might very well apply only 
to General Services and the Department of Finance. 

Management planning — In the reorganization of the Departments of 
Finance and General Services the organization and cost control unit 
underwent a change. Departments have missed some of the services of 
the old organization and cost control unit. We understand that General 
Services now has plans to move in the direction of increased services 
to departments by competent management analysis and we would 
encourage them to do so. 

Merit Award Board — The Merit Award Board has developed an 
award system that has been helpful in improving state service. One 
improvement that might be made would be developing authorization 



120 ORGANIZATION OF THE EXECUTIVE BRANCH 

individual agencies and departments to develop their own non- 
>gnition systems which would contribute to and enlarge 
the ids program. 

of Administrative Procedure— In general, the contact we have 

had with the Office of Administrative Procedure has been most satis- 

ory. The office is quite service oriented and, insofar as their serv- 

oaed by the various departments of the agency, have been quite 

sfaetory. 

Printing- -A very noticeable improvement has been made in the 
printing services received by our departments. Not long ago a tre- 
mendous backlog existed in publications required by departments, the 
-];it ure and the general public. Today the printing plant is meet- 
sonable schedules and great credit should go to persons respon- 
sible for this improvement. 

Property acquisition — The property acquisition activities in General 
Services has been expanded by incorporation of other small acquisition 
units from operating departments. There appear to be some problems 
which are not being met by this unit, although in fairness we must 
say that it is too early to make a judgment. It is hoped that the 
property acquisition unit can be staffed with a sufficient number of 
qualified people to render adequate service to the organizations they 
serve. 

Purchasing — The purchasing division in General Services has been 
doing a very outstanding job. For example, the purchasing division 
was most helpful in assisting the Department of Water Resources in 
working out most difficult problems connected with the purchase of 
heavy equipment and machinery for the huge generating plants and 
pumps needed in the State Water Project. The purchasing division has 
kept within reasonable lead times on their purchases and has been able 
to provide the departments with a timely and useful service. 

Records management — The statewide records management program 
is now well underway and seems to be contributing to efficiency and 
economy of operation. 

Telephone book— The latest edition of the state telephone book shows 
great improvement and General Services should be commended and be 
encouraged for efforts in this direction. 

Xerox master contract — The master contract for renting xerographic 
equipment seems to be working well. 

Summary— The Department of General Services has been in exist- 
ence for only a short while. Even during its shakedown period a num- 
>f services have improved appreciably. Careful attention to central 
ices provided by the department can certainly lead to greater 
efficiency in state government. In all large organizations, public or 
private, central services have been used and have contributed to effi- 
ciency of operation when they have been equipped and staffed to carry 
on these services effectively, efficiently and with dispatch. 

Successful central services have the need for good management con- 
tinually working under an orientation of serving well segments of the 
organization utilizing such services. Central service units have been 



ORGANIZATION OF THE EXECUTIVE BRANCH 121 

unsuccessful and have not contributed to savings in those cases where 
they have not been service oriented, and where adequate equipment 
and staff have not been available. A look at improving the Department 
of General Services with the above in mind would appreciably add to 
the efficiency and economy already contributed by that department. 
I appreciate the opportunity to comment on this matter. I hope the 
remarks from this agency will prove helpful to you. 

Sincerely yours, 

Hugo Fisher 
Administrator of Kesources 



TRANSPORTATION AGENCY 

The Honorable Milton Marks December 30, 1965 

■mblyman 
ntgomery Street 
Snn Francisco 4, California 

Dear Mr. Marks : 

I am sorry to have delayed so long in responding to your letter re- 
questing our comments and suggestions concerning the central staff 
provided by the Department of General Services. 

In general, the services provided by the Department of General 

Services to the Transportation Agency are considerably more limited 

in scope than those provided by General Services to most state agencies. 

Tuple, because of the volume and special nature of its work, the 

irtment of Public Works itself performs many of the housekeeping 

and operational functions supplied by General Services to some other 

te agencies. For this reason, we are not in a position to advise you 
fully concerning the level of centralized services now being performed 
by General Services in most of the vital areas of activity that would P 
tend to be most productive of increased efficiency as a result of central- 
ization (e.g., real estate acquisition, real property management, data 
processing, etc.). No doubt the comments of the other state agencies 
would provide you with more information concerning the level of such 
centralized services now being provided by the Department of General 
Services. 

In those limited areas of activity with which the Transportation 
Agency does come into regular contact with the Department of General 
Services (e.g., purchasing, communications, printing services, the Office 
of Architecture and Construction), it appears that such services are 
better coordinated than previously as they affect assistance to client 
agencies, and that certain improvements in procedure and service have 
been made. The progress during the first year or so of organization 
appears to follow very closely the progress made by the U.S. General 
Services Administration, which was, incidentally, the first new agency 
recommended by the federal Commission on Government Reorganiza- 
tion (the Hoover Commission) which was put into operation by the 
federal government. In the 15 years that the U.S. General Services 
Administration has been operative a long list of improvements has been 
made, and at the same time the agencies served have been freed up to 
concentrate more on their own programs and less on housekeeping. 

We look forward to the adoption of many additional improvements 
in the general services field as these improvements can be studied and 
applied. 

It should be noted that in one special respect, the establishment of 
the Department of General Services has been of considerable organiza- 
tional and operational advantage to the Transportation Agency. By 

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ORGANIZATION OF THE EXECUTIVE BRANCH 123 

its assuming responsibility for the operations of the Office of Architec- 
ture and Construction it has made it possible for all departments of 
the Transportation Agency to concentrate all of their effort in carrying 
out the transportation-oriented functions of government that are prop- 
erly the responsibility of the Transportation Agency. 

If we may be of any further assistance to you concerning this matter, 
please advise. 

Respectfully, 

Eobert B. Bradford 
Administrator of Transportation 




EDMUND G. BROWN 
Governor 

Corrections 
RICHARD A. McGEE /^§\ Youth Authority 

Administrator /fe^flgfl Adult Authority 

Board of Trustees, 
California Institution for 

STATE OF CALIFORNIA 
Youth and Adult Corrections Agency 

State Office Building No. 1 
SACRAMENTO 14 

Hon. Milton Marks, Chairman § January 10, 1966 

in 1)1 y Committee on Government Organization 
Sf;ite Capitol 

Sacramento, California 

C Mr. Marks: 

This is in reply to your letter of October lb wM*sh asked for our 
comments and suggestions on the operating results of the reorganiza- 
tion which established the Department of General Services in 1963. 

In summary, we have found that services have, generally speaking,, 
either maintained the satisfactory level at which they operated priori 
to creation of the new department or, in cases where the services were! 
less than satisfactory before, have tended to improve under the depart- 
mental organization. 

Specific comments as to particular services follow. Services which 
are not mentioned are in our opinion being performed at a satisfactory 
level. 

1. Office of Architecture and Construction. The operations of this 
activity are being improved and certain innovations such as the 

-'ablishment of workshops on good design are commendable. There 
is a need for further definition of the functions of the division in- 
ternally and as they relate to the space utilization unit of the facili- 
ties planning service and the building standards unit of the 
administrative services division of the Department of General Serv- 
ices. Thought might be given to a client-centered rather than func 
tion-centered form of organization. 

We understand that some organizational changes are now under way 
and hope that they will alleviate the problem. 

2. Legal services. The quality of legal services provided is excellent 
although at times we encounter delays which may be the result of 
insufficient staff in relation to workload. The problems of our par- 
ticular agency are complicated by the fact that we are one of the 
few large agencies in state government which do not have one or 
more administrative advisers within its own organization. 
Some further delegation of authority for contract approval might 
be considered based on development of guidelines and further train- 
ing of staff in the agencies. 

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ORGANIZATION OF THE EXECUTIVE BRANCH 125 

3. Facilities planning. This service has not been established for a suffi- 
cient period of time to make possible a definitive evaluation of its 
services but we have found the attitude of the personnel to be 
cooperative and we feel that the idea of improving coordination 
between leasing and space planning is basically sound. As men- 
tioned above, we feel that the definition of functions performed by 
the space utilization unit should be reevaluated. 

4. Data processing. The Department of General Services has improved 
tremendously in this area and insofar as we can see is closely in step 
with the statewide effort toward improved automated data processing. 
Much yet remains to be done but the department has the necessary 
leadership and we are confident that we will receive increasingly 
better service as we work toward improved utilization of the con- 
cepts of modern information systems. 

5. Communications service. The leased line (ATSS) service has im- 
proved substantially and is now to the point where there appear to 
be sufficient leased lines to handle most calls without undue delay. In 
addition to the toll saving, I am sure that the availability of leased 
lines has encouraged executives to use the telephone in many cases 
where a letter would customarily be required, and that this has been 
both efficient and economical. It is suggested that the current ap- 
proach to strictly monetary evaluations of identifiable costs and 
savings in ATSS additions be modified by recognition of these hid- 
den savings. 

6. Transportation service. Is it doubtful in my mind if a state pool 
car operation which must be performed within strict budgetary limi- 
tations can ever provide service which is entirely satisfactory to its 
clientele. I wonder, therefore, if a fresh approach which would 
strongly encourage utilization of private cars might not make it 
possible to substantially reduce the size of the state pool. Perhaps 
some intermediate plan where the state would furnish a car to an 
individual on a shared expense basis might be worth investigation. 
This is sometimes done by private firms and the employee pays for 
that portion of the mileage which is for his own convenience while 
the firm pays for that portion which is company business. Obviously 
under these conditions existing insignia identifying the car for offi- 
cial use only would have to be changed, and the car could not be 
licensed on an exempt plate basis. 

Another alternative which we would recommend for consideration 
is to make much more use of the practice of leasing non-state-owned 
cars for individual trip use. It might be interesting to compare the 
unit cost of a master contract with one of the large national car 
rental services with the unit cost based on the entire expenditure 
for operating the state pool, including overhead, amortization of 
buildings, and all factors. 

One general point which I would like to discuss is what appears to 
be an increasing tendency to decentralize functions to the using agen- 
cies. Examples are consideration of decentralizing lease contracts and 
current decentralization of allocation of parking spaces and permitting 



ORGANIZATION OF THE EXECUTIVE BRANCH 

lubpurchafl directly to vendors under blanket contract. In 

in favor of decentralization but the problem is that we 

n.,t thereby qualify for additional staff to handle the additional 

jommend that before there is further decentralization 

ul evaluation be made of the added responsibilties in terms of 

requirements, and that wherever appropriate the decentrali- 

ecompanied by an increase in staff as required to accomplish 

the obj' of the decentralized program. 

Sincerely yours, 

Kichard A. McGee 

Administrator 

Youth and Adult Corrections Agency 



APPENDIX B 

LETTER FROM DIRECTOR OF GENERAL SERVICES 
RESPONDING TO AGENCY ADMINISTRATORS' LETTERS 

Honorable Milton Marks 
Chairman, Assembly Committee on 

Government Organization 
State Capitol 
Sacramento, California 

Dear Mr. Marks : 

From an analysis of the agency administrators' letters to your com- 
mittee in response to your questions regarding the activities of the 
Department of General Services for the past two years, I would like 
to report to you the status of our approach to the major areas men- 
tioned in their letters. 

In the area of legal services, the substance of their comments is the 
time it takes for final contract approval. In effect, they ask that there 
be a reexamination of the legal processes. 

In response to their request, the following steps have been taken. 
The Governor's cabinet through its cabinet secretary, Jim Alexander, 
has asked that the present contract review team, which was working 
on methods for greater delegation, be expanded to include broader 
representation from the state agencies and expanded in scope to cover 
such reexamination. 

The statutory General Services advisory council composed of mem- 
bers nominated by agency administrators together with members ap- 
pointed from industry has implemented the cabinet's request, and there 
has been created a special seven-member advisory committee to : 

— review adequacy of published standards and guidelines used to 

instruct all agencies in how to prepare sound contracts. 
— consider delegation of routine and minor contract approval to 

operating departments to the maximum extent possible but provide 

for post audit by General Services 
— consider the extent of jurisdiction and review by General Services. 

Under what circumstances do we have concern for other than 

"legal" matters 
— consider the specific suggestions on attachment A. 

Their findings and recommendations will serve as the basis for 
improving and expediting contract approval. 

In the area of space planning and leasing, the substance of the 
administrators' concern was leasing coordination, clearance procedure, 
staffing, cost estimates, delays and delegation. 

In this regard the entire facilities planning which includes space 
and leasing has been reorganized with a new chief appointed, training 
course implemented, and a complete new manual of procedures has 
been prepared, adopted and issued by the director with the approval 

(127) 



128 ORGANIZATION OF THE EXECUTIVE BRANCH 

of the Director of Finance. Increased staffing has been included in 
'a Budgel and is presently being discussed with the legis- 
lati viewing the budget. 

Basically, the recommendations and procedures will: 

— accomplish better coordination and simplification of activities con- 
than one unit of the Department of General Services. 

—make a clear statement of basic principles and procedures to be 
followed by the staff of facilties planning and by other agencies 
in acquiring leased facilities. 

— make a greater delegation to certain larger agencies for negotiat- 
ing (heir own leases in accordance with approved standards. 

— improve competition among prospective lessors where premises 
must be built to suit state requirements. 

— make for better coordination between the Departments of General 
and Finance with respect to authorizations for obtaining 
additional space required. In the future this will be cleared by 
Finance on an annual basis after the final budget has been ap- 
proved by the Legislature. 

— improve advance planning for space requirements of the various 
state agencies. 

Attached is a copy of the new manual instructions to all state agen- 
cies on leasing policies and procedures and a copy of the findings and 
recommendations of the "task force" which was the basis of the 
instructions. 

In the area of transportation services, the agencies express concern 
with shortage of available cars in our central pool. This may or may 
not be a temporary situation brought about by the necessity for us 
to reduce the total annual miles driven. We approached this by re- 
questing agencies to implement a closer review of the use of state cars. 
We required a supervisor's approval for automobile use. This was done 
to accomplish an elimination of low-priority mileage in order to meet 
the legislative 5 percent cut in the transportation services budget We 
anticipated the mileage reduction and disposed of 250 overage and 
obsolete vehicles. The situation may be only temporary and full ad- 
justed by the year's end. Attached is our management memo to aU 
agencies on this subject. 

Most of the other comments by the administrators seem to revolve, 
around level of staffing and inability to render all the services desired. 

Jnt^n f t C ° UrS i'i 1S i m0Stly a budget problem and as we are able to 
a tcipate workload increases and adequately present them in the 
budget, improvements in service will result 

wiH h be ] \;v^n f r ^ °PP2 rtuni ^ *<> P^sent this information, and I 
dVscussion at y ° Ur committe e meetings for further 

Sincerely yours, 

Robert L. Harkness 
Director 



ORGANIZATION OP THE EXECUTIVE BRANCH 129 

SUGGESTED COMMITTEE CONSIDERATIONS 

1. What transactions are subject to undue waits and delays. 

2. Where the delays occur — in legal services, elsewhere in General 
Services, in the Department of Finance, or due to clearance with 
Attorney General, State Personnel Board, etc. 

3. Determine cause of delay : 

a. Are the contractors poorly prepared and therefore require much 
revision 

(1) Are the purposes of the contract unclear 

(2) Is the state left exposed to contingencies 

b. Are backlogs accumulating around certain types of transactions, 
around certain members of the staff, or for transactions of certain 
agencies. 

4. What transactions should be entirely exempt from General Services 
review. 

5. What transactions can be handled by operating departments subject 
to review on a post audit basis. 

6. For what types of transactions can standards be developed so that 
agencies can do a better job of contract preparation subject to 
General Services review or even make it possible to delegate ap- 
proval of contracts prepared within the standards. 

7. How can legal services teach agencies how to prepare good contracts 
— through periodic skull sessions, General Services sponsored train- 
ing programs for agency personnel, etc. 

8. What is the legal responsibility of the Department of General Serv- 
ices in the approval of contracts? 



5— L-418 



Stat* of California 

Memorandum 



Revenue and Management Agen 



Robert L. Harkn Date : December 21, 1965 

Director of General Services File No. : 



Prom : Departmenl of General Services 

orce Progress Report on Leasing 

This report is in response to your request that an analysis be made 
of the Department of General Services leasing activities. The report 
i n organized as follow 
I. Proposed policies to be contained in the State Administrative 

Manual. 
1 1. ( Organization. 
ill. Procedur 

IV. Interna] Operations: Under this broad heading are subsections 
(»n management information and production control, communica- 
tions and file management, and in-service training. 

To accomplish this review, personnel were interviewed in the leasing 
and Bpace utilization units and the legal section. We also interviewed 
sons in the Departments of Motor Vehicles, Highway Patrol, Em- 
ployment, and Finance who are directly concerned with leasing prac- 
i policies, and procedures. For additional background we contacted 
and obtained Literature from the Safeway Stores, Inc., Post Office De- 
partment, federal General Services Administration, Los Angeles County, 
New York State, and Pacific Telephone and Telegraph Company. 
All of the personnel contacted in the course of this study have been 
rative and helpful. Many of the recommendations are, in 
in Large part upon ideas contributed initially by the chief 
and • (f of facilities planning service. 

Arthur W. Collins, Chairman 
Task Force on Leasing 

I. Proposed policies to be contained in the State Administrative Manual 

Bi sed en our review of leasing activities statewide, we have con- 
cluded that existing lease policies are inadequate for either facilities 
planning or other state agencies. The State Administrative Manual 
8AM has a se< tion on property which is inadequate as a general 
guide on Leasing. In addition, the Facilities Planning Leasing Man- 
ual is in need of revision and should be consolidated with the Master 
and Space Planning Manual. We are therefore in the process of 
preparing policies to be contained in a subchapter on leasing in the 
State Administrative Manual. Major features to be contained are: 
1. A statement clarifying that the Department of General Services 
is the final authority on leasing and that all requests will be sub- 

(130) 



ORGANIZATION OF THE EXECUTIVE BRANCH 131 

mitted to the department for execution or approval unless specifi- 
cally exempted, prior to committing the state. 

2. A general policy statement indicating when leasing of real prop- 
erty will be authorized. 

3. A section outlining general responsibility and procedures for 
lease negotiation. This section will indicate in general terms which 
leases will be negotiated by Facilities Planning and which by 
other agencies. 

4. Several sections will be devoted to explaining the procedure for 
requesting space. This w r ill indicate the forms to be used, the 
steps to be taken, and the approvals required. 

5. A section indicating when new construction under leasing is 
authorized and a listing, in order of preference, of the acceptable 
methods to be used. The preferable method will be the assignable 
option technique. This technique will allow all proposers to make 
proposals on the same site, which will be selected by the State, 
and removes land cost as a competitive factor. This method should 
greatly increase the number of proposals and provide better leases 
for the state. 

6. A section providing detailed instructions on the use of the above 
methods. 

7. A section outlining the method for soliciting sealed proposals. 
This section will require sufficient notice, a specific deadline, and 
ample time for preparation of proposals. The agency soliciting 
proposals will be required to develop a fair market rental figure 
to compare proposals against. Should no satisfactory proposal be 
received within acceptable range of the estimated fair market 
rental, all proposers will be given the same opportunity to amend 
their proposals. Proposers will be required to submit proof of 
their ability to perform. Successful and unsuccessful proposers 
will be so notified in writing. When an agency solicits proposals, 
it will be required to submit to facilities planning a list of all 
persons notified, a copy of any advertising, and copies of all 
proposals received. 

8. A requirement that the successful proposer obtain the services of 
a licensed architect to design any building constructed for prime 
occupancy by the state under a lease agreement. 

9. Several sections outlining policy on options, lease terms, lease 
provisions, and services, to be included in any lease. 

10. Statements on state policy on rental overlap, alterations, termina- 
tions, and renewals. 

11. Statements on state policy on inspections and disqualification of 
proposers. 

. Organization 

Consolidate the space utilization unit with the leasing unit to create 
a current planning section. 

This change will require a major reorientation of the present role 
of both the lease agent and the space utilization analyst. The opera- 
tion, after being consolidated, will lend itself to the use of a common 



ORGANIZATION OF THE EXECUTIVE BRANCH 

class which will be besl suited for the specialized functions facilities 
planning service performs, and will assure a better qualified and 
more flexible staff. We recommend that a single class of facilities 
planning analyst be established. 

To assist the chief of facilities planning in managing the facilities 
planning service, the organization should have two senior facilities 
planning analyst positions. The seniors occupying these positions 
would share responsibility for all technical and administrative func- 
tions and management of all activities which relate to the facilities 
planning service. Assignment of work to the seniors would be on a 
geographical basis. Assignment of work to the facilities planning 
analyst under a senior's supervision would be based on a further 
breakdown of the broad geographical area. This would help develop 
an improved knowledge of the real estate market over the entire 
state and help establish definite responsibility for state-owned and 
leased premises. 

In addition to the primary assignment by geographical area, each 
facilities planning analyst would be assigned responsibility for 
liaison for one or more operating departments. This assignment will 
include working with the department involved to prepare space 
standards for the space needs peculiar to that department. This 
double assignment will result in specialists for geographical areas, 
while at the same time retaining a contact person to interpret the 
needs of the various departments. 

To assist the chief of facilities planning in carrying out his re- 
sponsibilities, we also recommend that a new position at the jour- 
neyman level be established with the working title of staff facilities 
planning analyst. This position will be assigned to plan for further 
improvements within facilities planning service, develop and revise 
interna] working procedures, develop statewide space standards 
coord unite budget preparation, coordinate paperwork and forms' 
management, maintain the Department of General Services Facil- 
ities Planning Manual, and prepare recommended revisions to the 
Mate Administrative Manual. (See Exhibit I for detailed position 
responsibility statement for senior, staff and journeyman facilities 
planning analyst.) 

It is probable that a full-time position cannot be devoted to this 
|y>H|roin the present limited staff. However, if the new positions 

he 19G6-67 fiscal year are authorized, one of these positions 
should be used for that purpose as soon as possible. 
Procedures. 

B< via the system by which space is requested and approved. 
To jl,.f,nnme how space request documents are processed in the 
pwsenl system, a detailed flow chart was prepared showing the 

p ' ZZT^ f.lT the " AdVanCe SpaCe Recrement 
Report, Form 9 the "Space Request to Department of General 

In' Si „ T 6 ' and thG " Standard LRaSe Agreement," Form 
'" ■**», ■ t»me sample was taken to find out how long it takes 



ORGANIZATION OF THE EXECUTIVE BRANCH 133 

between each step in the procedure. As a result of these flow charts 
and the time sample, we concluded : 

• Too much time is required between each step in the pro- 
cedural flow of documents. 

• There is duplication in review between the Department of 
Finance, space utilization, leasing, and legal services. 

• The present policy for approval of lease documents is incon- 
sistent with the general principle of placing administrative 
responsibility at the lowest level qualified to accept it. 

We, therefore, recommend that the present system be revised as 
shown in the flow chart in Exhibit II. The major changes from the 
present system are as follows : 

A. The advance space requirement report, Form 9, will he retitled 
"Space Requirements Report" and forwarded to the Department 
of General Services senior facilities planning analyst prior to 
being forwarded to the Department of Finance budget division. 

Under the present procedure, the Department of Finance re- 
views the Form 9 prior to General Services. 

The purpose for this change is to insure that information con- 
tained in the Form 9 is adequate for the Budget Division to 
make a logical decision. This review will include a determina- 
tion by the Senior Facilities Planning Analyst of the full im- 
plications involved on the space request, being certain that he 
knows what the agency is planning to do and why, seeing that 
the space request conforms with this plan and the overall pro- 
gram of the agency, and relating the request for the facility 
to the State Building Program. This change will: 

• Establish General Services as the focal point for controlling 
all documents in the lease process. 

• Provide the Department of Finance with more complete 
information as to the proposed transaction to permit them 
to review the financial and program implications. 

• Require the requesting agency to document its program 
requirements more carefully. To accomplish this, it is pro- 
posed to require agencies to submit a freehand sketch of 
the space layout required. 

Greater emphasis will be placed on preparing a complete an- 
nual program for space requirements. In this connection, it is 
proposed that facilities planning service initiate the process by 
preparing for each state agency a detailed listing of all rental 
obligations currently of record. This will require a data proc- 
essing system discussed later in this report. When completely 
established, this should permit annual approval by the Budget 
Division of the proposed program in a manner similar to that 
in effect for budgeting of equipment. Thereafter, budget divi- 
sion will not need to review individual proposals unless they 
are a change from the approved annual program. 



].|| ORGANIZATION OF THE EXECUTIVE BRANCH 

B. Tin senior facilities planning analyst will be assigned respon- 
sibUity for making the decision as to whether the agency or 
a, hi nil Services should handle a proposed lease transaction. 

The decision is now made by a lease agent. This decision level 
is too low in the organization structure and cannot properly 
reflect all factors which need to be considered in making such 

a decision. 

C. Tin requesting agency will be required to accept or reject the 
proposal lease conditions prior to the actual preparation of the 
hast document. 

The present procedure is to have the agency approve the lease 
document after the lessor has signed the lease. This is undesir- 
able both from a procedural and timing standpoint. The agency 
should approve the conditions of the proposed lease at the time 
the negotiations are completed and the lessor has verbally 
approved the terms. This approval should be at a sufficiently 
high level in the agency to avoid the necessity for further ap- 
provals after the lessor has signed the lease. 

1). The responsibility for approval of all leases will be assigned to 
tin Department of General Services' assistant director. 

The assistant director is now responsible for approval of Form 6 
which is the authorization to the leasing section to prepare the 
lease document. The final approval of the lease rests with legal 
services for leases under $10,000 and three-year term. The 
deputy director approves all leases exceeding these amounts. 
Since the establishment of the chief of facilities planning po- 
sition, there is no justification for the assistant director to retain 
this line control over preparation of lease documents. It is the 
responsibility of the chief of facilities planning to make this 
decision and to ultimately recommend to the assistant director 
consummation of the lease. 

To facilitate the final review of the lease agreement, a trans- 
mittal and signoff sheet has been prepared. (See Exhibit III.) 
The form will provide the assistant director information con- 
cerning who has officially prepared and reviewed the agreement. 

B. The space request to Department of General Services, Form 6, 
wUl be retitlecl " Lease Negotiations Summary Report" and 
should describe the terms of the lease. 

It is our intent to require the negotiator to certifv that the 
precontract aegotiation conditions fully satisfy the Department 
General Services' policies, procedures and space standards 
requirements, and the lessor is agreeable to the terms set forth 
'» the Form 6. Based upon the information contained in the 
form (, concerning the proposed lease and the certificate by 
tne negotiator, the agency will then approve or reject the con- 
amons ol the lease by signing or rejecting the Form 6. 
Since the Form 6 will contain all the information about the 
proposed facility to be leased including acceptance by the les- 



ORGANIZATION OF THE EXECUTIVE BRANCH 135 

sor, agency, and negotiator, it will expedite preparation of the 
actual lease document. 

IV. Internal Operations. 

Management Information and Production Control 
A management information and production control system has been 
designed to furnish the director's office, the chief and staff of 
facilities planning, and the agencies concerned, sufficient informa- 
tion to properly direct the facilities planning program. When in 
full effect, this system will: 

1. Provide the basic data necessary for each state agency to prepare 
an annual program for space requirements. 

2. Provide a means of recording and expediting requests for space 
changes. 

3. Furnish management reports, including sufficient detailed infor- 
mation to determine workload, staffing, and production factors. 

4. Facilitate the preparation of special reports concerning existing 
leases, space assignments, and requests for changes as required 
for current and long-range planning. (See Exhibit IV for a 
description of proposed reports to be prepared.) 

This system will be accomplished by assigning a transaction number 
for each request which is pending as of December 31, 1965, and 
received subsequently, and recording necessary information re- 
quired to classify the type of request, location of the proposed 
premises, and finally the major factors of the approved lease or 
space assignment. The system will consist basically of tabulating 
cards (which will later be converted to electronic data tape), the 
periodic reports produced by the tabulating cards, and a visible 
board to record daily progress on the assigned projects. 

It has been generally established that the data processing section 
of the Department of General Services does not have available ca- 
pacity for this additional tabulating system. However, the Office 
of Architecture and Construction presently employs a programmer 
whom we believe is capable of absorbing this additional work with- 
out any additional out-of-pocket cost. It is our recommendation that 
the architecture programmer be assigned to install this tabulating 
system and to have the necessary work accomplished by the Divi- 
sion of Highways or other state facilities having sufficient capacity. 

It is anticipated that the major advantage of this proposed system, 
that of providing basic information for an annual program, will 
be available before July 1966 when the Department of Finance calls 
for preparation of the 1967-68 Support Budget. 

Reimbursements for Expenditures 

At the present time the facilities planning service is supported by 
a General Fund appropriation with approximately $20,000 in re- 
imbursements received on work orders of the space utilization sec- 
tion. These reimbursements consist of an hourly rate charged for 
the architect's time and charges for services of the Office of Ar- 
chitecture and Construction in reviewing mechanical and electrical 



ORGANIZATION OF THE EXECUTIVE BRANCH 

drawings and specifications. Tn addition the remaining costs, par- 
ticularly of the leasing section, are charged to special fund agencies 
I of the annual pro rata fiscal charges. This is based upon 
• arbitrary weighting of the number of leases by agency. There 
have been complaints from some agencies that they are double 
•<1 under this method. 

Under the recommended procedure each analyst working on a 
particular transaction would keep track of the time expended on 
tli.it transaction regardless of what phase he was doing. It would 
thus I).- practical to establish a system similar to that used by the 
property acquisition service to obtain reimbursements for all work 
accomplished by the facilities planning service other than that of 
genera] planning such as long-range plans which could not logically 
be charged to any particular agency or any particular construction 
work order. Since the ability to accomplish this will in effect be a 
byproduct of the rest of the recommended system, a decision will 
not have to be made until preparation of the next support budget 
requesl as to the method of reimbursement to be used. 

Communications and File Management 

1. Establish a formal means of issuing policy and instructions to 
the facilities planning staff. 

There is no formal means by which the chief of facilities planning 
can communicate policies, procedures, and instructions to the 
facilities planning staff. 

A formal notice series should be created and called facilities 
planning notice. Each facilities planning notice would be 
assigned a consecutive number, which consists of the last two 
digits of the calendar year, plus a consecutive number which 
starts over each calendar year (e.g., 65-01, 65-02, etc.). The notice 
would be signed by the chief of facilities planning. The facilities 
planning notice series would serve as an interim system for issu- 
ing and amending facilities planning policies, procedures, and 
instructions. These notices would later be issued as revisions to 
the Facilities Planning Manual. 

2. Establish (Ic finite control concerning use of form letters. 

Form letters which affect basic policies and procedures must be 
under control at all times. There are a number of informal form 
letters in facilities planning service. These, in many cases, were 
prepared and issued without the purpose, intent, or use being 
clearly understood. All form letters should be approved by the 
chief of facilities planning. 

• \. .1 dictionary of standard leasing terminology needs to be pre- 
lum d and included in the State Administrative Manual. 
Leasing is a relatively complex operation and common terminol- 
ogy is desirable to eliminate misunderstanding on what is meant 
by the various technical terms used in the profession. 



ORGANIZATION OF THE EXECUTIVE BRANCH 137 

4. In-service training program for all facilities planning service 
and agency personnel handling space planning matters should 
he initiated in the following areas: 

a. Objectives and responsibilities of facilities planning service. 

b. Public relations. 

c. Leasing policies and procedures. 

Continuing attention should be given to the improvement of 
employees' skills and job knowledge. Assistance from the depart- 
mental training officer should be obtained to implement this 
recommendation. 



6— L-418 



EXHIBIT I (Parti) 
SENIOR FACILITIES PLANNING ANALYST j 

Function , , 

The senior facilities planning analyst under general administrative 
direction of the chief of facilities planning shares responsibility for, 
and participates in, a coordinate capacity in all technical and admims- 
trative functions and in management of all activities which relate to 
facilities planning service. This includes development of program and 
policies, maintenance of good public relations, and making of inde- 
pendent decisions within approved program and policies of General 
Services as they relate to state space requirements. 

Responsibilities and Authority 

Within the limits of the approved program and policies of facilities 
planning, Department of General Services, the senior facilities planning 
analyst is responsible for, and has commensurate authority to accom- 
plish fulfillment of the duties listed in this statement. The senior facili- 
ties planning analyst may delegate portions of his duties to employees 
under his supervision, but may not delegate his overall responsibility 
for the satisfactory completion of work assigned to him. 

• Provides supervision for the planning, direction and coordination 
of all work activities assigned to facilities planning which relate 
to the senior facilities planning analyst sphere of responsibility. 

• Prepares and recommends to the chief of facilities planning state- 
wide leasing policies or changes in existing policies. 

• Determines whether requests for space from the state departments 
and agencies to General Services contain sufficient information to 
prepare a lease or an assignment of space. This includes a deter- 
mination of the full implication involved in the space request, 
being certain that he understands what the agency is planning to 
do and why, seeing if the space request conforms with this plan 
and the overall program of the agency, and relating the request 
for the facility to the state building program. 

• Assigns work to the facilities planning analysts under his super- 
vision, establishes work schedules and priorities and insures the 
completion of the work within the schedule. 

• Provides direction for preparation of leases, including assign- 
ment of lease transaction codes. 

• Reviews and approves facilities planning analysts' recommenda- 
tions to the chief of facilities planning to prepare lease documents 
for approval by the Director of General Services. 

• Keeps informed of availability of space, financing rental rate 
levels, and leasing conditions in all locations of the state. 

• Keeps informed of leasing problems experienced by agencies and 
assists in developing appropriate policies to obviate such problems. 



(138) 



EXHIBIT I (Part 2) 
FACILITIES PLANNING ANALYST 

Function 

The facilities planning analyst, under general administrative direc- 
tion of the senior facilities planning analyst, is responsible for the 
complete review and analysis of space requests for facilities either 
state or privately owned, and when required the negotiation of any 
leases necessary to obtain such facilities. 

Responsibility and Authority 

Within the limits of the approved program and policies of facilities 
planning, Department of General Services, the facilities analyst is 
responsible for, and has commensurate authority to accomplish, the 
fulfillment of the duties listed in this statement. 

• Performs all work required for handling all lease transactions for 
the geographical area assigned. This includes negotiating leases, 
preparing leases and all related documents, and reviewing and 
making recommendations concerning proposed leases and docu- 
ments. 

• Obtains all approvals required to consummate a lease including 
lessor, agency and legal approval. 

• When required, authorizes preparation of plans and specifications 
by Office of Architecture and Construction to be used for develop- 
ing preliminary plans and specifications in securing lease quarters. 

• Assists other state agencies in a consulting capacity wherever 
professional advice is needed concerning leasing policy, proce- 
dures, and activities. 

• Reviews leases negotiated by other agencies and recommends 
leasing policies and procedures to be followed. 

• Determines availability of space, financing rental rate levels, and 
leasing conditions in all locations of the state. 

• Keeps senior facilities planning analyst informed of leasing prob- 
lems experienced by agencies and assists in developing appropri- 
ate policies to obviate such problems. 



(139) 



EXHIBIT I (Part 3) 
STAFF FACILITIES PLANNING ANALYST 

Function 

The purpose of the staff facilities planning analyst is to assist the 
chief of facilities planning in discharging his responsibilities by assist- 
ing him in planning for improvements, developing and revising internal 
working procedures, development of statewide standards concerning 
housing of n on institutional state employees, coordination of budget 
preparation, paperwork and forms management, maintenance of the 
Department of General Services Facilities Planning Manual, and pre- 
paring recommended revisions to the State Administrative Manual. The 
stair' facilities planning analyst reports to and is under the direction 
of the chief of facilities planning. 

Relationship and Duties 

• Implement and coordinate the task force's instructions on facili- 
ties planning service. 

• Develop all necessary policies and procedures to provide the facili- 
ties planning services staff information about work methods and 
procedures, time reporting, and administrative policies of facili- 
ties planning service. 

• Responsible for revision and maintenance of the Facilities Plan- 
ning Manual and the issuance of revision whenever required. 

• Responsible for development of statewide space utilization and 
art layout standards. 

• Responsible for administering the facilities planning services re- 
lease system. This includes preparation of internal directives on 
policies and procedures and general information for the chief of 
facilities planning, maintenance of the Department of General 
Services administrative order system, and the State Adminis- 
trative Manual. 

• Preparation of special reports and studies concerning facilities 
planning activities as required. 

• Responsible for maintenance of paperwork and forms manage- 
ment and merit award program. 



(140) 



BASIC DECISION POINTS 
Proposed 



EXHIBIT II 
(Part 1) 




1. Agency determines need. 

2. Notifies General Services 

3. Prepares data for budget. 



Advanced Space Report 
completed. (Form 9) 




lease for State. 



Advance Notice 

Space request reviewed v 

for data content. \ 

Transaction Number and 

Code assigned. 

Negotiation responsibility 

established. 

Assignment of Fac. Pig. Anal. 



PROPOSED FLOW OF LEASE DOCUMENTS 



i m 






Fhnaber i 



■Igoing & returning 



FACILITIES AHALYST 



2/c 

2. DeC«rolne. Begotli 
Uaponalbllttlaa. 

3. Aaalgna Fac. Anal. 

4. Forward* to Ftaani 




EO/6 «1 1 



L 2/c _J 



" V 



14 

— 21 I 



1 t/c 



(—• »■•) 






(^) 



*§ 



FACILITIES FLASHING 



0/6 — -J 

'"I 



c^o 



r — rz 



I 






■jtcoaaaaada approval 



t% 



< ) 



EXHIBIT II 
(Part 2) 



PROPOSED FLOW OF LEASE DOCUMENTS 
(Agency negotiated ) 



EXHIBIT II 
(Part 3) 



FACILITIES ANALYST 



CONTROLLER 



■T77 



Prepares Porn 9 
"Advance Space 
Required" Including 
necessary sketches - 



1. Assigns Transaction 
Number & Code. 

2. Prepares New Lease 
Pile & Record Pile. 




1. After Reg. i 

pie ted. prepares 
Meg. Suaaaary Porn 



S/c 



agreement . 
approve 1 . 



1. Reviews program. 

Determines 

negotiation 

responsibilities. 
3. Forwards to Finance 



-*+- 



1. Reviews & Approves. 

2. Returns to G/S. 



• <> 



Prepares "Lease 

Transmittal Por»" 
9036. 



3. Retains copy. 



(Attaches "\ 
lease file J 



1. Approves & signs 
all copies. 

2. Retains copy. 



1. Been— unds approval. 



1. auth. lease 



I l/c 

1 m 



C^D 



Q 



r=n 



^Original Copy 



•*< ) 



EXHIBIT III 

Department of General Services Facilities Planning 

LEASE TRANSMITTAL 

Lease Transactions Number 

Lease for : Department Division 



This lease transmittal form is to be dated, initialed, and forwarded after 
the indicated action is completed. 



FROM : LEASE NEGOTIATOR DATE 

The attached proposed lease conditions have been approved by the 

tenant agency (ies) on and the lessor on 

(date) 

, and the funds encumbered. The lease con- 

(date) 
ditions agree with previously approved Form 6 and comply with 
state leasing policies and procedures (except as noted on the re- 
verse side of this form) and approval is recommended. 

TO: (Route in order listed) Date 

Forwarded Initials 

1. SIGNATURE OF AGENCY AUTHORIZ- 
ING OFFICIAL (if negotiated by agency 
personnel) 

2. SENIOR FACILITIES ANALYST 

a. Lease documents reviewed and approved 

3. DEPARTMENT OF GENERAL SERV- 
ICES LEGAL SERVICES 

a. Lease is approved for legality and may be 
consummated upon approval of the di- 
rector's office 

4. CHIEF, FACILITIES PLANNING 

a. Lease documents comply with state leas- 
ing policies and procedures and approval 
is recommended 

5. ASSISTANT DIRECTOR 

a. Lease agreement approved and signed. 

b. Lease file returned to Facilities Planning 

6. FACILITIES PLANNING RECORD CLERK 

a. Signed copies distributed. 

b. All documents filed 



(141) 



EXHIBIT IV 

The following reports will be published by facilities planning on a 
continuing basis : 

Report No. 1 

Report No. 1 will be prepared monthly for all transactions and 
will contain the following items: 

a. Transaction number 

b. Transaction code 

c. Agency 

d. City 

e. Agent assigned 

This information will be arrayed in the following manner: 

I. Transactions received during the reporting month 
II. Transactions completed during that month 

III. Transactions on hand prior to that month in 30-60-90-etc-day 
increments 

IV. Cumulative listing of transactions completed from beginning of 
fiscal year. 

Reports Nos. 2 and 3 

Reports Nos. 2 and 3 in addition to the above information will also 
contain for each lease : 

f . Term of lease 

g. Number of square feet assigned or leased 
h. Price per square foot 

i. Monthly rental 
j. Annual rental 
k. Building number 
I. Type of space assigned or leased 
m. Estimated occupancy of space 

n. Any options to renew lease and number of days of notice required 
o. Any cancellation privileges and number of days notice required 
p. Building information (misc.) 
q. Name and address of lessor 
r. Address and number of spaces of any parking which is available 

Report No. 2 will contain the above information for transactions 
completed during the prior month and will also have a cumulative 
listing with this information for all transactions completed since the 
beginning of the fiscal year. 

Report No. 3 will contain the master list of all space assignments 
and leases in effect as of end of fiscal year. Report No. 2 will be a 
monthly supplement to update the annually prepared Report No. 3. 



(142) 



ME OF CALIFORNIA-REVENUE AND MANAGEMENT AGENCY EDMUND G. BROWN, Governor 



PARTMENT OF GENERAL SERVICES 

CRAMENTO 



December 30, 1965 

Management Memo 65-42 
TO: All State Agencies 
SUBJECT : Leasing of Real Property, Policies and Procedures 

Effective immediately, the State Administrative Manual is revised to 
contain the attached subchapter outlining the state's policies on leasing 
of real property and the procedures to be followed in requesting and 
obtaining space. Sections 8617, 8617.1, 8617.2, 8617.3, and 8617.4 of 
the State Administrative Manual are hereby repealed. 

To insure that changes in the leasing policies and procedures are 
called to the attention of those concerned, the State Administrative 
Manual sections attached to this memorandum should be reviewed by 
all key personnel concerned with leasing. 

All agencies should revise their existing procedures to comply with 
these new policies and procedures. 

Robert L. Haekness 
Director of General Services 
I concur: 

Hale Champion 
Director of Finance. 

STATE ADMINISTRATIVE MANUAL 

PROCUREMENT OF PHYSICAL FACILITIES 

Facilities Planning 

General 1370 

Purpose 1370.1 

Services Offered to Client Agencies 1370.1 

Space Procurement Policies and Procedures 1380 

Adherence to Policies and Procedures 1381 

Legal Authority 1382 

General Leasing Policy 1383 

Responsibility for Leasing 1384 

Lease Requirements and Conditions 1385 

Lease Term 1385.1 

Options 1385.2 

Janitorial Services 1385.3 

Utilities 1385.4 

Fair Employment Practice Clause 1385.5 

Hold Harmless Clause 1385.6 

Prevailing Wage Clause 1385.7 

Escalation Clause 1385.8 

Subsequent Expenses for Alterations 1385.9 

Overlap in Rental 1385.10 

Terminations 1385.11 

Renewals 1385.12 

(143) 




144 ORGANIZATION OF THE EXECUTIVE BRANCH 

New Construction Under Leasing Authority 1386 

Procedures — Assignable Option Method 1386.1 

Procedures — Site Proposal Method 1386.2 

Procedures — Lease Proposal Method 1386.3 

Solicitation of Sealed Proposals 1387 

Disqualification of Proposers 1388 

Zoning and Property Control 1389 

of Private Architect 1390 

Inspection 1391 

Leasing Procedures 1392 

Request for Space 1392.1 

Negotiation for Space by Agency 1392.2 

Preparation of Lease Document 1392.3 

Procedure for Space Procurement, General Services Negotiated 1392.4 

Procedure for Space Procurement, Agency Negotiated 1392.5 

GENERAL 1370 

Purpose 1370.1 

The purpose of facilities planning service of the Department of General 
Services is to plan and provide adequate space for all client state agencies 
as requested and approved. 

Services Provided to State Agencies 1370.2 

To fulfill this responsibility, facilities planning provides to its clients the 
following services : 

1. Forecasts future space needs and assists in determining whether these 
needs will be met by state construction or leasing from private owners. 

2. Maintains an inventory of existing state-controlled office space. 

3. Develops policies, procedures, regulations and methods governing the 
assignment, reassignment, and utilization of space. 

4. Develops basic state leasing policies, procedures and standards to 

obtain maximum utilization of space. 

5. Negotiates leases of real property for state use and approves leases 
negotiated by other state agencies not exempted by law. 

6. Assigns and reassigns space in state-owned and leased buildings. 

Space Procurement Policies and Procedures 1380 

Adherence to Policies and Procedures 1381 

The policies and procedures on leasing of real property as contained 
in this subchapter are to be followed in all instances. Any proposed devia- 
tion from these policies and procedures must be immediately submitted in 
writing to the Department of General Services and approval obtained 
before proceeding. 

Legal Authority for Leasing 1382 

^ Government Code Section 14669 authorizes the Director of General 
Services to hire or lease any real or personal property for the use of any 
agency, including the Department of General Services, if he deems it to be 
in the best interests of the state. 

All requests for the leasing of real property or personal property such as 
prefabricated structures, except as exempted by law or in writing by the 
Department of General Services, will be submitted to the Department of 
General Services for approval prior to committing the state. 

GENERAL LEASING POLICY 1383 

The policy of the Department of General Services is to adequately house 
the activities of state government in state-owned or leased quarters. Ad- 
ditional leases of privately owned space will be authorized when it is deter- 
mined by the Department of General Services that : 

a. Needs cannot be met satisfactorily in space presently owned or leased 
by the state. 

b. The terms of the proposed lease are most favorable to the state, with 
due consideration to agency program needs, and at rental rates not in 
excess of those prevailing in the community for comparable facilities. 



ORGANIZATION OF THE EXECUTIVE BRANCH 145 

RESPONSIBILITY FOR LEASING 1384 

Department of General Services 

The Department of General Services will : 

1. Review all leases negotiated by other agencies for compliance with 
established policies and procedures and for reasonableness of rate. 

2. Negotiate all major leases — a major lease is any lease with an annual 
rental of $10,000 or more. 

3. Negotiate metropolitan area leases regardless of rental amounts except 
as exempted below. 

Other Agencies 

The following agencies are authorized to negotiate all their own leases 
subject to the approval of the Department of General Services : 

1. Department of Motor Vehicles. 

2. Department of California Highway Patrol. 

3. Department of Employment. 

Specific authority for other agencies to negotiate their own leases will be 
made at the time the space requirement report, Form 9, is received. This 
determination will be based upon the availability of qualified agency leasing 
staff and the estimated annual rental of the lease. 

See Section 1291 for other specific exemptions. 
LEASE REQUIREMENTS AND CONDITIONS 1385 

Lease Term 1385.1 

Lease term is the period of occupancy of the premises from the initial 
date to the last day of agreed occupancy. 

When a lessor agrees to construct a building according to state plans and 
specifications or perform major renovations in an existing building, state 
policy permits a lease term of 10 years, cancellable by the state any time 
after the fifth year. Leases which require new construction so located that 
the building cannot be used for usual commercial purposes may be written 
for 15 year term, cancellable by the state any time after the 10th year. 

Where minor alterations are proposed on any property or where adequate 
facilities to meet the needs of an agency are at a premium, a noncancellable 
lease term for as long as five years is permissible. 

When agency needs indicate probable additional space requirements be- 
fore five years and the lease contains an option to hire such additional space 
it is permissible to negotiate these leases for firm terms not exceeding five 
years. 

Terms in excess of the above must be fully justified to the Department of 
General Services. 
Options for Additional Term or Space 1385.2 

In lieu of including options to extend the term, state policy is to provide 
for a longer term and include a right to cancel the lease after a specified 
term. (See Section 1385.1.) 

STATE ADMINISTRATIVE MANUAL 
PROCUREMENT OF PHYSICAL FACILITIES 

A longer term with cancellation rights offers the following benefits : 

1. Allows continued occupancy when expected expansion does not ma- 
terialize. 

2. Facilitates cancelling leases after other lease arrangements have been 
made. 

3. Provides flexibility in cancelling or renegotiating after the firm term 
if the market has decreased below the rental provided in the lease. 

4. Enables lessors to obtain better financing although the lease is cancel- 
lable at the end of a specified period. 

Options for additional space for agencies with a history of predictable 
expansion of space requirements are encouraged. This is also applicable to 
master leases. 

Janitorial Services 1385.3 

Leases will require the lessor to furnish janitorial services. 



246 ORGANIZATION OP THE EXECUTIVE BRANCH 



1385.4 



' Lease! will normally require the lessor to pay all utilities except tele- 
phone Any provision which requires the state to pay utilities in a privately 
owned building, unless separate meters are used for the state, must be fully 
justified on the Form 9. An estimation of cost must be included. 
Fair Employment Practices Clause 1385.5 

A fair employment practices clause is included in all state leases where 
the state is the tenant. 
Hold Harmless Clause 1385.6 

A "hold harmless" clause in favor of the lessor in any state lease or 
agreement is not permitted. 
Prevailing Wage Clause # 1385.7 

An approved prevailing wage clause will be included in all leases where 
the lessor constructs a new building or performs alterations, estimated to 
cost $10,000 or more, in an existing building. 
Escalation Clause 1385.8 

The policy of the Department of General Services is not to permit escala- 
tion clauses in leases during the firm term of the lease. In guaranteeing 
reimbursement for taxes or services and utilities, the state is relieving 
property owners of increased costs which are part of the normal operation 
of business and should be anticipated in establishing rental levels. 
Subsequent Expenses for Alterations 1385.9 

After a lease has been executed or approved by the Department of Gen- 
eral Services and initial alterations and improvements have been provided 
for, no additional expenses for alterations or improvements to the premises 
will be allowed unless justified on the basis of absolute and urgent necessity. 
Overlap in Rental 1385.K 

In determining the effective date of leases for facilities which will replace 
existing leased facilities, sufficient overlap will be provided between the 
termination date of the existing lease and the effective date of the new 
lease to allow time for moving. No additional overlaps will be permitted. 

Terminations 1385.1! 

Agencies will notify facilities planning, Department of General Services, 
at least 60 days prior to the expiration of a lease or time specified for ex- 
ercising an option as to their intention to vacate the premises or to con- 
tinue the occupancy on a month-to-month or other basis. 

Unless it is otherwise provided in the lease, the lessor legally is entitled 
to receive notice of termination at least 30 days prior to the date when such 
termination shall become effective in order to terminate a month-to-month 
tenancy. The Department of General Services will serve notice of termina- 
tion, upon request of agencies, to lessors of premises leased by the Depart- 
ment of General Services. 

Renewal 1385.1: 

An officer designated by the agency occupying premises under leases con- 
taining renewal options shall notify Facilities Planning, Department of 
General Services, of intention to exercise the option at least 60 days 
prior to the date the option must be exercised. Failure to notify the 
Department of General Services may result either in losing the option or 
in unneccessary extra cost to the state if the rental is increased. 

NEW CONSTRUCTION UNDER LEASING AUTHORITY 1386 

A lease involving new construction by the lessor will be authorized only 
when adequate space cannot be obtained in existing facilities at a reason- 
able cost to the state. When new construction is approved, one of the 
following methods will be used for site selection: 

a. First choice — Assignable option — Secure an assignable option on an 
acceptable site on a form approved by General Services. This tech- 
nique allows all proposers to make proposals on one site and re- 
moves land cost as a competitive factor. 

b. Second choice — Site proposal — Prospective developers are invited to 
submit specific sites for consideration. Each of these sites is inspected 
for acceptability. Persons in control of the accepted sites are then 
invited to submit lease proposals. 



ORGANIZATION OF THE EXECUTIVE BRANCH 147 

c. Third choice — Lease proposal — Prospective lessors are invited to sub- 
mit lease proposals on any sites within a defined geographic:! 1 area. 
The agency must submit reasons for using any technique other than the 
assignable option. 

Procedures — Assignable Option Method 1386.1 

Any agency negotiating a lease under the Assignable Option method will 
follow the procedures outlined below : 

1. Define acceptable geographic area and determine minimum site re- 
quirements. 

2. Select the desired site considering relative cost and location. 

3. Appraise the selected site to determine that the asking price is rea- 
sonable. This appraisal may be brief, but must be supported by some 
indication of market value such as comparable sales in the area. 
The appraisal can show a "range of market value." 

If the asking price exceeds the "range of market value" and the seller 
refuses to lower the price, the site must be rejected. 

4. Make an economic analysis of probable rent to determine if the proj- 
ect is feasible. 

5. Obtain signed assignable option from owner using the Department of 
General Services' standard option form. A payment of $10 for an 
assignable option is the current policy. The option period should be 
sufficient to give the successful proposer 30 days to exercise the option 
after award. 

6. Obtain preliminary title reports and analyze to make sure there are 
no encumbrances which might hinder the state's use of the property. 

7. Prepare "proposer's package" to include: 

a. Preliminary plans and specifications. 

b. Proposal form. 

c. Sample lease. 

d. Transmittal letter outlining project terms and indicating assign- 
able option conditions. 

8. Advertise for lease proposals in local newspapers. Where project size 
warrants, advertisements should be placed in large metropolitan pa- 
pers and newspapers of statewide circulation, such as the Wall Street 
Journal. "Proposer's packages" should be sent to all who show inter- 
est and to any parties who have previously indicated an interest. All 
requests for lease proposals shall specify a deadline, after which no 
further proposals will be accepted. Ample time should be allowed for 
prospective proposers to prepare well-considered proposals. 

9. Offers should be opened at a previously announced time and place so 
that all interested parties may attend. 

10. Offers should be analyzed and compared with the previously prepared 
economic analysis. If the low offer is within the "acceptable rental 
range" and acceptable in other respects, the agency should recommend 
that the Department of General Services accept the proposal and 
notify the proposer of this recommendation. See Section 1387 for 
general sealed proposal instructions. 

11. Prepare lease documents and have successful proposer sign lease. For- 
ward lease to General Services for approval or execution. 

Procedures — Site Proposal Method 1386.2 

Any agency negotiating a lease under the site proposal method shall 
follow the procedures outlined below : 

1. Define acceptable geographic area and determine minimum site re- 
quirements. 

2. Advertise for site proposals in local newspapers. Mail brochure to all 
who show interest and to any parties who have previously indicated 
an interest. Brochure should contain all requirements and should 
specify a deadline after which no further proposals will be accepted. 
Ample time should be given to allow as many proposers as possible 
to submit site proposals. 

3. Inspect and evaluate all proposed sites. Select acceptable sites. Notify 
all parties who submitted sites of approval or rejection. 



ORGANIZATION OF THE EXECUTIVE BRANCH 

!. Make an economic analysis of probable rent to determine if the 

project is feasible. 
5. Send "propoeer'a package" to include : 

a. Preliminary plans and specifications. 

b. Proposal form. 

c. Sample lease. 

d. Transmittal letter outlining project terms. 

(5. Follow procedure for assignable option method, Section 1386.1 begin- 
ning at Step 9. 
Procedures — Lease Proposal Method 1386.3 

Any agency negotiating a lease under the lease proposal method shall 
follow the procedures outlined below: 

1. Define acceptable geographic area and determine minimum site re- 
quirements. 

2. Prepare plans and specifications. 

3. Make an economic analysis of probable rent to determine if the 
project is feasible. 

4. Prepare "proposer's package" to include : 

a. Plans and specifications. 

b. Proposal form. 

c. Sample lease. 

d. Transmittal letter outlining project terms. 

5. Follow procedure for assignable option method, Section 1386.1, begin- 
ning at Step 8. 

SOLICITATION OF SEALED PROPOSALS 1387 

To assure maximum response by prospective lessors on space needs re- 
quiring new construction, newspaper advertising and other notices to inter- 
ested individuals and groups shall be made requesting sealed proposals. All 
notifications shall specify a deadline, after which no further proposals will 
be accepted. Ample time should be allowed for prospective proposers to 
prepare well-considered proposals. 

All details, terms, and specifications should be carefully considered before 
proposals are solicited. A fair market rental figure for the proposed con- 
struction shall be developed prior to proposal opening. 

If there are material changes in the terms or specifications, all proposals 
should be rejected and new proposals solicited with opportunity for all 
proposers to submit new proposals. 

No proposer shall be given preferential treatment or privileged informa- 
tion. If low proposal is within acceptable range of the estimated fair 
market rental and acceptable in other respects, it should be accepted. All 
proposers will be given the same opportunity to lower their proposals when 
no proposal is within acceptable range of the estimated fair market rental. 

All proposers shall be required to submit proof of their financial ability 
to perform. No contract shall be awarded until the agency and General 
Services are satisfied that the proposer can perform. 

The successful and unsuccessful proposers shall be so notified in writing. 

When agencies are authorized to solicit proposals, they shall submit to 
facilities planning a list of all prospective proposers notified, copies of any 
advertising, and copies of all proposals received. 

DISQUALIFICATION OF PROPOSERS 1388 

A proposer will be disqualified when : 

1. He is unable to submit proof of his financial ability to perform or 
provide a performance bond. 

2. After proposal opening, he is unable or unwilling to perform on condi- 
tions and rates specified and agreed. 

ZONING AND PROPERTY CONTROL 1389 

When the state acquires an assignable option, the negotiating agency 
will assume responsibility for assuring that the property is zoned for the 
intended use. 

When the site proposal or lease proposal methods are used, the proposer 
must get a Letter from local zoning officials indicating that zoning for the 
intended use will be approved on request. The proposer also must certify 
that he has control of the property which he submits as a site. 



ORGANIZATION OF THE EXECUTIVE BRANCH 149 

USE OF A PRIVATE ARCHITECT 1390 

Buildings to be constructed for prime occupancy by the state under a 
lease agreement shall be designed by an architect registered to practice 
under the Business and Professions Code of the State of California. The 
architect's preliminary design will be subject to approval by a board con- 
sisting of a representative from each of the following state agencies: the 
tenant agency, the Office of Architecture and Construction, and facilities 
planning service of General Services. 

The architect shall also prepare the instruments of service such as 
drawings and specifications, and supervise the construction. 

STATE ADMINISTRATIVE MANUAL 
PROCUREMENT OF PHYSICAL FACILITIES 

INSPECTIONS 1391 

Facilities planning will assume responsibility for inspections of construc- 
tion and improvements on leases which they negotiate when new con- 
struction is required or alterations are estimated to cost $10,000 or more. 
Tenant agencies are responsible for inspecting and assuring that alterations 
costing less than $10,000 are performed according to specifications. 

When an agency conducts negotiations, they are responsible for inspec- 
tions. 

Any agency responsible for inspections must certify to the Department 
of General Services that the construction or alterations have been per- 
formed in accordance with specifications. 

LEASING PROCEDURES 1392 

Request for Space 1392.1 

Any agency requiring space will notify the Department of General Serv- 
ices in writing on space requirement report, Form 9. 

Upon approval of the Form 9 by the Department of Finance and the 
Department of General Services, facilities planning service will determine 
and notify the agency whether (1) facilities planning will conduct negotia- 
tions for the required space or (2) authorize the agency to locate accept- 
able space. 

Negotiations for Space by Agency 1392.2 

Agency negotiations for space may be conducted only after the facilities 

planning service has indicated this authority on an approved Form 9. 
When the agency has located space which meets their requirements and 

1. conditions in proposed lease are the same as authorized in the Form 9 
(terms, cancellations rights, area, and type of space), 

2. proposed effective date will not overlap term of existing lease except 
to provide sufficient time for moving purposes, 

3. proposed lease is the most favorable to the state, 

4. quality of proposed space is consistent with need and meets quality 
standards of state, 

5. value of parking is comparable to value of similar parking facilities in 
the area, and 

6. net rate per square foot is reasonable, 

they shall prepare a negotiations summary report, Form 6, summarizing 
terms and conditions of proposed lease, quality of proposed space, and solici- 
tation and advertising efforts. This report will be attached to the lease 
agreement and included in the facilities planning lease file. 
If any one of the following three conditions exists : 

1. the rental exceeds 10 percent above the amount approved in the 
Form 9, 

2. the area is more than 10 percent above the area approved in the 
Form 9, or 

3. the noncancellable term is greater than that on the Form 9, 

the agency must forward the lease negotiations report, Form 6, to facilities 
planning for obtaining approval from the Department of Finance prior to 
preparation of the lease agreement. 



150 



ORGANIZATION OF THE EXECUTIVE BRANCH 



Preparation of the Lease Document 1392.3 

Department of General Services' approval of the Form 9 authorizes the 
agency to prepare a standard form for leases, Form 1. Agencies should 
inform prospective lessors that no lease is valid unless executed or ap- 
proved by the Department of General Services. 

After the agency has prepared the Form 1 and obtained the lessor's 
signature, it should be submitted to the Department of General Services 
for final review and approval or execution. 
Procedure for Space Procurement, General Services Negotiated 1392.4 



General Services — 
Facilities Planning 



Agency 



General Services — 
Facilities Planning 



Agency 



Finance 



Legislature 



BUDGET PREPARATION 

1. Initiates annual rental schedule report for each 
agency listing current rental obligations of the 
agency for the current budget year, rental obliga- 
tions which expire during the current budget 
year, and pending space requirement reports, 
Form 9, in two copies. Retains one copy and for- 
wards the second copy to agency. 

2. a. Reviews and corrects the annual rental sched- 

ule report indicating changes anticipated, 
b. Returns updated report to facilities planning, 
General Services, for review. 

3. a. Reviews report for technical adequacy, amount 

of space proposed, and cost per square foot, 
b. Approves report and returns to agency for 
inclusion in budget. 

4. Includes "Annual Rental Schedule Report" in 
agency budget and forwards to Department of 
Finance. 

5. a. Reviews agency annual rental schedule report 

for compliance with fiscal and budgetary poli- 
cies, 
b. Includes report in Governor's Budget. 

6. Considers agency rental schedule report as a part 
of the agency budget. 



SPACE REQUIREMENT NOTIFICATION 

Agency 7. a. Prepares space requirement report, Form 9, 

in quadruplicate. Retains one copy and for- 
wards the original and two copies to General 
Services, facilities planning. 
Note : It is the responsibility of the initiator 
to prepare any sketches necessary to intelli- 
gently describe the layout desired and to in- 
clude these sketches with the Form 9. If more 
than a sketch is needed, a request for plans 
should be made a part of the space require- 
ment report. 

b. Forwards space requirement report, Form 9, 
to General Services, facilities planning. 
8. a. Reviews agency request for space. 

b. Determines whether the Department of Gen- 
eral Services or the agency will negotiate the 
lease and so notifies the agency on a copy of 
the Form 9. 

C Obtains Department of Finance approval when 
necessary. 

LEASE NEGOTIATION— GENERAL SERVICES NEGOTIATED 

Lease Negotiator 9. a. Performs all work required for handling lease 

transactions including requesting Office of Ar- 
chitecture and Construction to prepare any re- 
quired plans and specifications. 



General Services — 
Facilities Planning 



ORGANIZATION OF THE EXECUTIVE BRANCH 151 

b. Obtains lessor's approval of proposed terms. 

c. Prepares lease negotiation summary report, 
Form 6, in triplicate. 

d. Signs the negotiations summary statement 
portion of the Form 6 and forwards the origi- 
nal and one copy to the requesting agency for 
their approval of proposed terms. 

Agency 10. a. Reviews and approves or rejects lease terms. 

b. If approved, returns original Form 6 to Gen- 
eral Services, facilities planning. Retains copy 
for encumbrance of funds. 
Note : The copy retained for encumbrance 
must be forwarded to facilities planning prior 
to the time the facilities planning analyst 
recommends approval of the lease. The origi- 
nal Form 6 should not be retained by the 
agency longer than 10 working days. 

LEASE AGREEMENT 

General Services — 11. a. Prepares lease agreement in quintuplicate. 
Facilities Planning Forwards original and four copies to the lessor. 

Lessor 12. a. Reviews, approves, and signs all copies. 

b. Retains one copy and returns the original 
and three copies to facilities planning. 
General Services — 13. a. Approves lease. 

Facilities Planning b. Notifies agency, Controller, and lessor of ap- 
proval by distribution of signed copies. 
Procedure for Space Procurement — Agency Negotiated 1392.5 

See Section 1392.4 for budget preparation and space requirement notifi- 
cation (Steps 1 through 8). 

LEASE NEGOTIATION— AGENCY NEGOTIATED 

Agency 9. a. Performs all work required for handling lease 

transactions including requesting Office of Ar- 
chitecture and Construction to prepare any 
required plans and specifications. 

b. Obtains lessor's approval of the proposed 
terms. 

c. Prepares lease negotiation summary report, 
Form 6, in duplicate. 

d. Indicates approval of proposed terms by sign- 
ing the negotiations summary statement por- 
tion of the Form 6. 

Agency (official) 10. a. Reviews and approves or rejects lease terms. 

b. If approved, authorizes preparation of lease 
agreement and encumbrance of funds. 

LEASE AGREEMENT 

Agency 11. Prepares lease agreements in quintuplicate. For- 

wards original and four copies to the lessor. 

Lessor 12. a. Reviews, approves, and signs all copies. 

b. Retains one copy and returns the original and 
three copies to the agency. 

Agency 13. Prepares lease transmittal, Form 9036, attaches 

to lease documents along with the lease negotia- 
tion summary report, Form 6, and forwards to 
the General Services facilities planning for ap- 
proval and consummation. 

General Services — 14. a. Approves lease. 

Facilities Planning b. Notifies agency, Controller, and lessor of ap- 
proval by distribution of signed copies. 



APPENDIX C 
NEWSPAPER SERIES 






ORGANIZATION OF THE EXECUTIVE BRANCH 



155 



The following is reprinted from the San Jose Mercury of 
Monday, January 23, 1967 



A MERCURY INVESTIGATION 

'Super Service' GSD 
Plagued With Abuses 



By LOU CANNON 

Mercury Sacramento Bureau 
(First of a Series) 

SACRAMENTO— The new Reagan ad- 
ministration is about to launch a major 
reform in a "super service" department 
which was formed to foster efficiency and 
economy in state government, but has 
run aground on the shoals of duplication, 
waste and rising costs. 

With the creation of the Department 
of General Services (GSD) three years 
ago, a "new era" in the management of 
the state's business was begun, contends 
the department's glowing progress report. 

A Mercury investigation into the GSD 
found that this "new era" includes ques- 
tionable leasing activities, bidding irreg- 
ularities and recurrent complaints of 
inefficiency. 

Official records and a series of inter- 
views with people both in and out of 
GSD gave this picture of the department 
that was formed to centralize state serv- 
ices: 

• An Auditor-General's report, com- 
pleted late in 1965 but never made public, 
discovered seven cases of questionable 
building lease activity in the GSD and 
its predecessor service in the Department 
of Finance. 

• Two of the questionable leases cited 
by the Auditor-General were negotiated 
with a Sacramento businessman who sub- 
sequently served as director of a land 
development firm. Another director and 
stockholder of the same firm was GSD Di- 
rector Robert L. Harkness, whose status 
under the new Reagan administration 
is currently clouded. Reports within the 
past week indicate that he is about to be 
relieved of his post as departmental direc- 
tor and shunted into a less sensitive job 
compatible with his civil service status in 
the Department of Finance. 

• GSD spending increased by $8.2 mil- 
lion from its first year in 1963-64 to 
$57.6 million three years later, an in- 
crease of nearly 17 percent. Department 
employment climbed from 4,150 to 4,473. 

• The GSD-managed State Fair con- 
tinues to lose money. The 1965-66 fiscal 



year net loss was $256,641 despite tax 
revenues of $474,014 received from horse- 
racing. 

• State parking, centralized when the 
GSD was born, has been divided among 
four offices. The man who headed the cen- 
tralized parking charged in a successful 
court case that he was fired because he 
"made too many faces red." 

• Unauthorized use of state cars is 
widespread. "Anybody can get a car," 
complained Sen. (then Assemblyman) 
Tom Carrell (D-San Fernando) at a 
hearing last year. 

• An investigation by the Little Hoover 
Commission made public in the San Jose 
Mercury disclosed a near-monopoly in 
bidding for California Highway Patrol 
cars and specifications that discouraged 
competitive bidding. The GSD's office of 
procurement conducted the bidding, which 
is still under investigation by the Attor- 
ney General's office. 

• A private party, Viertel's Automotive 
Service, struck it rich at state expense 
by renting land from the Division of 
Highways under a Los Angeles freeway. 
A Little Hoover Commission report 
showed that Viertel's made $43,935 dur- 
ing the past fiscal year for towing and 
storing cars confiscated by the state in 
narcotics cases on the state-owned land, 
which was rented for only $4,680 a year. 

• Janitorial service costs the GSD 40 
percent more per square foot than it 
does the federal General Services Admin- 
istration, Legislative Analyst A. Alan 
Post found. Post, who unsuccessfully 
urged a budget cut last year, is now push- 
ing for adoption of federal standards and 
a savings of $500,000. 

• Reports by the Department of Fi- 
nance, the Legislative Analyst and the 
State Personnel Board have revealed 
costly absenteeism at the state printing 
plant, well above the normal rate for the 
industry. 

"There undeniably were abuses of 
sick leave at the printing plant," con- 
cedes deputy director Stanley B. 
Fowler. "But we think we have cor- 
rected them." 



156 



ORGANIZATION OF THE EXECUTIVE BRANCH 



Harkness and Fowler contend that the 
GSD has responded favorably to legisla- 
tive criticisms of the department. Further 
says Harkness, some GSD critics have 
magnified the department's supposed 
shortcomings "for their own purposes." 

The Mercury investigation found strong 
points as well as weak ones in the state's 
super service department. Auto inspec- 
tion procedures have been improved so 
that the state now scraps cars when it 
is no longer profitable to repair them, 
rather than at an automatic mileage 
point. 

The same Auditor-General's report 
which raked GSD leasing policies over 
the coals found property acquisition to be 
"generally satisfactory." 

The state printing plant, despite its 
absenteeism problems, has made signifi- 
cant savings in the printing of textbooks. 
And the implications of illegal con- 
flict-of-interest against Harkness and 
assistant director Arthur Collins arising 
from the stockholder interests they 
shared with Sacramento developer 
Charles E. (Duke) Brown remain 
totally unproven. 

The GSD won a major victory when 
an appeals court overturned a $123,000 
verdict against the state for the depart- 
ment's award of a leasing contract to 
Brown. 

But the Mercury also found that the 
GSD, set up to streamline government, 
has instead contributed to state govern- 
ment's ever-rising cost. Charged with both 
service and control, the GSD has stressed 
the former and downpedaled the latter. 

The results include a rising tide of 
legislative resentment. 

The Legislature, acting on a recom- 
mendation of the Little Hoover Commis- 
sion, created the GSD in 1963 out of the 
Department of Finance. 

Hale Champion, Director of Finance 
under ex-Gov. Edmund G. Brown, backed 
the move which was intended to allow the 
Finance Department to concentrate on 
policy and control matters and free the 
<;si> for day-to-day operations of govern- 
ment. 

"If you become deeply enmeshed in 
operations, you can't concentrate on 
policy," Champion said. "The Depart- 
ment of Finance is a lot better opera- 
tion since it's no longer involved in the 
things GSD has to do." 

These things include 20 separate serv- 
ices, among them state communications 
transportation, property acquisition (ex- 
cept highways) leasing, building stand- 
ards, office and administrative services 
purchasing, printing, "systems analysis " 



hearings officers for public agencies, state 
insurance, merit awards and the State 
Fair. 

The GSD took over the Office of Archi- 
tecture and Construction from the De- 
partment of Public Works. 

From the first the new super service 
department engendered legislative sus- 
picion, some of it inevitably reflecting the 
traditional conflict between different 
branches of government. 

Exasperated by unproven claims of 
savings, the Assembly Ways and 
Means Committee imposed a percentage 
slash on the GSD budget in 1965. But 
the department budget soared again in 
1966. 

Harkness maintains that economies 
effected by his department show up in 
savings for the agencies involved, not the 
GSD. But most of the agency budgets 
have steadily risen, also. 

After weathering the first gales of leg- 
islative skepticism the GSD encountered 
a more serious storm in 1964 with public 
disclosure that Harkness served as a 
member of the board of directors of 
Northern California Developers, a firm 
that had holdings near the since-developed 
Capitol Mall. 

Land developer Duke Brown, a fre- 
quently successful competitor for state 
business, later emerged as a director for 
the firm. 

Harkness owned 2,000 shares of the 
stock, which was initially capitalized at 
$10 a share. His deputy, Collins, owned 
500 shares. 

The GSD director purportedly acquired 
his stock while holding a lesser position 
in the Department of Finance. He denied 
any conflict-of-interest at the time and 
maintains the same position today, though 
he is reluctant to discuss the issue. 

His reluctance is not shared by Collins, 
who has kept his stock. The assistant 
GSD director showed the Mercury a list 
of original shareholders, a list that in- 
cluded the names of another former Fi- 
nance Department aide, an employe of the 
Mental Hygiene Department and a Dem- 
ocratic Party official in Sacramento 
County who since has been named a 
Superior Court judge by former Gov. 
Brown. 

Also on the list were four individuals 
and one investment firm that Collins said 
have done business at one time or an- 
other with the state. 

Harkness traded his stock for land in 
Sacramento. He said at the time the 
issue erupted that he had stopped serv- 
ing as a director 10 months before. 



ORGANIZATION OF THE EXECUTIVE BRANCH 



157 



Both Gov. Brown and Champion 
strongly defended their subordinate at the 
time. 

Recalling the incident, Champion says 
Harkness "acted honorably and didn't do 
anything wrong." 

"With foresight Bob would have been 
wise to get rid of the stock when he was 
named director," Champion added. "But 
no situation came up that confronted him 
with a conflict." 

At the time of disclosure, the Hark- 
ness role in the land development com- 
pany drew this comment from Assembly 
Ways and Means Committee Chairman 
Robert Crown (D- Alameda) : "There is 
nothing illegal, but I do certainly feel it 
is unethical." 

Duke Brown to this day remains one 
of the most influential Sacramento area 
builders. When Gov. Ronald Reagan 
set up recruiting headquarters on the 
Capitol Mall less than a week after 
election, Brown turned his plush quar- 
ters in the IBM building there over to 
the fledgling state chief executive. 

A Reagan official called the action "a 
semi-donation." 

The state leases that resulted in the 
conflict charges involved Duke Brown, 
who was not included on the original 
May 23, 1961, list of shareholders dis- 
played by Collins. Brown built the Crim- 
inal Investigation and Identification and 
the Mental Hygiene buildings for the 
state. 

The CII building led to the initially- 
successful suit against the GSD. Brown, 
the second low bidder, had been awarded 
the contract only a week before Collins 
acquired his Northern California Devel- 
opers stock. 

Procedures in contracts for both the 
CII and Mental Hygiene buildings were 
criticized in the auditor-general's report. 

To answer implications that he had not 
actually purchased the stock, Collins pro- 
duced financial records of other stock 
sales plus a canceled check. 

One of the stocks sold by Collins to 
purchase the Northern California De- 
velopers stock was the blue-chip Ford 
Motor Co., currently selling at about 
$46 a share on the New York Stock 
Exchange. Northern California Devel- 
opers stock has since slumped to as 
low as $1 a share. 

Collins, who said he bought the stock 
against Harkness' advice because he 
thought his boss "knew a good thing 
when he saw it," says he intends to keep 
his shares until the price goes up. 



Asked why Harkness advised against 
buying it, Collins says : "He knew I 
didn't have too much money." 

Ownership of a large amount of stock 
in a company with holdings near the Capi- 
tol might have constituted a conflict-of- 
interest, Collins conceded in an inter- 
view. 

"But our share of the thing was 

peanuts," Collins said. "We would 

have had to be plain, damn fools to 

try to enrich ourselves in that way." 

Refusal to sign contracts with Brown 

because of the businessman's interest in 

Northern California Developers would 

have "penalized the state," Collins said. 

The auditor-general's report relates this 
story : 

The leasing unit of the Department of 
Finance, now called Facilities Planning 
Service in the GSD, received some 12 
proposals for constructing the CII build- 
ing. G. Keith Kenworthy submitted the 
low bid of a $16,000 per month rental to 
the state. 

The state failed to obtain a perform- 
ance bond from Kenworthy, who after a 
disagreement with leasing unit officials 
finally submitted satisfactory drawings for 
the building on Jan. 25, 1961. 

Brown wrote a letter to the leasing 
unit on Feb. 24 stating that he was aware 
the state was having trouble with Ken- 
worthy and renewing his earlier offer of a 
$17,000 rental. 

At the end of March, Kenworthy had 
not started construction and the leasing 
unit under Collins declined him an 
extension. Brown was awarded the con- 
tract for $17,000 despite a lower offer 
from another bidder of $16,500. 
"The records do not indicate how the 
proposals were solicited or whether a 
deadline was specified," the report states. 
Kenworthy sued in June and Brown 
completed the building in September. 
On Aug. 17, 1962, after negotiations, 
the leasing unit canceled the five-year 
lease with Brown and signed a 10 year 
lease for $13,500 a month. 

In 1962 Brown won the award to build 
the Mental Hygiene Building in Sacra- 
mento, which afterward was leased to the 
state at a total rental of $1,680,000. 

The auditor-general's report, in review- 
ing the latter award, commented that the 
state had specified a very limited area 
for the building and had given bidders 
only 12 days to obtain the necessary 
details. 



15S 



ORGANIZATION OF THE EXECUTIVE BRANCH 



"It is our opinion that there was not 
adequate competition for the Depart- 
ment of Mental Hygiene lease," the re- 
port signed by Auditor-General William 
II. Merrifield concluded. 
To this day the state continues to lease 

the Mental Hygiene Building from Brown. 

But the CI I lease had an unusual sequel. 
After a legislative committee found that 

the sprinkler system in the CII building 

was constructed so that water would pour 



over criminal records automatically if a 
fire occurred, the CII moved into other 
quarters. 

Shortly before the move, Brown sold 
the building to Los Angeles buyers. 

The news of the sprinkler system, re- 
ported in the Mercury, was happily picked 
by a columnist for the San Quentin 
prison newspaper who asked the obvious 
question : 

"Anybody got a match?" 



ORGANIZATION OF THE EXECUTIVE BRANCH 



159 



The following is reprinted from the San Jose Mercury of 
Tuesday, January 24, 1967 



The 'Disappearing' State Records 



By LOU CANNON 
Mercury Sacramento Bureau 
(Second in a series on the costly path 
of the state's "super service" agency — 
the Department of General Services.) 

SACRAMENTO— "One of our most 
effective economy programs is paper man- 
agement," contended former State Fi- 
nance Director Hale Champion. 

The program, better known to some 
state officials as the records removal 
policy, enables state agencies to remove 
piles of useless records that would 
otherwise clog state office space. 
But the policy also has allowed state 
agencies to destroy purchase order rec- 
ords less than five years old and to throw 
out some bid records after one year. 

The Mercury encountered the policy 
last year while investigating California 
Highway Patrol bidding, monopolized for 
seven of the last eight years by a single 
Sacramento area bidder. 

Though Department of General Serv- 
ices (GSD) officials cooperated with the 
Mercury investigation, records of CHP 
car purchases before 1962 simply were 
not available. E. J. Petersen, the state's 
principal buyer, said they had been de- 
stroyed. 

Similar records are kept by most 
businessmen at least seven years in 
accordance with federal and state tax 
laws. 

The records removal policy, when vig- 
orously pursued by an agency, makes it 
impossible to discover the origin of a 
questionable buying practice, for all prac- 
tical purposes, most written records be- 
fore 1962 ceased to exist. 

Any possible use of this policy to con- 
ceal or cover up improper practices is 
compounded by the fact that the agency 
itself determines how long records are re- 
tained. 

The GSD, set up to centralize state 
government and improve its business 
practices, has nominal control over rec- 
ords removal but rarely exercises it. 
Neither John Berke, who administered 
the policy, nor Robert C. Woodall, the 
analyst who actually reviews the records 
destruction lists, can recall a single case 
where an agency has been told to keep 
records it wanted to destroy. 



"Generally speaking, our problem is 
the opposite," Woodall said. "They're try- 
ing to keep the records beyond their use- 
ful life." 

Woodall said the records removal policy 
conducted by the GSD's office of procure- 
ment calls for purchase orders to remain 
two years in the open file and three years 
in the archives before they are destroyed. 
Each type of bid document has a separate 
schedule of its own, some as brief as one 
year. 

The policy was staunchly defended by 
Champion, who was agency overseer of 
the GSD and direct boss of department 
director Robert L. Harkness. 

"I'll always err on the side of throwing 
out paper," Champion said. 

However, the ex-finance director con- 
ceded that the specific schedule adopted 
by the Office of Procurement for purchase 
orders and bid forms might be incorrect. 
"You shouldn't set one standard for 

business and another for government," 

Champion said. 

Under questioning Berke also said he 
thought purchase orders should be kept 
longer. But he said he lacked specific 
knowledge of any controls imposed by the 
GSD. 

The comments of Berke and Champion 
at best illustrate a common problem in 
the department set up to streamline and 
centralize state government services. 

The GSD is so big, so unwieldy and 
so reluctant to exercise its control func- 
tions that not even the officials in charge 
seem aware of the effects of their own 
policies. 

The Mercury investigation into the 
GSD, established as a super service de- 
partment three years ago, also found 
that few state purchases have ever been 
reviewed by the GSD to see if monopoly 
bidding or other restrictive practices 
exist. 

Competition and inspection of the files 
by the bidders tends to prevent restrictive 
purchasing practices, maintains Stanley 
B. Fowler, chief deputy director of the 
GSD in charge of purchasing. 

Fowler said the GSD "prequalifies" 
bidders by requiring them to file a 
statement of their financial ability and 
capability to perform. Qualified poten- 



3 GO 



ORGANIZATION OF THE EXECUTIVE BRANCH 



tial bidders then receive all invitations 
to bid on the product they supply. 
The state deals primarily with manu- 
facturers and wholesalers and, by and 
... purchases at highly competitive 
prices,*' warns a document for bidders 
supplied by the Office of Procurement. 
"Usually retailers have difficulty in com- 
peting for state business." 

The OHP ear bidding showed that the 
-usually" statement has some important 
exceptions. Disclosure by the Mercury 
that a single Sacramento area Dodge 
dealer had furnished all of the CHP cars 
for seven of eight years, often without 
competition, also cast doubt upon the 
GSD belief that bidding practices will 
remain fair and competitive without re- 
view. 

Changes in CHP car specifications 
came about only after the Little Hoover 
Commission invited representatives of 
major automotive manufacturers to meet 
with Harkness. The resultant competitive 
bids saved $600,000 for the state, and put 
the CHP into Oldsmobiles for the first 
time in years. 

Soon after the CHP bid opening, 
Assemblyman Vincent Thomas (D-San 
Pedro), chairman of the Joint Legis- 
lative Audit Committee, has said he 
would launch an inquiry into state 
purchasing practices. 

The Thomas committee received — but 
did not publicly distribute — copies of an 
auditor-general's report into GSD leas- 
ing practices completed late last year. A 
copy of that report obtained by the Mer- 
cury shows sharp criticism by the audi- 
tor-general of seven specific building 
leases negotiated by the GSD or its pred- 
ecessor unit in the Department of Fi- 
nance. 

In several cases the auditor-general 
singled out difficulties in finding out what 
happened from GSD files. 

"Most of the files are inadequate; 
they do not indicate investigations and 
findings relative to the best spaces at 
the lowest possible prices," the report 
stated. 

The report found that the GSD failed 
to give all bidders equal opportunity on 
an office building in Redding, had signed 
a lease for a Department of Employment 
building in Los Angeles that "may not 
have been in the best interest of the 
State," and had allowed the Board of 
Equalization to abandon a lease on its 
New York office in favor of plusher quar- 
ters without adequate justification. 

In the Los Angeles case the report dis- 
covered that the department had acted 



despite the advice of an employe in its 
own leasing unit who suggested two 
other less-costly locations. 

"I personally don't want to approve 
it — think it smells," the report quoted 
the employe as saying. His approval was 
never obtained. 

In still another Los Angeles con- 
tract, the Public Works Building, the 
state "paid in excess of $40,000 for 
unoccupied space," the report said. 

The report concluded with 11 specific 
recommendations, eight of them intended 
to improve the procedures on sealed bids. 
One of the 11 points specified that "no 
bidder be given preferential treatment or 
privileged information." 

Assistant GSD Director Arthur Col- 
lins told the Mercury: "They never have 
been given preferential treatment." 

But GSD officials, including Collins, 
admit that many of the auditor-general's 
other criticisms are valid and contend 
they have been met. 

"I got the message in the auditor-gen- 
eral's report," said Vaughn Miller, the 
GSD's facilities planning chief. "We went 
to work on it right away." 

Miller said the report lagged behind 
the GSD's awareness of its own leasing 
faults, some of which he said were cor- 
rected before the 16-page document was 
published. On the other hand, the GSD 
was not anxious to make the report pub- 
lic. 

"We certainly didn't rush to the 
newsstands with copies," Miller said. 

Harkness said the GSD took the criti- 
cisms as "a bible" even though he "hesi- 
tated to say that all of them were true." 
Instead of sampling GSD contracts, 
Harkness said, the auditor-general picked 
out certain specific ones. 

"They went to those and they just 
analyzed hell and breakfast out of those," 
Harkness said. 

During the course of a three-hour in- 
terview Harkness showed a reluctance to 
discuss only two issues. One concerned 
leases negotiated by the state with 
Charles E. (Duke) Brown, a leading Sac- 
ramento builder who became a director of 
Northern California Developers, Inc., a 
firm that owned property near the 
Capitol Mall. 

Harkness also was a stockholder and 
once a director in the same company, a 
disclosure that aroused sharp criticism in 
the Legislature late in 1964. The GSD 
director, who bought his stock before he 
became head of the state's property 
acquisition department, won strong back- 
ing from Champion and former Gov. Ed- 
mund G. Brown. 



ORGANIZATION OF THE EXECUTIVE BRANCH 



161 



Subsequently, Harkness traded his 
stock for some Sacramento land. He 
considers the issue closed, and he 
doesn't want to bring it up again. 
The only other issue that Harkness de- 
clined to discuss in detail is the con- 
troversial case of the state parking 
facilities analyst, laid off by the GSD for 
"lack of work" even though the depart- 



ment has added more than 300 employes 
in three years. 

The dismissed parking specialist, A. 
Lynn Stewart, charged that the GSD had 
arranged an administrative survey to fire 
him because he knew too much. 

Representing himself in a Superior 
Court case, the legally-inexperienced 
Stewart defeated the considerable legal 
resources of the Department of General 
Services. 



162 



ORGANIZATION OF THE EXECUTIVE BRANCH 



The following was reprinted from the San Jose Mercury on 
Wednesday, January 25, 1967 



52 



Wed., Jan. 25, 1967 San Jose Mercury 



Stewart Firing A Thorn In GSD's Toe 



By LOU CANNON 
Mercury Sacramento Bureau 

(Third in a series on the costly three- 
year path of the state's "super service 
agency" — the Department of General 
Services. Tuesday, the agency's director, 
Robert Harkness, teas replaced by Gen. 
Andrew Lolli. Story, Page 2.) 

SACRAMENTO— When the fledgling 
Department of General Services (GSD) 
winged out of the Department of Finance 
nest in 1963 with 4,150 employes and 
a $49.3 million budget, anxious sentinels 
on the ground floor of state government 
hoped for a smooth flight. 

But expectations that the GSD, an 
agency charged with the streamlining 
of many state government services, 
would make it on its own were sharply 
dashed only a few months after the 
department first tried its wings. 
Surprisingly, the GSD's downfall came 
because it decentralized one of the few 
state services that were already operat- 
ing on a coordinated basis. The issue, 
one that would cause gurgles of sympa- 
thy from many city managers and county 
administrators, was parking. 

A. Lynn Stewart, an experienced and 
highly-recommended traffic engineer, went 
to work for the State of California on 
March 31, 1961 as its sole parking facili- 
ties analyst. 

When the GSD was born in October 
1963 it acquired both Stewart and his 
parking analyst position. Neither sur- 
vived a year in the fast growing depart- 
ment, but Stewart's firing for "lack of 
work" became a touch-stone for the agen- 
cy specifically charged with economizing 
shite government services. 

Today an official veil of secrecy shrouds 
the ttrange case of A. Lynn Stewart. 

Despite growing complaints about cost- 
ly state parking lot developments in the 
LOO-block capitol plan area and else- 
where, neither former GSD Director Rob- 
ert L. Darkness nor Assistant Director 
Arthur Collins would discuss the Stewart 
case or the question of centralized park- 
ing. 



Nor would any of Stewart's several 
friends in state government talk about 
the case on the record. The ones that 
talked at all insisted on doing so out- 
side the confines of GSD buildings, a 
precaution that they insisted would 
prevent electronic eavesdropping. 

(Harkness says he would never permit 
such devices to be used.) 

The one exception to the no-talk rule 
is Stewart himself. Since his layoff he 
has talked persistently, both on and off 
the record. To the consternation of the 
GSD bureaucracy, he did his most effec- 
tive "talking" in court. 

The story Stewart tells in a volumi- 
nous Personnel Board and Superior 
Court record little resembles the picture 
of non-political efficiency painted by 
Harkness in his testimony before vari- 
ous legislative committees. 

Stewart's tale, largely supported by 
state records and interviews with GSD 
employes, is of a bureaucracy rife with 
professional jealousy and careful of step- 
ping on the wrong toes. By everyone's 
admission, including Stewart's, he was 
not careful. 

When Stewart arranged to have a 
state parking lot built near the State 
Capitol for less than $10,000, GSD 
yanked the project out of his hands 
and paid $23,000 to have it built un- 
der the jurisdiction of the State Of- 
fice of Architecture and Construction. 
Stewart complained. 

The GSD's reaction to the complaint 
was to reassign Stewart himself to the 
state architectural office. There, he sat 
for several weeks without being given 
any work to do. 

The record shows that Stewart played 
a role in obtaining better parking facili- 
ties for government employes, as the 
state's representative on the Inter-Gov- 
ernmental Civic Center Parking Commit- 
tee for Los Angeles. He was removed 
by Harkness three months after GSD 
was formed and succeeded on the com- 
mittee by Collins. 

And the record presents Stewart's con- 
tention, never refuted by GSD, that he 
was laid off because the department or- 
dered an administrative survey and came 



ORGANIZATION OP THE EXECUTIVE BRANCH 



163 



in with "predetermined recommendations" 
abolishing Stewart's job. 

As Stewart tells it in the Person- 
nel Board report, the man who made 
the study, administrative analyst Tom 
Richards, made the mistake of first 
preparing a report that failed to call 
for elimination of the parking special- 
ist's job. 

Deputy Director John Stanford refused 
to accept the study and ordered Rich- 
ards to make another report, Stewart 
testified. 

"I just want to tell you that this idea 
is to abolish your job and I think you 
ought to start looking," Stewart said 
Richards told him when he returned. 
Stewart asked why and Richards pur- 
portedly replied : 

"You have made too many faces red." 

Richards was never called to testify 
by the GSD. Stewart lost his case before 
the Personnel Board but he won it, with- 
out an attorney, in Superior Court. 

Ironically, the judge who issued the 
ruling in Sacramento Superior Court was 
Charles W. Johnson, the former depart- 
mental secretary of former Gov. Edmund 
G. Brown. Judge Johnson ruled that the 
department had failed to show that Stew- 
art had been fired for lack of work. 

Today, more than two years after 
Stewart's firing, a Mercury investigation 
found : 

• Parking responsibility fragmented 
among four GSD offices — facilities plan- 
ning, architecture, automotive and main- 
tenance. 

• Parking lot developments in the 
capitol plan area that do not amortize 



their costs, an apparent violation of leg- 
islative directive. 

• Growing waiting lists of employes 
seeking parking spaces. 

• Uncollected parking fee delinquencies 
from 189 legislative employes totaling 
$1,797. Non-legislative employes have 
their parking fees taken in payroll deduc- 
tions. 

Judge Johnson's decision in Stewart's 
favor has been appealed by the GSD, and 
the District Court of Appeal is scheduled 
to rule Feb. 16. Both Harkness and Col- 
lins use this as an excuse for not com- 
menting on the department's failure to 
contralize the parking operation. 

"We would be commenting in effect 
on the court case if we did," contends 
Collins. 

After his "layoff" Stewart took a cut 
in pay to work in the Division of High- 
ways, then found a job in his traffic spe- 
cialist's field at higher pay outside state 
government. 

A friend still working for the state 
remembers him as a "highly efficient per- 
son who rode roughshod over people who 
had been active in state government too 
long — they got him and they got him 
beautifully." 

Stewart issued a parting blast on April 
16, 1965, in a lengthy memo to Collins, 
in which he charged that the entire state- 
wide parking program was "disorganized, 
confused (and) irresponsible." 

The memo remains unanswered. So, 
also, do the costly questions posed by 
the super service agency's handling of 
state parking problems. 

(Next— Reforming the GSD) 



164 



ORGANIZATION OF THE EXECUTIVE BRANCH 



The following is reprinted from the San Jose Mercury of 
Thursday, January 26, 1967 



New GSD Chief Faces A Complex Task 



By LOU CANNON 

Mercury Sacramento Bureau 

Last in a series. 

SACRAMENTO— Some of the prob- 
lems facing former Maj. Gen. Andrew 
K. Lolli, the $23,500-a-year boss of the 
state's sprawling General Service Depart- 
ment (GSD) may give him some second 
thoughts about the glories of civilian life. 

Lolli, the retired commanding general 
of the western North American Defense 
Command, takes control of the state's 
embattled "super service" department on 
Feb. 1. Pie replaces Robert L. (Bob) 
Harkness, the only director GSD has had 
since its creation in 1963. 

One of the problems facing Lolli was 
illustrated by the complicated arrange- 
ment used by the Ronald Reagan admin- 
istration to remove Harkness from the 
directorship. 

Bumped Upstairs 

The discoursive Harkness, a sometime 
target of legislative criticism, is a Repub- 
lican, appointed as a department head by 
former Democratic Gov. Edmund G. 
Brown, and also a career civil servant 
with more than 38 years experience. 

The Reagan administration wanted a 
change of command at GSD, but in order 
to avoid a "bumping" arrangement that 
would have moved key Finance Dept. per- 
sonnel from their posts, a new job of 
assistant finance director was created for 
Harkness. 

It pays $24,336 a year and gives the 
60-year-old Harkness, who started his ca- 
reer as auditor for the Dept. of Mental 
Hygiene in 1928, an $836 annual pay 
boost. 

Gov. Reagan's decision to spend some 
money on a new job, in hope of major 
savings in GSD, perhaps shows best of all 
the difficulty facing the economy-minded 
administration in translating its budget- 
cutting theories into practice. 

Despite Brown's pointing with pride 
and Reagan's viewing with alarm in last 
fall's election campaign, virtually all of 
the career public servants except Hark- 
ness remains in charge of the GSD's day- 
to-day decisions under both administra- 
tions. 



Fowler Shifted 

One such is Deputy Director Stanley 
B. Fowler, who this week dropped down 
a notch into an assistant directorship, 
bumping Ray Long back into his former 
civil service post in the Department of 
Agriculture. The Reagan administration 
is seeking a deputy director to replace 
Fowler. 

Fowler, perhaps the most knowledge- 
able civil servant remaining in GSD, said 
he was "not surprised" by the appoint- 
ment of a retired general. 

"I wouldn't have been surprised if they 
named a doctor," Fowler said. "I served 
under 15 directors in 18 years in the 
Dept. of Employment, and I don't think 
the background matters — it's the man." 

Civil service prevents any mass reduc- 
tions in state employment, as the Reagan 
administration learned at an early date. 

The system's obvious long-suit is con- 
tinuity in government. Employees are on 
the whole so well-insulated from "spoils 
system" pressures that even Sacramento 
County, with its legion of state employees, 
gave Reagan a majority over incumbent 
Gov. Brown. 



Change Limited 



On the other hand, the system has the 
defects of its civil service virtues. Incom- 
ing governors, including Reagan, are 
sharply limited in the changes they can 
make to carry out their programs. 

Since savings cannot be made by any 
appreciable personnel reduction, they will 
have to come elsewhere if the Reagan ad- 
ministration is to carry out its budget- 
cut pledge. A search for savings is al- 
most certain to include the controversial 
areas of leasing, building and parking. 

And the GSD, carved out of the Dept. 
of Finance by Gov. Brown's administra- 
tion in 1963, will have to learn to say 
"no" to some of the requests of the many 
state departments that it serves. 

Avowed purpose of the department's 
creation was to allow the Finance Dept. 
to concentrate on the state's fiscal prob- 
lems while freeing GSD to streamline and 
centralize. 

The streamlining, however, remains in 
question. A Mercury investigation found 



ORGANIZATION OF THE EXECUTIVE BRANCH 



165 



recurrent complaints of waste, duplica- 
tion and questionable practices, particu- 
larly in leasing activities. 

Much Criticism 

The legislative analyst fills pages of 
his annual report with criticisms of the 
GSD, and the (Little Hoover) Commis- 
sion on Organization and Economy has 
exposed deficiencies in bidding practices 
and service contracts. Various legislative 
leaders, some of them staunch supporters 
of former Gov. Brown, took repeated pot 
shots at Harkness and the GSD. 

Part of the problem stemmed from the 
inevitable legislative distrust for veteran 
bureaucrats. 

Part arose from the natural conflicts 
that legislators get into with the execu- 
tive department over projects they want 
for their area, a classic example is the 
state office building planned for San Jose 
years before the GSD was born but still 
unbuilt and now the responsibility of 
that department. 

Part of the problem derived from the 
conflict-of-interest implications ("the only 
charges of that kind in 38 years," said 
Harkness) that the ex-GSD director faced 
in 1964 after disclosure that he owned 
stock and served as director of a land 
company with holdings adjacent to the 
Capitol Mall. 

GSA Different 

And part of the problem, a small but 
significant part, arose from what could 
be called the philosophical direction of 
GSD toward an agency providing many 
excellent state services but little state 
control. The philosophy is different in 
degree if not in kind from the U. S. Gov- 
erment Services Administration, a watch- 
dog agency that has attempted to reduce 
the costs and expose the economic foibles 
of the vast federal bureaucracy. 

Harkness' former boss, ex-Finance Di- 
rector Hale Champion, strongly favored 
the service philosophy of the state GSD 
and was in some measure responsible for 
it. As Champion saw it, control decisions 
on governmental economy have to be left 
up to individual agencies. 

"I'd rather take some risks than have 
government bound up with red tape," 
Champion contended. "The more you tie 
the hands of the guy who deals with the 
situation, the less relationship govern- 
ment has to the people it serves." 

Left unanswered is the question of 
what department, if any, will attempt to 
reduce costs of California's $4.6 billion- 



a-year state government. The economy 
function was originally a specific mission 
of GSD, whose budget grew in three years 
by $8.2 million to a total of $57.6 mil- 
lion. 

Millions Handled 

GSD's own spending, however, is a 
minor portion of the money it handles. 
The department in one way or another 
administers the expenditure of some $350 
million annually and in 1965 conducted 
property acquisitions totaling $90.8 mil- 
lion alone. 

Particularly sensitive is the office of 
procurement, always a prime target of 
suspicion for the form of preferential 
bidding treatment. The controversial CHP 
car specifications raised the question of 
whether firms selling other products to 
the state received preferential specifica- 
tions. 

Favoritism or not, the Little Hoover 
Commission's review of bids have uncov- 
ered several instances in which the GSD 
appears to have made little effort to foster 
competition. For instance, on last Aug. 
30, the GSD purchased 468 Motorola mo- 
bile radios for CHP cars at a cost of 
$339,797 (less a $79,723 trade-in allow- 
ance). 

Only one bid was received and the com- 
mission is inquiring to see what, if any- 
thing, the GSD did to encourage bids 
from other manufacturers. 

The GSD itself has conceded that 
bidding practices are not reviewed and 
the department's records removal policy 
makes it difficult to determine if prefer- 
ential policies existed in the past. 

Pride in Record 

However, Harkness displayed unflag- 
ging pride in the GSD record and dis- 
missed many of the criticisms as un- 
founded suspicions. He contended also 
that growth of the GSD's own budget 
provided a distorted picture because, he 
said, department-induced economies show 
up as savings for the agencies served by 
GSD. 

"We approached our problems before 
they consumed us," Harkness said, 
thumping the table to make his point 
during the course of a lengthy interview. 

As evidence that the GSD has not ig- 
nored waste in government, Harkness 
displayed a strongly worded memo crack- 
ing down unauthorized use of state auto- 
mobiles. He also hailed effectiveness of a 
GSD order restricting unauthorized long- 
distance telephone calls. 



166 



ORGANIZATION OF THE EXECUTIVE BRANCH 



But on other issues such as the GSD- 
nin state fair Harkuess remained essen- 
tially unresponsive to criticism. 

The fair has lost money every year un- 
der GSD, showing a net loss of $256,641 
in L966 despite tax revenues of $474,014 
from horseracing. Ground was broken re- 
cently for a gaudy new fair and exposi- 
tion in northern Sacramento, a $33.7 mil- 
lion package that Legislative Analyst A. 
Alan Post says has been accepted "purely 
on faith." 

Views on Fair 

Asked about the exposition, self-styled 
"showcase of California," Harkness re- 
sponded this way. 

Q — The present fair loses money — is 
the new fair going to lose money? 

A — No. The new fair is programmed 
and planned on a self-supporting basis. 

Q — What would happen if it doesn't 
break even? Is there any requirement or 
restriction? 

A — Well, from a psychological point of 
view I'm not going to answer that because 
we're so dedicated to it coming out I'm 
not even going to think that it won't 
come out. . . . 

It was this type of response that led 
to imposition of an uprecedented percent- 
age cut in the GSD's budget in 1965. 

The GSD, however, emerged virtually 
unscathed in 1966. The Legislature ap- 
proved the budget substantially as sub- 
mitted without adopting most of Post's 
suggested cuts. 



Change in Air 



The situation could change radically 
this year. In the topsy-turvy world cf 
State Capitol politics, Republican career 
servant Harkness probably benefited from 
a "don't rock the boat" attitude prevail- 
ing among Democratic legislators in 1966. 
The Democrats are not likely to be under 
similar restraints in the current legisla- 
tive session. 

In the past many of Harkness' lead- 
ing critics were Democrats, notably Ways 



and Means Committee Chairman Robert 
Crown of Alameda. Cracked Assembly- 
man Alan Pattee (R-Salinas) during 
hearings of the Assembly Government Or- 
ganization Committee last year : 

"Mr. Harkness, when you mention 
Ways and Means you get kind of a 
tremor in your voice." 

Perhaps the most thorough attempt at 
review of GSD came during the Govern- 
ment Organization Committee hearings 
headed by former Assemblyman Milton 
Marks (R-San Francisco). 

Among other things, the hearings dem- 
onstrated the difficulty for the Legislature 
in taking an overall look at the vast 
GSD. Much of the hearing was con- 
sumed by Harkness and his deputies go- 
ing page by page through the depart- 
ment's progress report. 

Asked to comment on his investigations, 
Marks issued a two-page statement up- 
holding the principle of separate depart- 
ments of finance and general services. 

As a result of the separation, he said, 
the functions of both departments were 
receiving more attention. 



Arguing Point 



"It seems to me that this in itself is 
one of the strongest arguing points for 
the creation of a separate department 
. . ." Marks said. 

"This brings us to the second ques- 
tion of whether the programs of the GSD 
are being managed properly," Marks 
added. "And I think this is what the 
criticism and controversy surrounding 
the department is all about." 

Marks, who has since been named to 
a San Francisco judgeship, said his com- 
mittee's findings will be contained in a 
report to the 1967 Legislature. The re- 
port is certain to form the basis of new 
scrutiny and perhaps some new criticism 
for the oft-maligned super service de- 
partment. 

Based on the GSD's performance in its 
first three years, it will need all the 
scrutiny it can get. 



L-418— 100 8-67 500 



printed in California office of statb printing 



Volume 15 



ASSEMBLY INTERIM COMMITTEE REPORTS 
1965-1967 



ASSEMBLY INTERIM COMMITTEE ON 
FINANCE AND INSURANCE 



Number 28 



BOB MORETTI, Chairman 



Jack R. Fenton, Vice Chairman 

Hale Ashcraft 

Anthony C. Beilenson 

Jack T. Casey 

C. George Deukmejian 

Houston I. Flournoy 

John Francis Foran 

Stewart Hinckley 

John T. Knox 

James R. Mills 



W. Byron Rumford 
Newton R. Russell 
Philip L. Soto 
Robert S. Stevens 
Howard J. Thelin 
John G. Veneman, Jr. 
Victor V. Veysey 
George A. Willson 
George N. Zenovich 



JANUARY 1967 

Edward Levy, Consultant 

Errol Miller, Assistant Consultant 

Fern Appleton, Secretary 



PARTI 

WORKMEN'S COMPENSATION 

UNEMPLOYMENT INSURANCE FOR 
FARMWORKERS 




Published by the 

ASSEMBLY 

OF THE STATE OF CALIFORNIA 



JESSE M. UNRUH 
Speaker 

GEORGE N. ZENOVICH 
Majority Floor Leader 



JAMES DRISCOLL 
Chief Clerk 



CARLOS BEE 
Speaker pro Tempore 

ROBERT T. MONAGAN 
Minority Floor Leader 



TABLE OF CONTENTS 

Page 

Letter of Transmittal 5 

Workmen's Compensation 7 

Unemployment Insurance for Farmworkers 49 



(3) 



LETTER OF TRANSMITTAL 



The Honorable Jesse M. Unruh 
Speaker of the Assembly, and 

Members of the Assembly 
State Capitol 
Sacramento, California 

Gentlemen : 



January 31, 1967 



In accordance with the provisions of House Resolution No. 710 
of the 1965 Regular Session, the Assembly Interim Committee on 
Finance and Insurance herewith submits Part I of a record of com- 
mittee activities and a report on the subject matter studied by the com- 
mittee. 

Respectfully submitted, 

Jack R. Fenton, Vice Chairman 

Hale Ashcraft 
Anthony C. Beilenson 
Jack T. Casey 
C. George Deukmejian 
Houston I. Flournoy 
John Francis Foran 
Stewart Hinckley 
John T. Knox 
James R. Mills 



Bob Moretti, Chairman 

W. Byron Rumf ord 
Newton R. Russell 
Philip L. Soto 
Robert S. Stevens 
Howard J. Thelin 
John G. Veneman, Jr. 
Victor V. Veysey 
George A. Willson 
George N. Zenovich 



(5) 



WORKMEN'S COMPENSATION 






WORKMEN'S COMPENSATION 

RECOMMENDATIONS 

1. The committee does not favor an increase in the number of weeks 
of compensation for the minor permanent partial disabilities of less 
than 25 percent. Those disabilities rated at 25 percent or higher 
should be compensated at an increased rate to more adequately re- 
flect the wage loss suffered by the average claimant. 

2. For the 1967 session, we recommend an immediate increase in the 
maximum temporary disability benefit to $80 per week. 

3. That an uninsured employers' fund be created to provide immedi- 
ate benefits to employees of uninsured employers. The fund should 
be created by an appropriation from the General Fund and admin- 
istered by the State Compensation Insurance Fund. 



(8) 



WORKMEN'S COMPENSATION 

The California workmen's compensation system has been the sub- 
ject of a rather intensive study for the past four years. At the close 
of the 1963 legislative session there was created, pursuant to legis- 
lation adopted that year, the Workmen's Compensation Study Com- 
mission composed of well-qualified representatives of the legal pro- 
fession, employers, labor groups, insurance companies, the medical 
profession, the Assembly and Senate, and the public, and chaired by 
a public member, Conrad J. Moss (now a judge of the Superior Court 
of Los Angeles County). The commission did an outstanding job of 
research into the workmen's compensation system. Many of its rec- 
ommendations were enacted into law with the passage of AB 2023 
during the 1965 General Session. These recommendations, formally 
acted upon in 1965, dealt mainly with the reorganization of the for- 
mer Industrial Accident Commission into the Division of Industrial 
Accidents and the Workmen's Compensation Appeals Board and the 
strengthening of the administrative, consultative and quasijudicial 
functions of these agencies. It is not the purpose of this report to re- 
view this legislation, suffice it to say that the enactment of that leg- 
islation in 1965 was a significant step forward in rationalizing the 
state 's workmen 's compensation system. 

However, significant areas of the workmen's compensation system 
remained untouched during that session of the Legislature, and it 
is upon these that your committee has focused its attention. Primarily, 
these unresolved problems relate to the compensation of heart cases 
under workmen's compensation including the apportionment liability 
and disability, and the adequacy of benefits under the present statu- 
tory limits. These represent difficult problems in the workmen's com- 
pensation field to deal with, but the overall success of the objectives 
of the workmen's compensation system itself require that they be 
answered. 

Compensation of Workmen's Compensation Claims 
Based Upon Injury or Disease to the Heart 

The California workmen's compensation system has been created 
pursuant to Article XX, Section 21, of the State Constitution, which 
provides in part that : 

The Legislature is hereby expressly vested with plenary power, 
unlimited by any provision of this Constitution, to create, and 
enforce a complete system of Workmen's Compensation, by ap- 
propriate legislation, and in that behalf to create and enforce a 
liability on the part of any or all persons to compensate any or all 
of their workmen for injury or disability, and their dependents 
for death incurred or sustained by the said workmen in the course 
of their employment, irrespective of the fault of any party. 

Pursuant to these powers, the Legislature enacted Labor Code Section 
3600 which provides : 

Liability for the compensation provided by this division, in lieu 
of any other liability whatsoever to any person except as pro- 

(9) 



IQ COMMITTEE REPORT ON FINANCE AND INSURANCE 

vided iu Section 3706, shall, without regard to negligence, exist 
against an employer for any injury sustained by his employees aris- 
ing out of and in the course of the employment and for the death 
of°any employee if the injury proximately causes death, in those 
cases where the following conditions of compensation concur : 

(a) Where, at the time of the injury, both the employer and 
the employee are subject to the compensation provisions 
of this division. 

(b) Where, at the time of the injury, the employee is per- 
forming service growing out of and incidental to his em- 
ployment and is acting within the course of his employ- 
ment. 

(c) Where the injury is proximately caused by the employ- 
ment, either with or without negligence. 

(d) Where the injury is not caused by the intoxication of the 
injured employee. 

(e) Where the injury is not intentionally self-inflicted. 

(f) Where the employee has not willfully and deliberately 
caused his own death. 

(g) Where the injury does not arise out of an altercation in 
which the injured employee is the initial physical aggressor. 

Although this section of the Labor Code, in establishing conditions 
of compensation, speaks in terms of an " injury' ' to an employee, this 
term has a somewhat broader meaning than solely a traumatic in- 
jury. The work " injury" is defined in Labor Code Section 3208 as 
follows : 

'Injury" includes any injury or disease arising out of the 
employment, including injuries to artificial members, dentures, 
eyeglasses and medical braces of all types; provided, however, 
that eyeglasses will not be replaced, repaired, or otherwise com- 
pensated for, unless injury to them is incident to an injury causing 
disability. 

The act, therefore, compensates not only for industrial injuries but 
for industrial disease, although for such a compensable condition to 
exist, it must (1) arise out of and be incurred in the course of employ- 
ment, and (2) be proximately caused by the employment. 

It should be noted that our statute does not require that there be 
an "accident" or that the injury or disease arise out of an "indus- 
trial accident." The absence of such limiting language has a notice- 
able effect upon the interpretation of our statutes. Similarly, the ex- 
press inclusion of "disease" in our statute's definition of injury 
broadens coverage as compared to jurisdictions where an industrial 
accident is required as a precedent to a compensable injury. 

To the average layman, a degenerative disease such as atheroscle- 
rotic heart disease is not commonly thought of as industrially caused, 
and m most cases it is not. However, to the extent that competent 
medical testimony is presented which indicates that the normal degen- 
erative process was accelerated by work-connected activity, the disease 
becomes compensable under rulings of the Workmen's Compensation 
Appeals Board and the appellate courts. 



workmen's compensation 11 

Industry spokesmen maintained at the committee's hearings on this 
subject on January 27-28, 1966, that all of the 9,791 heart deaths due 
to atherosclerotic heart disease and to coronary disease which oc- 
curred among persons aged 25-65 in 1963 are potential workmen's 
compensation claims under present legal standards and that, in ad- 
dition, there are countless nonfatal but disabling heart cases which 
could potentially be considered work connected under present "Work- 
men's Compensation Appeals Board decisions. They maintain that the 
trend toward finding more and more heart cases compensable has al- 
ready started and, because of the difficulty in disproving that the heart 
condition was work connected, a substantial number of these cases are 
settled by compromises and release. 

Mr. Edmund Leonard [California Self-Insurers' Association] : 
. . . There has been a great tendency to belittle the realm of 
heart cases in workmen's compensation as being extremely nor- 
mal and this on the basis of the number of cases heard over 
the years before the commission. I was given just this morning 
the most recent run of statistics, and I will make it available to 
the committee. This comes from the Division of Labor Statistics 
and Research, showing before the commission in 1953 there were 
291 cases involving disease of the arteries and hypertension, in- 
cluding heart disease, and that ending with the fiscal year of 
June, 1965, there were 1,219 cases presented to the commission. 
... In 1962 there were 723 cases according to the division, and of 
those 358 were compromised. Now this, I think, speaks for it- 
self — the uncertainty in reference to heart matters that require 
358 compromises out of 723 cases. In 1963 out of 95 cases — 467 
were compromised. Now the 1965 cases, June 30, 1965, 1,219 — 547 
compromised. 

Now, I pointed out to you in the short summary, first, in prac- 
tically every case it is conceded that the employee who suffers 
disability or death has had severe progressive heart disease for 
years, sometimes known to exist but its existence often unknown; 
sometimes symptomatic, often nonsymptomatic or " quiescent. ' ' 

Secondly, the question of compensability depends upon a medi- 
cal statement. 

Thirdly, there is almost invariably a direct conflict of medical 
opinion on the question of causal relationship. 

Fourth, the decisions by the commission on compensability over 
the years have only been reversed in the only rare number of 
cases and those where there was absolutely no medical testimony 
to support their position. 

Fifth, that unusual stress and strain, emotional or physical, is 
not in the least required any more to make a case compensable. 
All you have to show is that the person was employed and then 
have some medical statement to the effect that that employment 
was a causal relationship between the employee's routine duties 
and his disability or death. 

Sixth, the commission assumes in heart cases that the admo- 
nition of Labor Code Section 3202 that the Workmen's Compensa- 
tion Act ' ' deliberately construed ' ' requires that a similar liberality 



22 COMMITTEE REPORT ON FINANCE AND INSURANCE 

be given an interpretation of the lay and medical opinion coming 
to court so there is a great tendency towards compensability 

built into the act. 

The seventh, and last, is that there is absolutely no standard 
by which the commission and the courts have acted over the 
years. 1 

In order to understand the complex case law dealing with this prob- 
lem, flic committee made use of three documents prepared by the legal 
staff of the State Compensation Insurance Fund. The first was pre- 
pared in 1952 and submitted to the Senate Labor Committee which, 
at that time, was examining the workmen 's compensation program. The 
second, titled Report on Current Appellate Rulings Concerning 
Workmen's Compensation Claims for Disability or Death Arising 
Out of Cardiac Conditions, was submitted to this committee at its re- 
quest on November 1, 1965, and covers the developing case law between 
1952 and 1965. The final report, titled Supplemental Citations — Re- 
port on Current Appellate Rulings Concerning Workmen's Compen- 
sation Claims for Disability or Death Arising out of Cardiac Condi- 
tions, was submitted at the committee hearings on January 27-28 
and deals with certain cases decided between December 1965 and 
January 1966. Because these reports represent an excellent and fair 
discussion of the legal precedents in workmen's compensation cases 
involving claims arising out of cardiac conditions, we are partially 
reproducing them here. 

DISABILITY OR DEATH ARISING OUT OF CARDIAC CONDITIONS 

"The earlier decisions in heart cases fall into two general groups, the first of which 
is exemplified by the decision in McNamara v. Ind. Ace. Com., 130 Cal. App. 284, 
19 IAC 175. For a number of years the rule laid down in the McNamara case was 
the standard whereby liability was determined in most heart cases. In that case 
the Industrial Accident Commission denied a death benefit to a widow whose hus- 
band had died from a heart condition. From physical examinations it was known that 
McNamara had a preexisting heart pathology, as a result of which he had suffered 
heart attacks on the two days preceding his death. On the day of death he re- 
ported to work, drove a truck, and apparently had occasion to crank the truck. He 
was observed seated at the wheel with the motor running and in evident distress. 
Presumably he had just cranked the truck. He died within a few minutes. 

"The district court of appeal affirmed the commission denial award and laid down 
the rules which form the basis of the following statements by Campbell : 

' 'Compensation will not be awarded where a chronic heart trouble, which 
has finally reached such a stage that death may ensue at any time, results 
fatally while the employee is doing the ordinary work of his employment. The 
fact that an employee dies from heart trouble while doing work which calls for 
no unusual physical strain raises no presumption of an industrial injury.' 
(Campbell on Workmen's Compensation, page 291.) 

"'There is no sufficient foundation for industrial liability, if the final cul- 
mination be brought on merely by the normal exertion of the employment. 
There must be some unusual strain or exertion; some sudden shock or excite- 
ment incident to the employment.' (Campbell on Workmen's Compensation, 
page 293.) 

"At the same time, however, the courts recognized another line of cases in which 
a recovery of compensation benefits was allowed. It is interesting to note how fre- 
quently^ these decisions are cited almost as a unit by the courts. Most of these 

1 AsS ^5lL In ^ er ^ n Commit tee on Finance and Insurance, Transcript of Hearing on 
^ted^aVranscl : ipT) ati0n ' ^ Dieg °' January 27_28 ' 1966 « p - 26 " 27 - (Hearing 



workmen's compensation 13 

cases were initially denial awards in which the commission decision was annulled 
by the courts. 

"One of the earliest cases of importance is that of Eastman Co. v. Ind. Ace. 
Com., 186 Cal. 587, 8 IAC 184. In this case an employee apparently suffered a 
heart attack, fell from a truck which he was driving, and then was run over by the 
truck. The commission awarded a death benefit, which was affirmed by the California 
Supreme Court. It was held that the death was due to crushing injuries sustained 
when the truck ran over the deceased. In discussing the proximate cause of the 
death and the possibility that the fall came about as a result of a heart attack, 
the court quoted with approval the following language from Wicks v. Dowell, L.R. 
(1905) 2 K.B. Div. 225: 

" '. . . an accident does not cease to be such because its remote cause was 
the idiopathic condition of the injured man ; we must dissociate that idiopathic 
condition from the other facts and remember that he was obliged to run the 
risk by the very nature of his employment, and that the dangerous fall was 
brought about by the conditions of that employment.' 

"The Supreme Court concluded that even though it appeared that an attack of 
dizziness or unconsciousness from heart trouble was a contributory cause of the 
accident, a finding of death from injuries arising from the employment would find 
support under the evidence. However, the court also pointed out, considering the 
cases aside from an idiopathic condition, that acceleration or aggravation of a 
preexisting disease is an injury in the occupation causing such acceleration ; if the 
disability, although arising from a chronic heart condition, were brought on by any 
strain or excitement incident to the employment, the industrial liability would still 
exist. A review of the case will show that the court did not place any reliance 
upon this latter possibility (and the record seems to be devoid of any showing of 
strain) but merely cited the circumstances as a possibility. Nevertheless, this case 
is primarily cited because of this dictum by the court. 

"In the Knock case, Knock v. Ind. Ace. Com., 200 Cal. 456, 14 IAC 177, the 
employee had a preexisting heart disease. He was sent by his employer to inspect 
some peat lands at an elevation of some 3,300 feet. Medical opinion held that the 
altitude and strenuous walking precipitated a heart attack which caused death. The 
commission issued a denial award, finding that 'said heart condition was due to a 
previous diseased condition being precipitated by the employee's situation in a higher 
altitude than that to which he had long been accustomed' and that 'such situation 
and precipitation did not constitute an injury arising out of the employment.' The 
Supreme Court pointed out the rule mentioned in the Eastman case and annulled 
the commission's decision. 

"In Fogarty v. Dept. of Indus. Rel, 206 Cal. 102, 15 IAC 182, the employee 
was 19 years of age. Fogarty was required to repair a broken flume. Because of the 
emergency of the work, the men were required to work with all possible expedition 
and did so laboriously for many hours. The shift on which Fogarty worked was 
engaged continuously for 38 hours. Fogarty worked in wet clothes and was sub- 
jected both to the heat of the sun and the coldness of the night air. He developed 
what was diagnosed as acute rheumatism, was hospitalized, treated, and ultimately 
died some two years later of a heart pathology. The commission issued a denial 
award which was annulled by the Supreme Court on the authority of the Eastman 
and Knock cases. 

"Nielsen v. Ind. Ace. Com., 125 Cal. App. 210, 18 IAC 232, was a case in which 
a cabinetmaker suffered a heart attack from which he died. He had been employed 
for 15 years, during which time he had no symptoms. He helped carry an altar 
top. After arriving at the place where the new altar top was to be installed, it was 
found necessary to remove an old top. The deceased used a hammer and chisel for 
about five minutes in attempting to remove the old top. While doing this he was 
stricken with a heart attack and died. While this work was part of the regular 
work performed by Nielsen, it was pointed out by the court that the work in this 
instance was done in a great hurry and the carrying of the altar top up the aisle of 
the church was accomplished in an awkward and hurried manner. In citing the 
Fogarty, Eastman, Knock, and other cases, the court pointed out that 'the rule of 
these cases compels an annulment of the award in this instance because the material 
evidence unmistakably discloses that, however serious the preexisting heart condition 
or disease might have been, the unusual exertion and hurry and excitement of the 
work immediately preceding his death either aggravated and accelerated such pre- 
existing condition or directly caused the death/ 



14 COMMITTEE REPORT ON FINANCE AND INSURANCE 

"In Mark v. Ind. Ace. Com., 29 Cal. App. 2d 495, 3 C.C.C. 164, another denial 
award of the commission was annulled. In this case the deceased and another em- 
ployee raised a motor weighing about 200 pounds and put it into a truck. It was 
taken to a pumphouse and installed. The men then attempted to start the motor by 
cranking it, taking turns doing this. The job was finally completed about 10 a.m., at 
which time the other employee states that they were all in, by which he meant they 
were 'very tired and exhausted.' Following this, the deceased drove a truck for about 
an hour, the truck being used to hoist bales of hay into a barn loft. Deceased then 
had his midday meal, following which for a short time he lifted bales of hay and 
again drove the truck, but thereafter became ill. While the court felt that there 
was not a direct conflict in the medical evidence before the commission, it neverthe- 
less pointed out that under the Eastman and Knock decisions an unusual exertion 
would be sufficient for a compensable claim and that the work of cranking the 
engine in this instance was both unusual and exhausting. 

"As can be seen from the above, the commission decisions in the Knock, Fogarty, 
Nielsen and Mark cases were all denial awards which were ultimately annulled by 
the courts. In these cases the commission adhered to a principle which was ulti- 
mately stated or which had been stated in the McNamara case ; that is, the commis- 
sion first endeavored to ascertain whether the decreased employee had engaged in 
unusual work or exertion. While the commission ruled to the contrary, the courts 
followed the dictum in the Eastman case and on a basis of aggravation, resulting 
from what the court found to be unusual work or effort, annulled the awards. In 
some instances the work was normal to the employment, but strenuous — perhaps 
more so than usual. 

"In any event, it became uncertain as to which line of decisions might be fol- 
lowed in any given case — the tendency of the commission to follow a more or less 
strict interpretation of the McNamara rule, or the more liberal view of the courts 
as seen in the Knock, Fogarty, Nielsen, and Mark cases. At this time the Calabresi 
case came before the commission. 

"In the Calabresi case, Liberty Mutual Ins. Co. v. Ind. Ace. Com., 73 Cal. App. 
2d 555, 11 C.C.C. 66, the employee regularly lifted and dumped sacks of peanuts. 
This was a normal activity of his employment and a task he performed for several 
hours each day. He had a preexisting heart pathology. While lifting one of the heavier 
sacks of peanuts, he had a heart attack. This case, then, is well beyond the rule in 
the McNamara case, because there was nothing unusual or exceptional in the work he 
was doing. It was hard work, although normal to the employment. The parties re- 
quested the commission to make a decision which could be taken to the courts with 
a clear-cut issue so that doubt arising from the McNamara decision could be re- 
solved. Ordinarily in a case with the facts similar to those in the Calabresi case a 
denial award would issue. However, for the purpose of establishing a test case in 
accordance with the wishes of the parties, a compensable award issued and was 
affirmed by the district court. The resulting decisions was interesting. 
"The court pointed out that decided heart cases fall into three classes : 

. 7 ' T ^ os ? in Y h ^ h the commissi °n denied an award and the courts affirmed the 
denial. Typical of this class is the McNamara case. e 

off 2 ' C A S u S in wh T icn f the commission awarded compensation and the courts 
affirmed the award. In this class is the Eastmen case 

"The court then said : 

opinion it must follow that where *«£?„£ I P r mciple * ^ f ^h in this 
a. to whether the injury or death ™T ? S » h ? slCmns or specialists differ 
Physician or special^ Shies til i*Z industrial and a competent qualified 
-.used by the employment and tL •° P - m ° n the °° llapSe was Proximately 

should be affimed ftht * T" 0011 f W ?"?• the award ■»* and 
trary view. In such a caw whether tS ? mpet f nt <* octor expresses a con- 
« case whether the strain is a "usual" or an "unsual" 



workmen's compensation 15 

one is only one of the facts involved. If there was strain, even though a 
strain was a strain usual to that type of employment, the injury or death is 
compensable if there is competent substantial evidence to shoic the causal 
connection between that strain and the collapse.'' 

"I have emphasized that part of the opinion above so you may clearly see just how 
the court has set aside the old rule of the McNamara case and has gone so far as to 
liberalize even the Eastman, Knock, Fogarty, Nielsen, and Mark cases. Now, all that 
is required is evidence of any strain or exertion while at work, plus medical evidence 
to show a causal connection between that and the employments (Emphasis added 
by committee.) 

On November 29, 1954, Mr. Everett A. Corten, now Chief Counsel of the In- 
dustrial Accident Commission, directed our attention to a recent decision of the 
court, Associated Indemnity Co. v. Ind. Ace. Com. (Johnson), 120 Cal. App. 
2d 423 (1953). The decedent, Johnson, was working as a laborer, digging a pit 
with a hand shovel, when he collapsed and died. The autopsy report showed 
that the employee was suffering from arteriosclerosis and death was the result 
of coronary occlusion. There was expert medical testimony that the exertion in 
which the employee was engaged at the time of death, although normal to the 
employment, could have caused the fatal occlusion. The death was held to arise 
out of the employment. 

The court stated : "The facts of this case in light of the applicable rules of 
decision which we have stated furnish substantial support for the finding of the 
commission that Johnson suffered an injury which was proximately caused by 
the employment." As a rule of decision, the court cited Liberty Mutual Ins. Co. 
v. Ind. Ace. Com., 73 Cal. App. 2d 555, 558-9 (166 P. 2d 908, 11 Cal. Comp. 
Cases 66), in which the court stated : 

"It is now too well settled in this state to require extended citation of 
authority that the employee is entitled to compensation for disability proxi- 
mately caused by industrial injury regardless of whether the employee's con- 
dition at the time of injury was average or subnormal. Thus, an aggrava- 
tion of an existing infirmity where such aggravation is proximately caused 
by the employment is compensable, even though a normal man would not 
have been adversely affected. This rule applies even though is is shown that 
the employee would have ultimately died from such disease, if the evidence 
shows and the commission finds that the injury hastened or produced his 
death. . . . Industry takes the employee as it finds him. A person suffering 
from a preexisting disease who is disabled by an injury proximately arising 
out of the employment is entitled to compensation even though a normal 
man would not have been adversely affected by the event. 

". . . The burden of proof that the injury arose out of and in the 
course of the employment, and was proximately caused thereby, is on the em- 
ployee. ... It is obvious that whether the employment proximately precipi- 
tated the collapse of a preexisting diseased heart and proximately caused it 
to collapse before normal progressive developments would have resulted in 
the collapse is a question of fact." 

REPORT ON CURRENT APPELLATE RULINGS CONCERNING WORKMEN'S 

COMPENSATION CLAIMS FOR DISABILITY OR DEATH ARISING 

OUT OF CARDIAC CONDITIONS 

This report will update previous materials supplied concerning 
important legal precedents in workmen's compensation cases involv- 
ing claims for disability oi death arising out of cardiac conditions. 

1. Unusual employment-connected stress or strain is not an absolute con- 
dition precedent to a finding that employment activity caused or pre- 
cipitated a disabling or fatal heart condition. 

It was emphasized in our report of May 26, 1952, that the old dic- 
tum in early cases, which seemed to require an unusual or extraordi- 
nary employment-connected stress or strain precipitating a heart 



26 COMMITTEE REPORT ON FINANCE AND INSURANCE 

condition, was overturned by the district court of appeal in the Cala- 
bresi case, Liberty Mut. Ins. Co. v. Ind. Ace. Com., 73 Cal. App. 
2d 555. This so-called ''old rule" emanating from McNamara v. Ind. 
Ace. Com., 130 Cal. App. 284, and other cases, was epitomized in 
Campbell's treatise on workmen's compensation: " There is not suf- 
ficient foundation for industrial liability, if the final culmination 
[heart attack] be brought on merely by the normal exertion of the em- 
ployment. There must be some unusual strain or exertion; some sud- 
den shock or excitement incident to the employment." (Campbell 
on Workmen's Compensation, p. 293.) The conclusion was that as of 
1952 there was no such requirement in that "Now, all that is required 
is evidence of any strain or exertion while at work, plus medical 
evidence to show a causal connection between that and the employ- 
ment." (Letter of May 26, 1952, p. 7.) Such a rule, still valid today, 
is based upon the following language in the Calabresi case, where 
Presiding Justice Peters, in analyzing the actual decisions from which 
the so-called rule requiring unusual stress was derived, concluded 
that the decisions did not in fact justify such a rule : 

4 'From an analysis of these cases and of the principles set forth 
in this opinion it must follow that where examining physicians 
or specialists differ as to whether the injury or death was indus- 
trial, and a competent qualified physician or specialist testified 
that in his opinion the collapse was proximately caused by the em- 
ployment, and the commission so finds, the award must and should 
be affirmed although an equally competent doctor expresses a 
contrary view. In such a case whether the strain is a 'usual' or an 
'unusual' one is only one of the facts involved. If there was strain, 
even though the strain was a strain usual to that type of employ- 
ment, the injury or death is compensable if there is competent sub- 
stantial evidence to show the causal connection between the strain 
and the collapse." (73 Cal. App. 2d, at p. 563, emphasis added.) 

The language of the Calabresi case and its holding were adopted 
by the Supreme Court in Lumbermen's Mut. Cos. Co. v. Ind. Ace. 
Com. (Cacozza), 29 Cal 2d 492 (1946). The court reasoned in citing 
federal precedents "that an accidental injury may occur notwith- 
standing the injured is then engaged in his usual and ordinary work, 
and likewise ... the injury need not be external." (29 Cal. 2d at 
p. 498.) 

2. It is the claimant's burden to show by scientific evidence that the dis- 
abling or fatal heart condition is employment connected. 

It is evident that the primary requirement for compensability of a 
heart condition under the Calabresi and Cacozza cases is that there 
causal connection between the employment and the condition. As in 
many other cases, "In order to be entitled to an award, petitioners 
[the employee's dependents] must show a causal connection between 
the employment and the injury." (See Daniels v. Ind. Ace. Com., 148 
Cal. App. 2d 500, 503.) Further, whether or not there is such a 
causal connection between the employment and the heart condition is 
a question of fact. As stated in the Calabresi case, "whether the 
employment proximately precipitated the collapse of a preexisting 



workmen's compensation 17 

diseased heart and proximately caused it to collapse before normal pro- 
gressive developments would have resulted in the collapse is a question 
of fact." (73 Cal. App. 2d at p. 559.) And, "The burden of proof that 
the injury arose out of and in the course of the employment, and was 
proximately caused thereby is on the employee." (Ibid.; see also 
Associated Indem. Corp. v. Ind. Ace. Com. (Johnson), 120 Cal App 
2d 423, 426 (1953).) 

In answering the question of whether or not there was a casual con- 
nection between the employment and the heart condition, "Obviously, 
the commission must depend on the reasoned opinions of attending 
physicians and experts in the field." (Calabresi, 73 Cal. App. 2d at 
p. 559.) In other words, to support an award of compensation in a 
case involving the intricate medical question of whether an employee's 
heart condition resulting in his disability or death was related to his 
employment, there must be competent medical evidence of work causa- 
tion. 

In City and County of San Francisco v. Ind. Ace. Com. (Murdoch) , 
117 Cal. App. 2d 455 (1953), the employee, a maintenance worker for 
the city's park commission, collapsed as he was cutting trees and 
branches which had blown down in a storm. He was dead a short time 
later upon arrival at the hospital. The report of one doctor stated his 
death was due to an acute coronary occlusion, the result of a longstand- 
ing arteriosclerosis. He also noted that this type of complication 
"would occur at any moment of the day, whether this man had been 
active physically, or whether he had been sitting or lying quietly." 
(Id. at p. 457.) On objection of applicant's counsel this doctor's opin- 
ion was not admitted into evidence, at which point there was no medi- 
cal evidence of any kind before the commission. The court, in annulling 
award, stated : 

"To make out a prima facie case it is necessary to prove more 
than the fact that decedent died while performing a task required 
by his employment which he had performed on various occasions 
throughout the years apparently without incident. The present 
record is wholly devoid of evidence of the cause of death. It is 
true that the employee died immediately after performing a task 
that was the most arduous of any required by his employment. 
However, it is not a matter of common knowledge that operating 
a crosscut saw with a partner on the other end is labor of such a 
strenuous type as to bring on a fatal heart attack. . . . Where the 
subject matter is within the exclusive knowledge of experts trained 
in a scientific subject, expert evidence is essential. [Citations]. 
... In the present case there is nothing in evidence bearing on the 
cause of death. . . . The award must be annulled . . . because 
there is no competent evidence in the present record from which it 
may be inferred that the employee 's death arose out of his employ- 
ment." (Id., at pp. 458-460, emphasis added.) 

(See also Peter Kiewit Sons v. Ind. Ace. Com. (McLaughlin) , 234 
A.C.A. 981 (June 1965), award annulled, where no medical evidence 
related applicant's allegedly disabling back condition to his employ- 
ment. ) 

2— L-2516 



18 COMMITTEE REPORT ON FINANCE AND INSURANCE 

3. Medical opinion generally varies regarding the relationship of any activ- 
ity to cardiac failure, and resultant conflicts on the issue of causation 
in specific cases present questions of fact for the conclusive resolution 
of the commission. 

However, the expert opinion, essential to a determination of the issue 
of causal ion in heart cases, is often varying. As noted in the Calabresi 
case, "We have frequently read in applications for writs before this 
court the divergent views of medical specialists on the effect of strain 
on a preexisting diseased heart. There can be no doubt but that there 
is a respectable school of thought that believes that strain, at least a 
nonunusual strain, does not adversely affect a preexisting diseased 
heart. Other doctors, equally qualified, honestly believe that strain ad- 
versely affects such preexisting condition. The existence of these diver- 
gent ideas is what has led the commission to render, on occasions, what 
appear to be divergent opinions." (73 Cal. App. 2d at p. 560.) 

Thus the commission must have the support of medical evidence in 
finding that an employee's death or disability resulting from heart 
disease was caused by his employment. In reaching its decision, as in 
any other case, the commission is faced with the statutory admoni- 
tion that the workmen's compensation provisions of the Labor Code 
"shall be liberally construed by the courts with the purpose of extend- 
ing their benefits for the protection of persons injured in the course 
of their employment." (Labor Code Section 3202.) In addition, in the 
case of certain law enforcement officers (Labor Code Section 3212), 
correctional institution security officers (Section 3212.2), highway pa- 
trolmen and other police officers (Section 3212.5), and peace officers in 
the Bureau of Narcotics enforcement and Bureau of Identification and 
Investigation (Section 3212.7), heart trouble "which develops or mani- 
fests itself during a period while such [person] is in the service ..." 
of such agencies is presumed to arise out of and in the course of such 
persons' employment. 

The commission in heart cases, as in many other cases, is almost in- 
variably faced with divergent conflicting medical opinion respecting 
the employment relationship of an employee's death or disability re- 
sulting from heart trouble. But the appellate courts have made it clear 
that, once the commission weighs the scientific evidence and reaches its 
decision in light of the above cited statutory admonitions, the decision 
on the facts is not subject to review so long as there is sufficient scien- 
tific evidence to support it. 

/-.o^ f R°° d i eXample is Foster v - Ind " Acc - Com -> 136 Cal - A PP- 2d 812 
(1955), where a mechanic from the Division of Highways arrived at 
work at 7 :30 and was found dead an hour and a half later. His death 
was due to a coronary occlusion, although he had no prior symptoms 
of arteriosclerosis Decedent had been on light work due to a prior 
back injury. Dr Lucia, who had treated decedent on several occasions 
T- F AF en S .° f yearS ' conclud ed unequivocally "that the work in 
which Mr Foster engaged and the circumstances under which it was 
consummated directly contributed to his demise, as is clearly shown 
by the details of his last illness." (136 Cal. App. 2d at p. 814 ) Dr 
Wallace, not acquainted with decedent, but who had studied the medi- 
cal records and testimony in the case, concluded, "In my opinion 

for re hk 7J^ ° f eVidG ? Ce that his ^ ob was in an ^ ™W ^sponsible 
xor nis death . . . assuming that he had coronary arteriosclerosis, 



workmen's compensation 19 

there is nothing to support the thesis that his work precipitated the 
fatal attack or coronary occlusion. There are instances when unusual 
and extraordinary physical activity or severe and exceedingly upset- 
ting emotional upheaval may be said to precipitate occlusion of pre- 
viously diseased arteries, but certainly neither situation was evident 
here." (Id., at pp. 814r-815.) On this evidence the commission denied 
death benefits based on its finding that decedent's death did not arise 
out of and in the course of his employment. The appellate court, in 
affirming the award, stated as follows : 

"While petitioner's arguments are persuasive and the evidence 
of Dr. Lucia would no doubt have sustained a compensable award 
if the referee and the commission had accepted it, the rejection of 
it and the acceptance of a contrary opinion from another expert is 
not ground for reversal by an appellate court." (136 Cal. App. 2d 
at p. 815.) 

The court concluded that "if there is any evidence, whether direct or 
by reasonable inference, which will support the finding of the commis- 
sion, a reviewing court has no power to disturb it. [Citations.] The 
function of the court on review of the action of the commission is to de- 
termine whether the evidence, if believed, is substantial and supports 
the findings." (Id., at p. 816.) 

4. Although not an absolute prerequisite, the presence of unusual physical 
or emotional employment-connected stress or strain remains an impor- 
tant factual consideration, but some evidence of such stress or strain 
does not guarantee benefits. 

The absence of unusual or extraordinary physical or emotional 
stress or strain under the Caldbresi case does not preclude an award of 
disability or death benefits for heart trouble, but the presence of such 
stress or strain is often a significant factor in commission awards. 

The Supreme Court in Walters v. Ind. Ace. Com., 57 Cal. 2d 387, ap- 
pears to recognize that an unusual employment-connected physical 
strain is a most important consideration in heart cases, both factually 
and legally. In the Walters case the commission had originally denied 
disability benefits on the basis of the trial referee's disbelief of appli- 
cant's story that he had suffered an attack while attempting to lift the 
front end of an unusually heavy car. At the original hearing appli- 
cant's treating physicians opined that such a lifting incident undoubt- 
edly precipitated applicant's heart attack and his resultant heart trou- 
ble, rendering him disabled. The carrier's physicians, on the other hand, 
discounted the effects of any such lifting incident and were of the opin- 
ion that the heart attack was spontaneous, a natural incident of appli- 
cant's underlying asymptomatic heart disease, and thus not work-con- 
nected. After appellate review of the commission's take-nothing order 
was denied (see 26 C.C.C. 146), applicant sought to reopen the case 
based on the newly available testimony of three other witnesses, con- 
firming the happening of the heavy lifting incident and impeaching the 
employer's conflicting version. In reversing the commission's refusal 
to reopen the case, the Supreme Court noted that the original denial 
was itself supported by very meager evidence, to wit, the failure of the 
employer's foreman to specifically recall the lifting incident. The addi- 
tional evidence, both confirming that the incident happened and im- 



20 'YIMITTEE REPORT ON FINANCE AND INSURANCE 

peaching the foreman's story, was held to constitute a sufficient show- 
in? by applicant of good cause to reopen the matter, especially in light 
of the statutory presumption favoring employee's claims for compensa- 
tion. The Supreme Conrt also noted that one of the grounds for re- 
opening a compensation case is a showing that the original award was 

inequitable. 

Also, evidence of unusual mental stress has been considered by the 
Supreme Court to be significant in heart cases. The court in Argonaut 
Ins. Exchange v. Ind. Ace. Com (Bellinger), 49 Cal. 2d 706 (1958), 
in affirming an award of death benefits, held the commission was justi- 
fied in finding that the employee's fatal heart attack was work-con- 
nected in light of the medical evidence that "decedent's work, with its 
exceptional mental stress and responsibility, might 'be considered the 
precipitating factor in hastening his exodus.' " (Id., at p. 713.) 

Many other cases where appellate review was sought but denied have 
been found in the reports ("California Compensation Cases," cited 
"C.C.C."). It should be noted that not all commission decisions are 
reported — only those where the losing party petitions for appellate re- 
view. No attempt has been made to trace all commission decisions in- 
volving heart disorders — the reported decisions, nevertheless, seem to 
indicate definite factual trends. 

For example, a physical shock or stress seemed important in Hart- 
ford Accident & Indemnity Co. v. Ind. Ace. Com. (Grief), 26, C.C.C. 
188 (writ denied, 1961). There an award of disability benefits was left 
undisturbed where applicant, while working as a waitress, suffered a 
severe electrical shock. She had had a preexisting heart murmur but 
this heart condition had never interferred with her work. The award 
was based on the opinion of applicant's treating doctor that applicant 
had suffered fibrillation of the heart as a direct result of the electrical 
shock, and that once such fibrillation occurs there will be successive 
episodes until ultimately the fibrillation is constant and disabling. An- 
other doctor was of the opinion that the electrical shock had nothing 
to do with the cardiac condition, and still another was of the opinion 
that applicant was not, in fact, disabled. (See similar asesc involving 
unusual physical stress where appellate review was denied at 29 C.C.C. 
89, 22 C.C.C. 157 and 20 C.C.C. 100.) 

Emotional stress has also played an important factual role. Thus, 
the District Court of Appeal refused to review an award of disability 
benefits in City and County of San Francisco v. Ind. Ace. Com. (Minis), 
29 C.C.C. 257 (writ denied, 1964). The award was based on the treat- 
ing doctor's opinion that the emotional stress suffered by applicant, a 
busdriver, in an altercation between himself and a passenger was suffi- 
cient to produce the heart symptoms which led to his disabling heart 
attack. (See other emotional stress cases at 27 C.C.C. 128, 27 C.C.C. 
288, 25 C.C.C. 20, 25 C.C.C. 91, 24 C.C.C. 12 and 21 C.C.C. 270.) 

On the other hand, some evidence of unusual emotonal or physical 
stress or strain in and of itself is no guarantee of an award of disabil- 
ity or death benefits. Thus in Grace v. Ind. Ace. Com., 20 C.C.C. 247 
(writ denied, 1955), the commission denied disability benefits where 
applicant, a butler-chauffeur, alleged that his disabling heart attack 
was precipitated by the unusually heavy lifting involved in slipping 
pads of paper out from under his employer's living room furniture. The 



workmen's compensation 21 

commission reversed the referee's award if benefits on conflicting medi- 
cal evidence, noting that but little effort was required to remove pads 
of paper from underneath furniture. (See other such denials at 25 
C.C.C. 105, 21 C.C.C. 39, 20 C.C.C. 74 and 20 C.C.C. 27.) 

5. In the absence of unusual stress, dependent upon the persuasiveness of 
the medical evidence of work connection, the commission has awarded 
benefits for disabling or fatal heart conditions and has been upheld on 
petition for appellate review, but has just as frequently denied benefits 
in such cases. 

In the absence of any particularly unusual stress or strain where 
only ordinary exertion is manifest, the commission, in line with the 
Calaoresi case, has often rendered awards of death and disability 
benefits in heart cases, even where employees are stricken performing 
their ordinary and regular duties. In all such cases there is invari- 
ably substantial medical evidence to connect the employment with the 
fatal or disabling heart disease. Thus in City and County of San Fran- 
cisco v. Ind. Ace. Com. (DeJarnatt), 29 C.C.C. 229 (writ denied, 
1964), disability benefits were awarded to applicant, an ambulance 
steward, who, while pulling out a heavy oxygen tank to inspect it as a 
part of his normal duties, suffered a severe disabling heart attack. The 
independent medical examiner concluded that "such exertion even for 
one or two minutes might have been sufficient to have induced some 
myocardial muscle necrosis and thereby initiated his beginning infarc- 
tion. " Other medical evidence was directly to the contrarv. (See other 
such awards at 30 C.C.C. 45, 28 C.C.C. 38, 27 C.C.C. 42, 25 C.C.C. 242, 
23 C.C.C. 185 and 22 C.C.C. 130.) 

On the other hand, many cases appear in the reports in which work- 
men 's compensation benefits have been denied where an employee's 
fatal or disabling heart attack occurs during or after the performance 
of his ordinary employment duties. In Daniels v. Ind. Ace. Com., 148 
Cal. App. 2d 500 (1957), the appellate court affirmed the commission's 
denial of death benefits. Decedent was employed as a" troubleshooter ' ' 
for an irrigation district with duties including the repair of transform- 
ers, meters and other electrical facilities, which occasionally involved 
the climbing of poles. Decedent had had no prior signs of heart disease. 
On the day of his death he suffered a heart attack while engaged in 
climbing his third pole of the day. His death later at the hospital was 
attributed to a coronary occlusion. An independent medical examiner 
claimed that statistics verified that physical exercise has nothing to do 
with death from coronary occlusion. Other medical opinion was intro- 
duced to the effect that decedent's death was not work-connected. 
Another doctor opined that the work strain was a factor in decedent's 
lung congestion which led to a rupture of a coronary valve, resulting in 
death. But a further autopsy revealed no such rupture. 

Similarly, appellate review was refused in Silva v. Ind. Ace. Com., 
27 C.C.C. 107 (writ denied, 1962), where the commission denied death 
benefits. There an employee, a chipper for a steel company, had had 
heart symptoms from January 1959, until his death on April 11, 
1960. After a pneumonia attack his symptoms persisted and his doc- 
tor recommended that he do light work. Decedent died while per- 
forming his regular duties which apparently involved working in 
extreme temperatures, climbing stairs and handling equipment 



22 COMMITTEE REPORT ON FINANCE AND INSURANCE 

weighing up to 20 pounds. His treating doctor reported that deced- 
ent's death was work-connected because the doctor had recommended 
decedent do no heavy work and he was allowed to do such against 
his instructions, and that the strain and fatigue of the work he was 
doing would aggravate or accelerate the medical problem and has- 
ten death. The autopsy surgeon was of the opinion that the work did 
not cause or aggravate decedent's underlying heart pathology. Two 
other doctors also opined that there was no work-connected activity 
which would contribute to decedent's death or aggravate his under- 
lying heart pathology. (See also Foster v. Ind. Ace. Com., supra, 136 
Cal App. 2d 812 and other denials at 30 C.C.C. 157, 23 C.C.C. 
46, 22 C.C.C. 184, 22 C.C.C. 185, 22 C.C.C. 272, 21 C.C.C. 74, 20 C.C.C. 
1, 20 C.C.C. 262, 19 C.C.C. 143.) 

6. Despite the statutory presumption of work connection, death and disa- 
bility benefits have been denied in heart cases involving firemen and 
policemen, but the medical evidence must clearly disassociate the heart 
condition with the employment. 

The commission has denied death or disability benefits to policemen 
and firemen or their dependents where such employees have suffered 
disabling or fatal heart attacks. The statutory presumption that such 
heart trouble arises out of their employment was held rebutted by 
medical evidence, although sometimes in conflict, clearly indicating 
that the employment had nothing to do with the disability or death. 
The district court of appeal has affirmed the commission in one such 
case. In Havel v. Ind. Ace. Com., 154 Cal. App. 2d 737 (1957), the 
commission had denied benefits to a policeman who was disabled by a 
heart attack occurring at home after two prior experiences while on 
duty. The medical evidence was conflicting, some connecting the police- 
man's heart disability with his employment in terms of possibilities, 
and other medical testimony unequivocally denying that there was any 
connection between decedent's heart disability and his employment. 
The district court of appeal affirmed the commission's decision on the 
basis that "there was substantial evidence before the commission to 
controvert the presumption in favor of the petitioner." The court 
concluded that "we cannot, therefore, hold as a matter of law that the 
presumption and supporting evidence necessarily compel the conclusion 
that the petitioner's heart trouble was of industrial origin." (Id., at 
p. 743; see other such denials at 24 C.C.C. 17, 23 C.C.C. 132, 21 C.C.C. 
165, 20 C.C.C. 105, 20 C.C.C. 202.) 

It should be noted, however, that the commission has no authority to 
ilcny compensation in a death or disability case involving a fireman, 
policeman or other person entitled to the statutory presumption at- 
tributing heart trouble to employment under Labor Code Sections 
3212, 3212.2, 3212.5 and 3212.7, where there is no medical evidence 
specifically disassociating the heart trouble from the employment. In 
Horn v. Ind. Ace. Com., 128 Cal. App. 2d 837 (1954), the commission 
had denied disability benefits to a fireman who had had repeated heart 
symptoms during his long period of employment as a fireman from 1924 
to 1953. There was no medical opinion at all on the issue of how the 
heart disease arose, i.e., whether or not it was employment-connected. 
Further, no physician specifically disassociated applicant's heart trouble 
from his employment. The district court of appeal annulled the com- 



workmen's compensation 23 

mission's take-nothing order because the statutory presumption of 
causation had not been controverted by any evidence. 

7. In rare cases awards have been made based on medical evidence relating 
an employee's heart condition to his employment, although almost no 
employment stress was apparent, except that encountered in any normal 
activity. 

Although the presence or absence of stress is often factually im- 
portant to a determination or work-connection, there are rare instances 
where awards have been made based on medical opinion attributing 
an employee's heart failure to his employment, even though there is 
virtually no manifestation of any exertion, usual or unusual, beyond 
that encountered in all normal activities. Thus, in City of Los Angeles 
v. Ind. Ace. Com. (Stone), 29 C.C.C. 154 (writ denied, 1964)^ the 
applicant, an electrical inspector, had been suffering from arterio- 
sclerosis from 1958 which had rendered him partially disabled for long 
periods. Applicant had worked on November 14 and 15 but apparently 
nothing unusual had happened. The nature of his work was unex- 
plained. He left work on November 15 because of chest pains and re- 
turned February 20, 1961. Dr. M. D. Kritzer was of the opinion that 
his heart problem "was at least made more severe and aggravated 
by virtue of the fact that this gentleman did work on November 
14th and 15th while probably having a posterior myocardial infarc- 
tion." On this and other medical evidence the commission issued an 
apportioned award of total disability. This decision was let undis- 
turbed by the appellate court. 

In the Stone case the doctor's basis for the connection between the 
employment and the employee's heart condition was that the employee 
happened to be engaged in an employment activity even though such 
activity was not necessarily stressful in any sense of the word. Similar 
medical opinions, which emphasize that any activity would have pre- 
cipitated an attack, have sustained awards, where the activity pre- 
cipitating the attack happens to be work-connected. (See other such 
awards at 28 C.C.C. 9, 26 C.C.C. 185 and 24 C.C.C. 259.) 

In what appears to be a somewhat similar situation, the appellate 
court has affirmed a commission award. In Associated Indent. Corp. 
v. Ind. Ace. Com. (Johnson), 120 Cal. App. 2d 423 (1953), decedent, 
employed on a weekend job, had been digging in a pit. After a 25- 
minute respite, during which the dirt was shoveled out of the truck, 
decedent got back into the pit, picked up his shovel, collapsed and 
died, from what was determined to be a coronary occlusion. Although 
decedent had no prior symptoms, he was found to have had advanced 
arteriosclerotic disease. One doctor said that the exertion of shoveling 
would have been but a minor factor in precipitating decedent's attack. 
Another doctor felt that his exertion played some part in his death, 
but that the same effects "could have been caused by any normal 
activity, such as eating meals or walking a block." (120 Cal. App. 2d at 
p. 425.) The court in upholding the award, concluded : 

"Although he was afflicted with general arteriosclerosis which, 
at the point where the final occlusion occurred, was far advanced, 
so that death would have occurred in time from the normal prog- 
ress of the disease, yet the exertion which the performance of his 
work called for increased the hazard of final occlusion which oc- 



24 COMMITTEE REPORT ON FINANCE AND INSURANCE 

curred and which caused his death. The exertion was sufficient, 
according to the expert testimony, to have brought about, by 
means of the increased contraction and expansion of the artery 
and the accelerated blood flow, a dislodging of particles from the 
diseased lining, causing a block. This the autopsy surgeon found 
had occurred, and caused the fatal occlusion. The experts testified 
that this exertion could have had the effect that the autopsy dis- 
closed. That is sufficient support for the finding of the commission 
as to proximate cause." (120 Cal. App. 2d at p. 426.) 

8. The presence or absence of symptoms prior to the allegedly industrially 
related heart condition is an important, but not conclusive, factual con- 
sideration. 

From a review of the reported cases, it is readily apparent that in 
virtually every case involving disability or death on account of heart 
trouble there is some degree of underlying preexisting heart dis- 
ease. The manifestations of the preexisting disease seem to be of fac- 
tual importance in the determination of work causation. Thus where 
the evidence clearly shows that the employee had no prior symptoms 
of heart disease, his fatal or disabling attack is often related to his 
employment. (See awards in such cases at 22 C.C.C. 157, 20 C.C.C. 
100, 27 C.C.C. 128, 24 C.C.C. 12, 28 C.C.C. 38, 25 C.C.C. 242, 23 
C.C.C. 185, 22 C.C.C. 130, 26 C.C.C. 185.) And, compensation has 
been awarded where, although preexisting symptoms were present, 
the heart trouble never had interfered with the employee's work (see 
awards at 21 C.C.C. 270, 29 C.C.C. 229). On the other hand, compen- 
sation is often denied where it is established that the employee's 
heart condition was symptomatic prior to his alleged industrial in- 
jury. (See denials at 23 C.C.C. 46, 22 C.C.C. 184, 22 C.C.C. 185, 22 
C.C.C. 272, 20 C.C.C. 1, 20 CCS. 262.) But, again, there is no abso- 
lute factual rule relating to the employee's prior condition, since com- 
pensation has been awarded even where the employee's underlying 
heart condition was symptomatic and to an extent disabling (see 
awards at 27 C.C.C. 42, 21 C.C.C. 165), and denied where apparently 
there were no prior symptoms. (See Daniels v. Ind. Ace. Com., supra, 
148 Cal. App. 2d 500.) 

9. Apportionment in Heart Cases. 

The fact that almost invariably an employee's heart trouble stems 
in part from a preexisting heart condition gives rise to problems of 
apportioning liability. An employer is, of course, fully responsible for 
the industrially caused aggravation or lighting up of a preexisting 
condition (Labor Code Section 4663), but not liable for the natural and 
normal progress of a preexisting condition (see Tanenbaum v. Ind. Ace. 
Com., 4 Cal. 2d 615 (1935)). 

(a) Death eases: So long as work contributed to the death, there may be no 
apportionment to preexisting condition, but there may be an apportion- 
ment of full benefits as between carriers or employers responsible during 
(he period of work activity found to have caused an employee's fatal 
heart condition. 

The Supreme Court has held that Section 4663 applies only to disa- 
bthhf benefits. Thus, in death cases, so long as the employee's death 
was at least partially attributable to industrial factors, full death bene- 



workmen's compensation 25 

fits must be awarded, and there is never an apportionment of liability 
to the underlying disease, which in fact may also have contributed to 
the cause of death. (See Pacific Gas & Electric Co. v. Ind. Ace. Com. 
(Drew), 56 Cal. 2d 219.) However, the commission has allowed an 
apportionment of full death benefits as between two or more carriers 
or employers. That is, the commission has held two or more carriers 
or employers proportionately responsible for full death benefits 
awarded to the employee's dependents, where it finds that the em- 
ployee's heart trouble, resulting in his death, was caused by employ- 
ment activity during which there were two or more carriers or employ- 
ers. In two such cases the appellate courts have refused to review the 
commission action. (See 29 C.C.C. 12; National Surety Corp. v. Ind. 
Ace. Com. (Duffy), 2d Civ. No. 28,753, writ denied, 11/30/64, 30 
C.C.C ) 

(b) Disability cases: Preexisting symptomatology is an important, but not 
conclusive, factual consideration. 

Regarding the apportionment of disability benefits between the in- 
dustrially caused aggravation of, and the natural progress of, the un- 
derlying disease, again the nature of the specific effect of the heart 
disease upon the employee prior to his disabling heart attack is of 
factual importance. If the preexisting disease was asymptomatic, non- 
apportioned disability benefits will often be awarded. (See 22 C.C.C. 
157, 20 C.C.C. 100, 25 C.C.C. 20, 28 C.C.C. 38, 25 C.C.C. 242, 23 
C.C.C. 185, 22 C.C.C. 130.) The same tendency is observed even where 
there are symptoms, if the symptoms were nondisabling in that prior 
to the disabling attack the preexisting disease never interfered with 
the applicant's employment. (See 30 C.C.C. 90, 29 C.C.C. 229, 22 
C.C.C. 185, 26 C.C.C. 188.) 

But once again there are no factual absolutes. The fact that the 
employee had no symptoms, disabling or otherwise, prior to his dis- 
abling heart attack does not preclude the commission from finding 
that the employee's disability is attributable in part to the aggrava- 
tion of a preexisting asymptomatic heart condition and in part to the 
natural and normal progress of that condition, and issuing an appro- 
priately apportioned award. This is the precise holding of Bowler v. 
Ind. Ace. Com., 135 Cal. App. 2d 534 (1955). The court held that the 
question of the extent to which an applicant's disability is caused by 
the aggravation of the preexisting condition and the extent to which it 
is caused by the natural progress of that condition is a question of fact 
for the commission to resolve on the evidence. The court upheld an 
apportioned award, even though applicant had no symptoms of heart 
disease prior to his disabling heart attack suffered while engaged in 
heavy physical labor. The medical evidence indicated that the resultant 
disability was due in part to his preexisting heart disease. 

An example of a factual pattern where such an apportionment be- 
comes necessary is where the medical evidence indicates that an initial 
heart attack is employment-connected, but a subsequent disabling or 
fatal heart attack is the result entirely or partially of the natural 
progress of the employee's underlying heart disease. (See 22 C.C.C. 
272, 19 C.C.C. 143, 29 C.C.C. 239.) ' 



2g COMMITTEE REPORT ON FINANCE AND INSURANCE 

(c) Where the medical evidence without conflict calls for an apportionment, 
the commission must do so. 

Although usually a question of fact, an apportionment is required 
as a matter of law where the medical evidence without conflict estab- 
lishes that an employee's disability is due at least in part to the natural 
progress of an underlying heart disease. The appellate court in City of 
Glendale v. Ind. Ace. Com. (Enochs), 153 Cal. App. 2d 213 (1957), 
has ruled that in such a situation the commission is without authority 
to issue a nonapportioned award. In such case all the medical opinion 
was agreed that a portion of the applicant's disability was caused by 
the natural progress of his disease, and not by his employment, but one 
doctor "expressed the view that an apportionment could not be made 
because of its speculative nature. ' ' The court concluded that no matter 
how difficult the task, the commission should have made an apportion- 
ment : " To require the employer to assume the entire financial burden 
of the applicant's disability simply because it is difficult to make an 
apportionment between the occupational and nonoccupational causes 
would not only be contrary to the mandate of the Legislature but also 
unfair and inequitable to the employer." (153 Cal. App. 2d at pp. 216- 
217.) 

(d) In the case of law enforcement officers and others entitled to the statutory 
presumption of causation under Sections 3212, 3212.5 and 3212.7, the 
commission may not apportion compensation for heart trouble to preexist- 
ing disease, once causation is found. 

Respecting those public officers having the benefit of the statutory 
presumption of causation under Labor Code Sections 3212, 3212.5 and 
3212.7, the commission may not apportion any part of the disability 
compensation to an applicant's preexisting disease. The Legislature in 
1959 added the following phrase to each of the cited statutes: "Such 
. . . heart trouble ... so developing or manifesting itself in such 
cases shall in no case be attributed to any disease existing prior to such 
development or manifestation. ' ' 

Recently in Ferris v. Ind. Ace. Corn., 237 A.C.A. 509 (District Court 
of Appeal, 4 Civil No. 7753, 10/7/65, the court held that the effect of 
the quoted 1959 addition to the cited statutes was to preclude any ap- 
portionment of liability to preexisting disease once the commission has 
found in line with the presumption of said sections that the disability 
was caused in part by employment. (See also State Compensation In- 
surance Fund v. Ind. Ace. Com. (Quick), 56 Cal. 2d 681, 686.) 



SUPPLEMENTAL CITATIONS— REPORT ON CURRENT APPELLATE 

RULINGS CONCERNING WORKMEN'S COMPENSATION 

CLAIMS FOR DISABILITY OR DEATH ARISING 

OUT OF CARDIAC CONDITIONS 

This supplement is for the purpose of citing certain heart cases 
which have been decided since the submission of the report. The sec- 
tions in which they are deemed to fit will be quoted in full. If a par- 
ticular section is not quoted, no further cases in that category have 
been decided. 



workmen's compensation 27 

1. Unusual employment-connected stress or strain is not an absolute condi- 
tion precedent to a finding that employment activity caused or precipi- 
tated a disabling or fatal heart condition. (Pp. 1-3, Report.) 

In City of Oakland v. Ind. Ace. Com. (Haley), 30 C.C.C. 393 (writ 
denied, December 6, 1965 ; hearing denied by Supreme Court, January 
6, 1966), the petitioning city urged that decedent had not been ex- 
posed to any unusual stress in his employment as a police clerk on 
the; date of his fatal heart attack. The commission 's answer ob- 
served that under the Calabresi case (73 Cal. App. 2d 555) it was un- 
necessary to show unusual stress, but that in any event as a matter 
of fact decedent 's last day was unusually stressful. An award of death 
benefits to decedent's wife was left undisturbed by the appellate 
courts. 

2. It is the claimant's burden to show by scientific evidence that the dis- 
ability or fatal heart condition is employment connected. (Pp. 3-5.) 

An award of workmen 's compensation benefits will be annulled where 
there is no medical evidence to relate an applicant's disability 
(caused by a cerebral vascular accident) to her employment. Allied 
Ins. Co. v. Ind. Ace. Com. (Williams), 30 C.C.C. 227 (award annulled 
and case remanded on concession by commission of lack of such medi- 
cal evidence in the record). 

3. Medical opinion generally varies regarding the relationship of any ac- 
tivity to cardiac failure and resultant conflicts on the issue of causation 
in specific cases present questions of fact for the conclusive resolution 
of the commission. (Pp. 5-10.) 

In Pacific Intermountain Express v. Ind. Ace. Com. (Pilkington), 
30 C.C.C. 266 (writ denied, September 23, 1965; hearing denied by 
Supreme Court, October 20, 1965), three doctors, all "board certified" 
as heart specialists, testified on behalf of the employer that decedent's 
fatal heart attack was not related to his employment. Two other doc- 
tors, specialists in internal medicine and cardiology but not "board 
certified," testified on behalf of applicant that " Pilkington 's duties 
before his death were beyond his endurance and that his continued 
work caused his attack." (30 C.C.C. 267.) An award of death bene- 
fits was left undisturbed by the appellate courts. See also Drum- 
mond v. Ind. Ace. Com., infra, 30 C.C.C. 292 (writ denied). 

4. Although not an absolute prerequisite, the presence of unusual physical 
or emotional employment-connected stress or strain remains an impor- 
tant factual consideration, but some evidence of such stress or strain 
does not guarantee benefits. (Pp. 10-13.) 

Employment-connected emotional stress was a significant factor in 
the medical reports supportive of the commission's awards in El Do- 
rado Ins. Exch. v. Ind. Ace. Com. (Simon), 30 C.C.C. 302 (writ de- 
nied), and City of Oakland, v. Ind. Ace. Com. (Haley), supra, 30 
C.C.C. 393 (writ denied, December 6, 1965; hearing denied by Su- 
preme Court, January 6, 1966). 

5. (No further cases.) 



COMMITTEE REPORT ON FINANCE AND INSURANCE 

6. Despite the statutory presumption of work connection, death and disa- 
bility benefits have been denied in heart cases involving firemen and 
policemen but the medical evidence must clearly dissociate the heart 
condition with the employment. (Pp. 16-17.) 

In Drummond v. Ind. Ace. Com., supra, 30 C.C.C. 292 (writ denied), 
applicant, a lady deputy sheriff, had heart trouble which her treating 
doctor asserted was related to the stress of her employment. Defend- 
ant's medical expert, and an independent medical examiner, opined 
that there was no relation between her employment and her heart 
trouble. The commission's denial of benefits was upheld despite peti- 
tioner's contention that the presumption of Labor Code § 3212.5 had 
not been dispelled by ' ' unequivocal evidence. ' ' 

7. In rare cases awards have been made based on medical evidence relating 
an employee's heart condition to his employment, although almost no 
employment stress was apparent, except that encountered in any normal 
activity. (Pp. 17-19.) 

See Pacific Inier mountain Express v. Ind. Ace. Com. (Pilking- 
ton), supra, 30 C.C.C. 266, to the effect that the employee's duties 
were beyond his endurance. In that case another element appeared, 
however, in that decedent's employment as a truckdriver so isolated 
him at the time of his heart attack as to make medical treatment and 
recovery impossible. 

8. The presence or absence of symptoms prior to the allegedly industrially 
related heart condition is an important, but not conclusive, factual con- 
sideration. (Pp. 20-21.) 

In cases where applicant's preexisting heart condition was asympto- 
matic (City of Oakland v. Ind. Ace. Com. (Horn), 30 C.C.C. 269 
(writ denied)), and nonlabor disabling (El Dorado Ins. Exch. v. 
Ind. Ace. Com. (Simon), 30 C.C.C. 302 (writ denied)), the commis- 
sion's findings of employment connection to the disabling heart attacks 
were sustained. 

9. Apportionment in Heart Cases. 

(b) Disability cases: Preexisting symptomatology is an important, but not 
conclusive, factual consideration. (Pp. 22-23.) 

The appellate courts refused to review commission findings that em- 
ployment caused applicant's entire disability without apportion- 
ment to underlying condition, (1) where there were no prior symptoms 
(City of Oakland v. Ind. Ace. Com. (Horn), supra, 30 C.C.C. 269), 
and (2) where the prior condition Avas nonlabor disabling (El Dorado 
Ins. Exch. v. Ind. Ace. Com. (Simon), supra, 30 C.C.C. 302). 

Respectfully submitted, 

Everett A. Corten 
Chief Counsel 

Sheldon C. St. Clair 
Associate Counsel 



workmen's compensation 29 

At the heart of our quasi-judicial system for determining compen- 
sability for work-connected injuries is the availability of expert medical 
testimony to establish not only the existence of an injury or disease 
but expert medical testimony to determine the cause of the degenera- 
tive disease. As pointed out in the above legal summary, there must 
be competent medical evidence to establish whether the work-connected 
activity either caused, accelerated, or adversely affected a preexisting 
symptomatic or asymptomatic disease before there can be an award. 
In recognition of this problem, the California Heart Association ap- 
pointed an ad hoc Committee on Workmen's Compensation which 
conducted a two-year study of workmen's compensation as it relates 
to the employment and rehabilitation of individuals with heart dis- 
ease. The report of this committee, as presented to the Assembly 
Finance and Insurance Committee by Harold T. Griffeath, M.D., 
Chairman, California Heart Association Public Relations Committee, 
pointed out that there are many types of heart disease, the most com- 
mon being congenital (present at birth), rheumatic (caused by 
rheumatic fever), arteriosclerotic or coronary heart disease (sec- 
ondary to atherosclerosis), and hypertensive ('secondary to high 
blood pressure), and with each type of heart disease, impairment can 
vary from none whatsoever to extremely severe. The committee states 
that with respect to the nature of heart disease : 

It is evident that questions relating to diseases of the heart 
and circulatory system are complex and do not lend themselves 
to formulae or simple solutions. 2 

The Heart Association Committee report also stated: 

The legal problems relating to heart disease are made doubly 
difficult by the fact that the two major causes of heart disability 
and death, coronary atherosclerosis and high blood pressure, are 
diseases about which medical information is far from complete. 
We feel that it is extremely important to emphasize the inade- 
quacy of present knowledge to answer many of the questions raised 
by Workmen's Compensation Law. 3 

The committee concluded that atherosclerosis was a major cause of 
disease of the heart and circulation and posed the chief legal problem. 
It pointed out that 50 percent of all men over 45 have present an 
important degree of atherosclerosis of the coronary arteries. In sup- 
port of this contention, Dr. Griffeath reported on a study conducted 
by the U.S. Army Institute of Pathology : 

I referred to the fact that occlusion of vessels of surprising 
degree will be seen in apparently healthy young people. On the 
left-hand column which you can't see well are the ages of these 
people, and they range from 18 to 40. There are only two aged 
40, all the rest are 18 to 22. The average age of this group is 21.8. 
These were all hearts taken from healthy soldiers, American 

2 California Heart Association, Heart Disease and Workmen's Compensation, 1964, 

p. 4. 

3 Ibid. 



3() COMMITTEE REPORT ON FINANCE AND INSURANCE 

soldiers, killed in action in Korea. On the right-hand column are 
listed luminal narrowing. That means how much of the artery 
was still open. The first two— 100% occlusion in these apparently 
healthy young soldiers— and then 98, 98, 98, 98, .98, 95, 90, right on 
down to 50% occlusion. These were cases of apparently healthy 
young boys killed in Korea, frozen, and their hearts were later 
examined by the Army Institute of Pathology. The striking finding 
of that study which involves 300 hearts was that in 80 percent of 
those hearts at an average age of 21.8, there was sufficient athero- 
sclerosis that it could be seen with the naked eye in these hearts 
without even needing a microscope. In 80 percent of the boys at 
an average age just under 22 years, there was sufficiently advanced 
arteriosclerosis to see with the naked eye. This is shown to illustrate 
the fact that this disease begins very early in life and is well estab- 
lished early in life. This information makes it clear that the disease 
is well on its way long before employment comes into the picture. 4 

The Heart Association report went on to say : 

The development and progression of this condition usually pro- 
ceeds gradually over a period of many years before the occur- 
rence of symptoms. What appears to be a sudden onset of a seri- 
ous illness in a previously healthy individual is in reality an 
outward expression of a progressive disease process which has 
been silent for years. The factors which initiate atherosclerosis 
are poorly understood. The factors which influence the progres- 
sion of this disease are poorly understood. The factors which 
determine when the quiescent disease will abruptly manifest itself 
by sudden death or a nonfatal heart attack are poorly understood. 

Current knowledge indicates that atherosclerosis is the result 
of interplay among several factors, including genetic (heredi- 
tary), hormonal, and metabolic. ("Metabolic" in this sense re- 
fers to the quantity and type of certain fat and protein compo- 
nents of the blood as well as clotting components of the blood.) 
Environmental factors may modify the process. An example is 
heavy cigarette smoking which has an unfavorable influence. The 
modifying effect of certain diets, high blood pressure, diabetes and 
of physical and emotional stress are under study. Time is an ex- 
tremely important factor. It has been said that if a man lives long 
enough he will certainly die of atherosclerosis. The relative impor- 
tance of these factors varies among individuals and in the same 
individual at different times. Undoubtedly there are factors as yet 
to be discovered. 

Although facts are relatively scant in this field, opinions are 
plentiful and one can find support for almost any hypothesis. Based 
on what is known about atherosclerosis, it is the conclusion of al- 
most all experts in the field and the belief of the California Heart 
Association that atherosclerosis is not primarily due to work but to 
otner causes. Complications of atherosclerosis of the coronary or 



* Transcript, pp. 8-9. 



WORKMEN S COMPENSATION 31 

other arteries are usually unrelated to work but may be precipi- 
tated by work activity after the disease process is advanced. 5 

"With respect to workmen's compensation awards for heart cases as a 
deterrent to a person with a heart condition being able to find em- 
ployment, the ad hoc committee has this to say : 

It is the opinion of all members of our committee and the con- 
cern of the California Heart Association that "Workmen's Com- 
pensation Law in California is causing unemployment for people 
with heart disease who are perfectly capable of working with com- 
plete safety for themselves, their employers and fellow workers. 
Industrial spokesmen have stated before our committee that as a 
consequence of present law and interpretation, employers are un- 
willing to hire individuals who might expose them to liability for 
a preexisting impairment. It is apparent that this reluctance by em- 
ployers is increasing. 

It follows that as medical science becomes increasingly able to 
discern heart disease in apparently healthy individuals, we will be 
creating a formidable new class of unemployables. Our committee 
is aware that there is a tendency at present for larger employers 
to screen out individuals who are "potential" cardiacs. These are 
persons who are not diseased but whose age, family history, slightly 
elevated blood pressure or blood cholesterol level places them in a 
group with a greater-than-average chance of ultimately develop- 
ing cardiovascular disease. 

It is alarming indeed to picture one million or more Californians 
with an imagined disability, unable to support themselves or their 
families. The committee feels that this prospect is more than just 
a gloomy prospect. It is a likely consequence of present law as it 
becomes expressed in relation to the reasonable self-interest of 
employers. The deterrent to employment is largely a financial one 
involving increased insurance costs, since most employers are fa- 
miliar with the data from the United States Labor Department 
and elsewhere indicating that impaired workers have proved gen- 
erally equal to and in some respects better than other workers if 
properly placed. 

The California Heart Association is concerned about the yearly 
increase in the number of claims based upon heart disease coming 
before the Industrial Accident Commission. It is our committee's 
conviction that the rate of increase will accelerate rapidly. The 
number of heart claims in relation to the total number of workers 
with heart disease is still small. If the criteria which have led to 
awards in heart cases before the Industrial Accident Commission 
were applied in all possible similar cases, the number of heart at- 
tacks and other cardiovascular problems which could be judged 
industrial would, we think, be tremendous. A natural consequence 
of this predicted rapid increase in cardiac claims will be an in- 
creased reluctance of employers to hire individuals with heart 
disease. 6 



5 California Heart Association, ibid., pp. 4-5. 

6 Ibid., pp. 6-7. 



32 COMMITTEE REPORT ON FINANCE AND INSURANCE 

Finally, the Heart Association made the following observation on the 
adequacy' of medical testimony as it relates to permanent disability 
evaluation : 

It is the view of many physicians within the Heart Association 
that awards in workmen's compensation cases involving heart dis- 
ease are based more on folklore than on scientific facts. Though 
there is certainly a need for clear guidelines regarding the condi- 
tions under which disability from heart disease may reasonably be 
considered as arising from employment, the gaps in present knowl- 
edge in this field create difficulty in setting down strict medical 
criteria for assessing work aggravation. Any such medical criteria 
would run the risk of being arbitrary and lacking in scientific 
backing. Although research is needed and is under way to eluci- 
date some of the problems posed by compensation cases, we cannot 
reasonably expect research data to give us the answer in a specific 
case with all its individual variables. There can be no substitute 
for a careful analysis of all the factors in the individual case by a 
highly competent and well informed physician. 

In the evaluation of disability, newer methods of physiological 
testing for the determination of disability should be encouraged. 
Methods of evaluating cardiac and pulmonary functioning during 
exercise have been developed. When properly applied and inter- 
preted, such techniques add objective and quantitative measure- 
ments to the assessment of disability. Such techniques are espe- 
cially helpful in cases where disability from emotional problems 
or lung disease is mistakenly attributed to the heart. 

Testing is of greatest help in those cardiac problems which are 
anatomically relatively stable. On the other hand, coronary artery 
disease, because of the rapidity with which improvement or worsen- 
ing of the coronary circulation can occur with accompanying vari- 
ations in the degree of disability, can be evaluated with more 
limited certainty. No matter how refined the physiological testing, 
such procedures must be a supplement to the all-important clinical 
evaluation by a physician with special training and experience in 
the field of cardiovascular disease. 

The Heart Association is concerned about the competence of 
medical testimony. It is believed that higher standards should be 
applied to medical witnesses. The possession of a medical degree 
does not insure that a physician is competent to give meaningful 
opinions regarding technical cardiovascular questions. There is a 
need to study means of elevating the qualifications of medical wit- 
nesses or ways of assigning relative credence to opposing testimony. 
Even more important may be a study of ways to supply the Indus- 
trial Accident Commission with highly competent, impartial medi- 
cal advisers. The present system discourages impartial testimony 
since counsel for each party tends to select medical witnesses of 
predictable persuasion. 7 

Appearing on behalf of the City of Los Angeles and the League of 
Californ ia Cities, Mrs. Christina New, Deputy City Attorney for the 

7 Ibid., pp. 8-9. 



workmen's compensation 33 

ity of Los Angeles, discussed both the problems of rebutting testi- 
nony before the Workmen 's Compensation Appeals Board on questions 
j)f industrial causation of heart conditions and the scope of review of 
ippeals board findings. Mrs. New maintained: 

For heart attack or heart disease to be compensable, the work 
does not have to be the sole cause or even the primary cause of the 
heart condition. If the work is but a contributing cause, it is a 
compensable injury under the facts and law as liberally construed 
by the Industrial Accident Commission. 

The rule . . ., namely, if any doctor testified, including the fam- 
ily physician, that the heart condition was the result of the em- 
ployment that this should be considered industrial is, in fact, gen- 
tlemen, the very rule that is being applied by the Industrial Acci- 
dent Commission at the present time. 

Dr. Griffeath pointed out that there is no substantial agreement 
as to the causes of arteriosclerotic heart disease and that it would 
be possible to find a doctor to support any medical theory or opin- 
ion as to causation. This, gentlemen, is true. This is one of the prob- 
lems that we are up against. The applicant merely has to go out 
and find a doctor that will write a report for him saying that his 
heart condition is industrially caused. It doesn't matter how many 
other reports from other doctors are in the evidence. It doesn't 
matter if there are reports by independent medical examiners. 
The referee can and almost invariably will, because of Labor Code 
Section 3202, construe and find in favor of the applicant that this 
is an industrial heart condition. Now, this is the situation we are 
faced with once the referee has so held. This is the finding of facts. 
It is a finding of medical facts but it is a finding of facts that is 
conclusive on appeal. Labor Code Section 3953 says that, and I 
will quote right from the section: "The findings and conclusions 
of the commission on questions of fact are conclusive and final and 
are not subject to review." So if we don't win a case that we feel 
is definitely a nonindustrial condition at the commission level . . . 
there is no hope. 

Also, if we are fortunate enough to have a writ of review 
granted, if there is any evidence in the record whatsoever, the dis- 
trict court of appeals and the Supreme Court will not disturb the 
finding of the commission. Not substantial evidence, gentlemen, 
but any evidence. And I will point this fact up by reading from 
the most recent Advanced California Report dated January 7, 1966, 
from the case of Riders Material Company v. Industrial Accident 
Commission. The decision was written by the Honorable Justice 
Mosk and I quote: "Under the rules of construction by which we 
are bound, findings of the commission must be liberally interpreted 
in favor of sustaining an award, and even if the findings are inade- 
quate for uncertainty, they will be upheld if they can be made cer- 
tain by reference to the record. Moreover, conflicts in the evidence 
must be resolved in favor of the findings of the commission, and if 
there is any evidence in support, findings will not be disturbed on 
appeal." Any evidence. Now, this can be the evidence of a doctor 
that the applicant's counsel has gone out and carefully questioned 
3— L-2516 



34 COMMITTEE REPORT ON FINANCE AND INSURANCE 

regarding his theory— does chronic stress and strain aggravate pre- 
jsting degenerative underlying arteriosclerotic heart condition — 
and the doctor, especially if he is a treating physician, the family 
doctor, says, well— I think in this case, yes it did, and he will write 
a report to that effect; the referee will find it is industrially 
caused and that is the end of it. 

It goes so we petition, if we have it granted, the court will say 
there is evidence here. We could have five other doctors and an in- 
dependent medical examiner saying — well, we disagree, we feel 
that this is a nonindustrial condition. 8 

The charge is often made that the family physician, when called 
to testify for an applicant on the question of industrial causation or 

irravation of a heart condition, is not an impartial expert medical 
witness. This proposition was supported by Dr. Griffeath : 

It is very common for the family physician to testify, and he is 
in a position where he often is not an ideal impartial witness. I 
know that I find it very difficult to testify in a case where I am the 
attending physician. You will see individuals who are quite rigid 
about their attitudes in all cases except their own patients. Doctors 
are human like everybody else ; they are influenced by loyalty and 
emotions. We do certainly have a situation where as mentioned the 
system does seek out people of known persuasion, and if you had 
a group of perhaps superhuman, ideal, impartial, medical wit- 
nesses, they probably would never be asked to testify because they 
would be too unpredictable. 9 

If an employer is faced with a choice of hiring an employee with a 
known cardiac condition or one with no such condition, he would, all 
other things being equal, hire the person without the cardiac condition. 
The employer does not, of course, wish to expose himself to a potential 
workmen's compensation claim Avhich might result in a substantial per- 
manent disability award or the payment of a death benefit. Although 
the permanent disability may be apportioned where it is a symptomatic 
prior disabling disease, the death benefit is not apportionable. One 
member of the committee questioned Dr. Griffeath on the reluctance of 
employers to hire known cardiac risks : 

Assemblyman Russell : Do you have any statistics as to the num- 
ber of men or women who are unemployable because of . . . any 
kind of heart condition? 

Dr. Griffeath : I think this is very difficult information to obtain 
because most people will not report the individuals they turn 
down. It is difficult to get at times information on hiring practices 
and why certain individuals are excluded. We do know, though, 
that many companies have exclusion of cardiac policies in their 
hiring just as insurance companies rate up or exclude cardiacs 
and we know that this is a real problem. We even know that some 
companies are now screening people as to their risk of developing 
heart disease and are tending to exclude those individuals who are 
a high risk even though they are well at the moment. 10 

8 Transcript, pp. 60-62. 

9 Transcript, p. 22. 

10 Transcript, pp. 31-32. 



workmen's compensation 35 

While industry spokesmen argue that heart cases account for a 
substantial amount of the expenditures for workmen's compensation 
in this state, others point out that the number of such heart cases before 
the Workmen's Compensation Appeals Board are relatively small: 

Clint Fair, California Labor Federation, AFL-CIO : In 1953, 
they represented 1.7% of all cases decided by the Industrial Acci- 
dent Commission] now they have increased to 2.8% in 1964 [and 
in 1965] they are down to 2.7%. The problem is not that great a 
problem nor is it endangering our system of workmen's compen- 
sation when but 2.7% of the cases are in the area in which we have 
the greatest number of deaths in our society. 11 

Given the difficulty that the medical profession itself has had in 
determining whether a particular patient's heart condition was caused 
or aggravated by his employment and the lack of any generally ac- 
cepted medical standard on such causation, can the Legislature set 
acceptable legal standards different than those now used. One witness 
thought not : 

Charles Scully: With respect to the assumption that there 
should be a different standard for heart cases, rather than for 
other types of compensable injury, I submit that the witness that 
you heard this morning in my opinion obviously establishes that 
you cannot establish a rule of certitude. You cannot come up with 
statutory criteria which in a medical-legal aspect can fairly eval- 
uate liability or nonliability. As a matter of fact, I believe the only 
conclusion that you can draw from the testimony of Dr. Griffeath 
this morning is that it is an individual medical-legal determination 
to be made in each case based upon the existing factors applying 
to that particular individual in his particular job classification 
at the time the condition came about. 12 

Alternative suggestions have been made with respect to compensat- 
ing persons with preexisting injuries or illnesses when his condition 
would make an employer reluctant to hire him. One such suggestion 
was made at the committee hearing by Mr. Thomas Harris of the 
Teamsters Legislative Council : 

We have developed this suggestion, and it was only a suggestion 
as the attorneys present will immediately recognize, is open to a 
challenge of constitutionality on the basis of a case that was de- 
cided in the Supreme Court some 20 years ago, but courts change, 
and maybe it would be worth the challenge. Our proposal essen- 
tially [is] this: that any man with one of the statutory defined 
disabilities whether it be heart or epilepsy or certain other types 
of injury, leg or back and so forth that the Legislature might de- 
fine, he could get from the Industrial Accident Division on a 
proper medical basis a certification that he suffered from this kind 
of injury. He could then go to an employer and say, yes, I have 
a back injury and had a back injury five years ago, and I am 
pretty good at this sort of business, here 's my card that shows that 
I am registered with the Administrative Director as having such 

11 Transcript, p. 37. 

12 Transcript, p. 43. 



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36 COMMITTEE REPORT ON FINANCE AND INSURANCE 

and such an injury. That man would in no way waive his rights 
1. cnefits in any way whatsoever. But as in automobile insurant 
you have an assigned risk fund that takes care of this, that . 
signed risk insurance, that takes care of some of us more ir 
mpetent drivers, so you would have this fund that would ps 
actly the full benefits as though he were on a. par with anybocf 
36. The man would not in any way waive his benefits; on t? 
her hand, the employer's own account would not be charge 
for those benefits. It could be met, obviously, out of General Func 
it might be met in various other ways but the suggestion we mat 
and that is not the crux of the matter as to how the fund wi 
made. Our suggestion was tha.t there be an additional tax on ever; 
body who was paying for workmen's compensation. 

We believe that the question that has appeared ... here tods 
... is serious. Not that it is affecting hundreds of thousands < 
workers, but it is affecting many, many hundreds — probably thoi 
sands of workers — who want to work, are able to work, physical] 
able to work, but which under the present state of the law i 
sane employer, especially small employers, is very eager to hire. 

To what extent would the mandatory use of independent medic; 
examiners or heart specialists help solve the problem of the refer* 
gaining superior impartial medical testimony on which to base hi 
decision? Since it has been argued that referees will often disregaxne 
the opinion of heart specialists in favor of that of a family physicia lere 
in reaching a decision on the compensability of a particular heart cas i» ' 
it is necessary to consider this problem. i le 

In 1956 a study 14 was conducted under the auspices of the Cardk 
and Industry Committee of the California Heart Association to, amon 
other things, test to the degree of unaniminity of medical opinio 
with respect to the relationship between alleged ''injury" and heai 
disease and to determine if the Industrial Accident Commission^ 
decisions in heart cases were consistent with expert medical opinio 
rendered outside the claims process. The study consisted of an examine 
tion of 395 heart cases taken from the files of the Industrial Accider 
Commission. These cases were submitted to the panel of outside qual 
fied physicians. Over one-half of these cases involved industrial workei 
and an additional one-fifth were policemen and firemen entitled to tr 
presumption of compensability granted such safety members by varioi' 
sections of the Labor Code. A separate tabulation was kept of thei 
safety members. 

The panel of examining physicians concluded that 79 out of the 3J* 
cases submitted for review lacked sufficient information upon whic 
to base an opinion. Out of the remaining 319 cases, there was unanimoi 
agreement among the reviewers in only 47 cases (15%). Subsequent; 
101 of these cases were sent to the same reviewers just as if the 
were abstracts not previously distributed. In this case, only 70 percei 
of the abstracts were judged the same way by the reviewer the secon 
time. On this point the study concluded that the medical judgment i 

1:1 Transcript, pp. 47-48. 

" Beard, Rodney R., M.D., et al., "Heart Disease Claims Under the California Worl 
men's Compensation Act," Circulation, Vol. XIII, No. 3, March 1966, pp. 448-45 



K 

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lere 



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ill 



workmen's compensation 37 

ured by reproducibility on case abstracts material is far from 
able. However, often when an expert medical witness is called to 
;ify upon such heart cases, he relies on the same information and 
many cases does not make a personal examination of the claimant. 
s is the case in all cases involving claims for death benefits. This 
ticular study concluded with these words: 

There is some discrepancy between the judgments of the Cali- 
fornia Industrial Accident Commission and a group of expert 
physicians reviewing the cases in abstract form, but it compares 
favorably with the substantial discrepancy among the physicians 
themselves, and the discrepancy between one judgment by a physi- 
cian and a second judgment made on the same case by the same 
physician, some time later. Inasmuch as awards favorable to the 
claimant must be supported in nearly every case by medical evi- 
dence, it appears that education of physicians for the part they 
play in these proceedings is needed. 

It may also be pointed out that the allegation that " every 
heart claim gets an award" has not been substantiated by this 
study. 15 

fThe evidence available to this committee would indicate that al- 
pugh there has been a rise in the number of cardiac cases filed with 
e Workmen's Compensation Appeals Board and its predecessor, 
gre has not been an inordinate increase. The increase in the work- 
* force and the growing awareness among claimants and counsel of 
e developing law with respect to this type injury account for much 
this increase. Taking into account the lack of generally accepted 
sdical standards on the degree to which work-connected activity 
uses or contributes to heart disease, it is not surprising that in any 
ven case before the Workmen 's Compensation Appeals Board predic- 
bility of the outcome is uncertain. As in most legal matters, the trier 
fact must weigh the evidence presented and, exercising sound dis- 
etion and reasoning, reach a decision. We are not convinced that 
ere has been an abuse of such discretion by the referees or the 
>ard, particularly in light of the unanswered medical problems in- 
lved in heart disease. We do not believe that the legal framework 
this regard, set forth earlier in this report, is manifestly unfair 
employers or employees. Although some would like to confine awards 
ised on heart disease to cases arising out of extraordinary or severe 
ress or strain connected with the work, it must be remembered that 
Le compensation system in California was not designed to provide 
nefits only for the extraordinary event, but for all ordinary occur- 
nces which result in injury, illness or death. 

If there is uncertainty in the appeals board decisions, it stems 
iainly from the lack of medical certainty in this area. What is re- 
hired is medical guidelines rather than legal absolutes. The Legis- 
iture cannot impose a rule restricting heart awards to cases of ex- 
''aordinary stress or strain when such a rule would not be based 
pon reason or substantially conclusive medical evidence that such a 

Ibid., p. 456. 



COMMITTEE REPORT ON FINANCE AND INSURANCE 

rule is proper It was our hope that in enacting AB 2023, and in par- 
ticular Section 139 of the Labor Code during the 1965 General Ses- 
sion reasonable guidelines could be developed. This new code sec- 
tion requires the appointment of a medical advisory committee which 
is charged in subsection (d) of that section to "assist in develop- 
ing guidelines for determination of disputed questions of medical 
fact n This direction to the medical advisory committee should pro- 
ride the Workmen's Compensation Appeals Board with added medi- 
cal information to, if necessary, revise its guidelines on heart cases 
if subsequent medical findings deem this necessary. 

Benefits 
Permanent Disability Benefits 

The Governor's Workmen's Compensation Study Commission, in its 
report, found that there had been a sharp increase in benefit-payroll 
ratios since 1953, and this increase was contributed to, primarily, by 
awards in certain categories. Table 1 sets forth the aggregate benefit- 
payroll ratios on a loss-incurred basis for carrier-insured payrolls 
during those 10 years. As can be seen from these figures, the more sig- 
nificant increases took place in three categories: death benefits (77.8 
percent), major permanent partial disabilities (122.9 percent), and 
minor permanent partial disabilities (58.5 percent). Wages in this 
period of time increased by only 43.3 percent. 

The reason for the sharp rise in death benefits is accounted for by the 
increased number of death cases (44.9 percent), which roughly cor- 
responds to the increase in covered working force during that period 
(40.6 percent). In addition, statutory changes in the maximum death 
benefit from $8,750 or $7,000 (according to whether there is a sur- 
viving widow with at least one dependent child or not) to $20,500 or 
$17,500 respectively has accounted for a 50 percent rise. These two ele- 
ments taken together account for nearly all of the total 77.8 percent 
rise in death benefits ratios. 

However, the increased permanent disability costs cannot be attrib- 
uted solely to the rise in the covered work force, increased wages or 
statutory changes of benefit amounts. In comparing the respective 
numerical increase in permanent disability cases resulting from an 
increased work force to the actual number of cases, an important 
insight can be gained. 

While the temporary only cases have remained 6,421 short of the 
expected number, major permanent partials have gained 2,586 cases 
and minor partials 6,940 cases in excess of the expected numbers. 
Hence, a substantial shift across the spectrum has taken place which is 
in part responsible for the disproportionate changes in the benefit-pay- 
roll ratios of the respective loss categories. 

After reviewing the benefit cost figure developed for the study, the 
commission concluded : 

The substantial increase in the relative amounts of death bene- 
fits was primarily the result of increase in benefit levels. The sharp 
rise in indemnity benefits for permanent disability was not only 
the product of the growth in covered workers and rise in benefit 



workmen's compensation 



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TABLE 2 



41 



Type of increase 



Major 
permanent partial 



Increase in number of cases 



Minor 
permanent partial 



Temporary only 



Expected 

Actual 

Excess or deficiency. 



922 

3,508 

+2,586 



5,077 

12,017 

+6,940 



20,390 

13,969 

-6,421 



levels, but in addition the result of a demonstrable shift from in- 
juries resulting only in temporary disability to injuries resulting 
in a residual permanent disability. The shift occurred across the 
whole disability spectrum, but had the most pronounced effects on 
relative costs in the category of permanent partial disabilities of 
25 percent and above. 16 

Two witnesses at the committee's hearings presented explanations 
for this increase in permanent partial disability costs. One, Mr. Ray- 
mond Young, Manager, State Compensation Insurance Fund, blamed it 
on inadequate temporary disability payments presently being made 
which, in his opinion, forced persons to claim a permanent disability 
to make up for wages lost while unable to work and being paid this in- 
adequate temporary disability. 

In our society, our entire economy is based on the assumption 
that we will be able to pay for the groceries, the gas and lights, and 
the installment payments on the car, and our kids' teeth, and ton- 
sils, and so forth, and it is in this area that workmen's compensa- 
tion can really do its greatest job, in terms of the number of people 
directly involved. 

The need exists when the man has the need, immediately after 
the injury occurred. When wage replacement payments are de- 
layed or when they prove to be inadequate to meet basic economic 
needs, the injured man is forced to seek some other remedy. When 
he is forced in this direction, a series of ripple effects are set in 
motion which create problems as great or greater than the ones you 
have heard expressed here during the hearing. 

Specifically, it leads to increased litigation. It leads to a tendency 
to misuse the permanent disability rating system to augment or 
supplement inadequate temporary benefits. It tends to delay the re- 
turn to work. 

. . . This [chart] indicates that there is 70.28 percent increase in 
filings before the Industrial Accidents Division since 1958 com- 
pared to a 20 percent increase in disabling injuries reported. In 
other words, 70.28 percent gain in the number of filings for deter- 
mination by the new Division of Industrial Accidents since 1958. 

Another facet of the problem shows up in the apparent shift 
from cases involving temporary disability only, as contrasted to 
cases involving permanent disability. For example, a comparison of 
the figures in 1957 compared to 1962 show that there was a 123.8 



"California, Report of the Workmen's Compensation Study Commission, April 1965, 
p. 46. 



42 COMMITTEE REPORT ON FINANCE AND INSURANCE 

percent increase in major permanent disabilities ; a 62.3 percent in- 
crease in minor permanent disabilities compared to only a 25.6 
percent increase in cases involving temporary. 

Assemblyman Beilenson: What's the reason, do yon think, for 
this increase .' 

Mr. Young: 1 think there is a real need for these workmen to 
augment the benefits they are receiving as temporary benefits. 
Quite frequently in correspondence in our files, we see a man who 
has accumulated a number of bills during the time he has been re- 
ceiving temporary disability. Oftentimes, benefits are delayed, a 
man doesn't get them when he needs them and when he does get 
them they aren't enough, so he must seek some other remedy to 
get himself out of the financial situation. 

Assemblyman Beilenson : This didn 't used to be the case % 

Mr. Young : I think it was less the case in time when the benefits 
more nearly approximated the 62 percent. 17 

Pressing an opinion contrary to that of Mr. Young was Mr. Warren 
Hanna representing the California Conference of Employer Associa- 
tions. Mr. Hanna attributed the increased number of applications and 
the increased number of permanent disability awards to three causes. 
First, the increased number of awards for cardiacs and other degenera- 
tive pathologies; second, refusal of the Workmen's Compensation Ap- 
peals Board to apportion disabilities between those caused by the injury 
and a preexisting injury or disease ; and third, the granting of awards 
based wholly or in part on the subjective complaints of the applicant. In 
reference to the awards based on subjective complaints which he de- 
scribed as the ''subjective racket" the witness mentioned that it is al- 
most unheard of for an applicant to walk away from the Appeals Board 
hearing without an award of some sort, even if it is solely based on sub- 
jective complaints unsupported by medical testimony. Further : 

. . . this makes it possible for a claimant seeking a rating to ex- 
aggerate the subjectives, that is, by saying they are so severe that 
he can no longer do his work adequately or perhaps at all, and if 
believed by the referee or the board, even though unsupported by 
any objective finding or sign of disability, the employer can thus 
be forced to pay for a substantial permanent disability or even at 
times, for total and permanent disability. 18 

Mr. Hanna suggested the elimination of awards for subjective com- 
plaints that cannot be supported by findings of manifest physical im- 
pairments. He also suggested that : 

. . . it would be well to eliminate all allowances for minor and 
minimal disabilities which take up so much time of the board and 
staff which aren't really disabling. 19 

This latter suggestion was supported by Mr. Edmund Leonard of the 
California Self-Insurers' Association. Directing his attention to those 
applicants who have permanent disability ratings of between 1-19 per- 
cent, he postulated : * 

17 Transcript, pp. 121-122. 

18 Transcript, p. 101. 

19 Transcript, p. 103. 



workmen's compensation 43 

. . . [they] actually had no wage loss. And under the concepts of 
a wage loss replacement . . . advanced to you and which is the 
basic concept of a compensation system, this whole 19 percent 
should be washed out. There's no question on that. They have no 
need. They have no wage loss and they shouldn't get anything. 20 

Reference must also be made to the study by Professor Earl F. 
Cheit 21 on the question of permanent wage loss suffered by permanent 
disability cases. In a study of actual cases Professor Cheit determined 
that only 7.3 percent of persons with disability ratings between 1 and 

19 percent actually suffered a permanent wage loss. This figure rises 
to 27.1 percent for persons with a disability rating of 20-69 percent 
and 66.8 percent ^hen the rating is 70-100 percent. 

Of these persons with permanent wage loss in each of the three cate- 
gories, the median compensation paid was as follows : 

1- 19% permanent disability — $1,200 

20- 69% permanent disability 3,294 

70-100% permanent disability 16,801 

However, for those same persons, those with permanent wage loss, the 
actual median wage loss suffered was as f o\lows : 

1- 19% permanent disability $27,500 

20- 69% permanent disability 42,222 

70-100% permanent disability 46,562 

These figures would indicate that, measured by a "wage loss" stand- 
ard alone, a significant number of ^persons with minor permanent par- 
tial disabilities are compensated w'hen they have suffered no wage loss. 
But those persons who do suffer some wage loss are compensated at a 
fraction of what is the actual wa'ge loss. 

However, wage loss is not Khe only criteria used to determine the 
degree of permanent disability an injured employee has suffered. Labor 
Code Section 4660(a) provid es that account shall be taken of the nature 
of the injury, the age of the applicant, his occupation and the dimin- 
ished ability of the injured employee to compete in the open labor 
market. 

The Workmen's Compensation Study Commission, in its report, rec- 
ommended that there be no increase in benefits for disabilities for less 
than 15 percent, but ^hat disabilities greater than 15 percent should be 
compensated at a proportionately increasing scale so that disabilities 
of 50 percent wouJ d be compensated at H times the present rate and 
the total disabilities at 2 J times the present rate. 

Their report on the subject concludes : 

We cone hide that it is not sufficiently probable that a worker 
with a permanent disability of 15 percent or less would suffer 
an actuei wage loss after the injury becomes permanent to justify 
increases in benefits for this group, as compared to the more seri- 
ously injured group. On the other hand, we conclude that it is 
sufficiently likely that a worker with a permanent disability of 
50 vercent or more (equivalent, for example, to loss of the major 
th\imb, index, middle and ring fingers at the proximal joints) will 

20 Trap script, p. 146. T ^ 

» Cheit, Earl F., Injury and Recovery in the Course of Employment, John Wiley and 
'.Sons, 1961, pp. 179-185. 



44 COMMITTEE REPORT ON FINANCE AND INSURANCE 

sustain an actual long-term wage loss sufficient to justify an ii 
crease in the indemnity rate. 22 



4 



Temporary Disability Benefits 

Temporary total disability payments are presently 61.75 percent c 
the employee 's average weekly earnings, but not to exceed $70 per wee 
(Labor Code Sections 4453, 4653). The maximum of $70 per week ha 
been in effect since 1961 when it was raised from $65 per week. The fo 1 
lowing table, prepared by the Division of Labor Statistics and Researcl 
illustrates the changes in temporary disability benefits from 1953 
1965: 



IP 

it 



sin 
I 



Year* 



Average weekly wage of injured workers 



Total 



Men 



Women 



Maximum 

temporary 

benefit 



Weekly 

earnings 
needed to 

receive 
maximum 

benefit 



Percent of 
injured workers entitled t 
receive temporary benefi (SI 



Equal to 

61% of 

earnings b 



Less than 

61% of 

earnings I 



I 



i 



(i) 



(2) 



(3) 



(4) 



(5) 



(6) 



(7) 



1948 
1949 
1950 
1951 
1952 
1953 

1954 
1955 
1956 
1957 
1958 
1959 

1960 
1961 
1962 
1963 
1964 
1965 



$64.12 
63.94 
66.87 
72.12 
76.50 
79.86 

80.32 
83.49 
87.69 
90.16 
94.63 
98.33 

102.64 
105.77 
111.39 
114.40 
119.43 
122.09 



$66.54 
66.70 
69.69 
75.71 
80.19 
83.51 

84.10 
87.48 
91.84 
94.71 
99.22 
102.97 

107.65 
111.39 
117.08 
120.10 
125.68 
128.61 



$45.27 
44.48 
46.67 
49.23 
52.00 
55.63 

55.73 
57.40 
60.58 
62.60 
65.52 



72.29 
72.58 
74.68 
78.38 
81.85 
83.56 



$30 
30 
30 
35 
35 
35 

35 
40 
40 
50 
50 
65 

65 
70 
70 
70 
70 
70 



$48.58 
48.58 
48.58 
56.68 
56.68 
56.68 

56.68 
64.78 
64.78 
80.97 
80.97 
105.26 

105.26 
113.36 
113.36 
113.36 
113.36 
113.36 



22 
23 
19 
26 
22 
19 

19 
28 
24 
42 
37 
63 

57 
61 
56 
53 
49 
48 



78 
77 
81 
74 
78 
81 

81 
72 
76 
58 
63 
37 

43 

39 
44 
47 
51 
52 



■ 1948-52 as of November; 1953-65 as of September. 

b This column represents the proportion of injured workers earning the same or less than the amount in column 5. 

This column represents the proportion of injured workers earning more than the amount in column 5. 

For the calendar year 1966, the percentage of injured workers en 
titled to receive 61.75 percent of earnings has dropped to 45 percent 
This decrease in the effective rate of compensation will continue so long 
as the average weekly wage in the state increases and the temporary 
disability benefit is held at $70. One casualty of the present maximum 
temporary disability benefit is the state 's Unemployment Compensation 
Disability Fund. Unemployment Insurance Code Section 2629 pro- 
vides that a difference between the injured worker's temporary disa- 
bility benefits for workmen 's compensation and the unemployment com- 
pensation disability benefit the employee would have been entitled tc 
f he had been injured off the job can be claimed by the employee. Since 
the unemployment compensation disability maximum is $80 per week,; 
all wor kmen's compensation applicants whose weekly earnings are 

■ Study Commission Report, p. 204. 



workmen's compensation 45 

)Ove $113 per week may receive an additional $1-$10 per week from 
ie Unemployment Compensation Disability Fund. In effect, the Unem- 
oyment Compensation Disability Fund is subsidizing the workmen's 
prnpensation program. Since the Unemployment Compensation Dis- 
•ij |)ility Fund is entirely supported by employee contributions, while 
ifc jorkmen's compensation is employer financed, the industrially injured 
ie| jorker is, in effect, paying the compensation for his own injury. Each 
;arc Bar this subsidy amounts to over $2.4 million. 

53 1 1 The committee does not look with favor upon the continuing deterio- 
ation in the temporary disability compensation rate. The totally dis- 
bled workman must be assured of adequate compensation benefits to 
55 jieet necessary living expenses at today 's prices. The present maximum 
\ U{ ^mporary disability benefit does not provide such adequacy. As a 
^ esult, serious economic loss is visited upon an employee while he is 
mporarily disabled, a loss which the workmen's compensation system 
/as initially designed to prevent. The committee also does not favor 
he continued subsidy of workmen's compensation by the State Unem- 
loyment Compensation Disability Fund which may seriously deplete 
Jhat fund. The committee would, therefore, favor an increase in work- 
len's compensation temporary disability benefits to at least that of 
he maximum Unemployment Compensation Disability benefit. 

The Workmen's Compensation Study Commission, the Administra- 
ive Director of the Division of Industrial Accidents and the Manager 
>f the State Compensation Insurance Fund have all recommended that 
he maximum temporary disability benefit be raised so that at least 75 
>ercent of the work force would, if injured, be compensated at the rate 
)f 61.75 percent of their average weekly wage. This would mean a maxi- 
num benefit of $94 a week in a year like 1966 rather than the present 
|>70 per week. 

Uninsured Employers 

Every employer subject to the California compensation laws (other 
_;han governmental agencies) who does not have a permit to self -insure 
must obtain a policy of compensation insurance. 23 Failure to do so is a 
misdemeanor. 24 Willful failure to insure may result in the addition of a 
penalty of 10 percent of the compensation otherwise payable, 25 and the 
award of a fee for the workman 's attorney against the employer. 26 The 
injured worker may proceed against the uninsured employer for com- 
pensation and, at the same time, sue him for damages in the civil 
T courts, 27 with credit being allowed against the judgment in the amount 
jjof the compensation award. 28 Negligence on the part of the employer is 
B presumed and the defenses of contributory negligence, assumption of 
j the risk and the act of a fellow servant are abolished. 29 The property of 
.the uninsured employer may be attached, 30 and the employer's business 
jmay be abated as a nuisance. 31 Workers not represented by counsel may 

l) 2 * Labor Code, Section 3700. 
24 Labor Code, Section 3710.2. 
26 Labor Code, Section 4554. 

26 Labor Code, Section 4555. 

27 Labor Code, Section 3706. 
if 28 Labor Code, Section 3709. 

28 Labor Code, Section 3708. 

80 Labor Code, Section 3707. 

81 Labor Code, Section 3712. 



Hi COMMITTEE REPORT ON FINANCE AND INSURANCE 

obtain tl tance of the Division of Labor Law Enforcement in col- 

lecting awards against uninsured employers. 32 

None of these remedies, potent as they may seem, is of any avail to 
a seriously injured worker if the employer is insolvent or has inade- 
quate assets to meet any judgment or award. California does not have 
a l'u nd for the compensation of workers of uninsured employers. The 
worker is left to a remedy resembling an employer's liability act 
coupled with severe sanctions, none of which is effective against a 
bankrupt uninsured employer. 

The Division of Labor Law Enforcement and the Department of 
Industrial Relations have had the duties since 1953 of enforcing the 
laws requiring insurance. One investigator in San Francisco and one in- 
vestigator In Los Angeles have the primary duty to enforce compliance 
with the workmen's compensation laws. This division receives from 
the Department of Employment cards showing the names and addresses 
of the approximately 6,500 new employers registered each month. It 
also receives from the Division of Labor Statistics and Research an 
average in 1963 of 540 doctors' first report of injury that failed to 
name a compensation carrier. These reports are mailed to the California 
Inspection Rating Bureau for screening, and those employers found to 
have no record of workmen's compensation coverage are sent a notice 
of their obligation to insure. In fiscal year 1963-65, 681 employers ob- 
tained workmen's compensation insurance as a result of enforcement 
programs and there were 49 prosecutions for failure to obtain compen- 
sation insurance. 

However, those business entities which maintain that the persons 
working for it are not employees but independent contractors may often 
not obtain insurance. The question of the employee-independent con- 
tractor status of the worker may not then arise until after an accident 
has taken place. If, at this time, the worker is found to have been an 
employee and not an independent contractor, and the employer has not 
obtained insurance and has no assets or only limited assets, the em- 
ployee will be unable to satisfy a judgment or award against the em- 
ployer. This works serious hardships against the injured employee 
especially when he is in need of immediate medical attention. In cases 
of severe injury to an employee where immediate and long-term care 
are required and some form of rehabilitation is a necessity the em- 
ployee s eventual physical recovery may be seriously hampered by his 
inability to get such necessary medical care. 

The Governor's Workmen's Compensation Study Commission and the 
other organizations which appeared at this committee's hearing recom- 
mended that an uninsured employer's fund be established with an 
initial appropriation of $100,000 to be administered bv the State Com- 
pensation Insurance Fund for the purpose of paying awards of compen- 
sation against uninsured employers, and for the purpose of supplying 

ZS2S! 7 d T l r V ?\ ? G State Fund ' as trustee of the uninsured 
employee s fund, should be authorized to obtain the assistance of the 

Sto™ t fZ Enforcement > the Attorney General and district 

attorneys to assist it in recouping from uninsured employers the 
amounts it has paid. J 

v Labor Code, Section 3715. 






workmen's compensation 47 

Ohio has such a provision in its statutes (Title 41, Ohio Revised Code, 
Section 4123). Under the Ohio law, the injured employee may file his 
application with the Industrial Accident Commission and file a copy 
of it, together with an affidavit that the employer has failed to insure, 
with the county recorder. The affidavit constitutes a lien from the time 
of filing in favor of the commission upon the employer's real and per- 
sonal property and it is recorded like a mortgage. The lien is lifted 
only when the employer pays the award or posts a bond satisfactory 
to the commissioner. The employee receives his award from the Ohio 
State Compensation Insurance Fund even if the fund is unable to col- 
lect from the employer. Suit is brought against the employer by a state 
agent, and such suits are given precedence on the dockets. The Ohio 
State Compensation Insurance Fund also sues the uninsured employer 
for the premium that he should have paid if he had been insured all 
along. 



UNEMPLOYMENT INSURANCE 
FOR FARMWORKERS 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 

CONCLUSIONS AND RECOMMENDATIONS * 

The committee favors in principle the extension of unemployment 
insurance to farmworkers and recommends that in the 1967 General 
Session a method be devised which will provide such an extension with 
reasonable eligibility tests and Avill further provide for the equitable 
distribution of the cost of such a program without an additional burden 
being placed on the nonagricultural employers. 

* Assemblyman Veysey dissents and submits the following statement : 

"In my judgment, the recommendation should be: Unemployment insurance is 
needed and should be extended to those agricultural employees who have a 
Strong and nonseasonal identification with the farm labor market. Strict eligi- 
bility tests of turnings and seasonality should be applied to include protection 
againal the chance of loss of earnings rather than the certainty of loss, thus 
taining a sound principle of insurance. 

"There should be adequate safeguards against passing the costs of the agricul- 
tural coverage to other employers. Agriculture and farmworkers do not seek a 
subsidy." 



(50) 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 

The two largest employee groups which remain ineligible for unem- 
ployment insurance benefits in most states are government employees 
and farmworkers. The absence of coverage for these groups largely 
results from the influence of the Federal Unemployment Tax Act. All 
employers subject to this act must pay 3.1 percent of their taxable pay- 
roll to the federal government to provide unemployment insurance 
coverage and administrative costs. However, if the employer partici- 
pates in an approved state unemployment insurance plan, a credit of 
2.7 percent is afforded the subject employer. However, governmental 
employees and farmworkers are specifically excluded from mandatory 
coverage under the federal act. For this reason almost all state and 
territorial unemployment insurance laws exclude these same groups, 
although the choice is optional with each state. Only the District of 
Columbia, Hawaii and Puerto Rico have extended mandatory coverage 
to farmworkers. 

There has been a significant change which has converted the hired 
farmworker from his former status in which he was virtually a member 
of the family living on the family farm to a position in which he is part 
of a mass nonresident labor supply to be hired as needed. The nature 
and pattern of his employment has become increasingly similar to that 
found in nonagricultural industry. 

Tables 1 to 4 illustrate some statistical details concerning the 
changing character of agriculture in the United States and the State 
of California. 

The trend from a rural to urban society has been accompanied by 
the increasing "industrialization" of the nation's agriculture. Today 
farming is big business, especially this is true in California. Large- 

TABLE 1 

POPULATION: URBAN, RURAL, FARM-U.S. AND CALIFORNIA, 
SELECTED YEARS, 1800-1960 

(Based on decennial census of population) 





United States 


California 




Total 
popula- 
tion 
(mil- 
lions) 


Percent 
urban 


Percent 
rural 


Farm 1 


Total 
popula- 
tion 
(mil- 
lions) 


Percent 
urban 


Percent 
rural 


Farm 1 


Year 2 


Num- 
ber 
(thou- 
sands) 


Percent 

of 

total 


Num- 
ber 
(thou- 
sands) 


Percent 

of 

total 


1800 


5.3 

23.2 

76.0 

92.0 

105.7 

122.8 

131.7 

151.3 

179.3 


6 
15 
40 
46 

50.3 
56 
57 
64 
70 


94 

85 

60 

54 

49.7 

44 

43 

36 

30 


23,048 
13,474 


15.2 
7.5 


10.6 
15.7 


81 
86 


29 

24 


568 
351 




1850 




1900 




1910 




1920 




1930. 




1940... 




1950 


5.4 


1960 


2.2 







1 Farm population is a part of rural population. 

2 As of April 1 since 1930, January 1 in 1920, April 15 in 1910, June 1 in 1850 and 1900, August 4 in 1800. 
SOURCE: Statistical Ahstrart of the United States, 1966, U.S. Department of Commerce, Bureau of the Census. 



(51) 



52 



COMMITTEE REPORT ON FINANCE AND INSURANCE 



TABLE 2 

EMPLOYED PERSONS IN AGRICULTURE BY TYPE OF WORKER: 
UNITED STATES, 1947-1965 

(Persons 14 years of age and over) 





Average annual employment in agriculture 




Number (000) 


Percent 


Year' 


Total 


Self-employed 

and unpaid 
family workers 


Wage and 
salary 
workers 


Total 


Self-employed 

and unpaid 
family workers 


Wage and 
salary 
workers 


1947 


8,266 
7,973 
8,026 
7,507 
7,054 
6,805 
6,562 
6,504 
6,730 
6,585 
6,222 
5,844 
5,836 
5,723 
5,463 
5,190 
4,946 
4,761 
4,585 


6,589 
6,227 
6,181 
5,773 
5,408 
5,278 
5,094 
5,051 
5,030 
4,893 
4,535 
4,173 
4,148 
3,856 
3,729 
3,524 
3,271 
3,179 
3,093 


1.677 
1,746 
1,845 
1,733 
1,647 
1,526 
1,467 
1,452 
1,700 
1,692 
1,687 
1,671 
1,689 
1,866 
1,733 
1,666 
1,676 
1,582 
1,492 


100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 


80 
78 
77 
77 
77 
78 
78 
78 
75 
74 
73 
71 
71 
67 
68 
68 
66 
67 
67 


20 


1948 


22 


1940 


23 


1Q50 


23 


1951 


23 


1952 


22 


1953* 


22 


1954 


22 


1955 


25 


1956 


26 


1957 


27 


1958 


29 


1959 


29 


I960* 


33 


1961 


32 


1962* 


32 


1963 


34 


1964 


33 


1965 


33 







1 Data for the period 1947-1956 have not been adjusted to reflect changes in the definitions of employment and unem- 
ployment adopted in January 1957. 
1 Not strictly comparable with prior years. 

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. 



TABLE 3 

SELECTED DATA ON SOCIAL SECURITY COVERAGE OF FARM WORKERS-1963 

November 16, 1966 





Number of 
employers 


Number of 
workers 


Taxable farm wages 


Average 




Total 
(millions) 


Average per 
worker 


number 

of workers 

per employer 


U^.— total' 

1955 


485,000 
475,000 
480,000 
475,000 

41,700 
39,600 
39,000 


1,890,000 
1,900,000 
1,950,000 
1,950,000 

380,900 
362,500 
393,000 


51,520 
1,920 
2,220 
2,290 

$312 
412 
493 


$805 
1,020 
1,135 
1,175 

$820 
1,135 
1,255 


3.9 


1960 


4.1 


1963 


4 1 


1964 (preliminary) 


4.2 


California 

1955 


9 1 


1960 ., 


9 2 


1963 


10 1 







1 Includes Puerto Rico and Virgin Islands. 

SOURCE: Social Security Farm Statistics, 1955-1963, U.S. Department of Health, Education and Welfare, Social 
Security Administration, June 1966. 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 

TABLE 4 
CALIFORNIA 
(SELECTED DATA FROM 1959 AND 1964 CENSUS OF AC 

November 15, 1966 

Item 



Number of farms 

Average size of farm (acres) 

Number of commercial farms (sales $2,500 or more) 

Number of farms with expenditures for hired labor 

Total wages paid (millions) . 

Average wage bill per farm employing hired labor 

Number of farms hiring regular workers (150 days or more). 

Total number of regular workers hired 

Average per farm hiring regular workers 

Value of farm products sold — total (millions) 

Livestock - 

Fruits and nuts - — 

Vegetables 

Other field crops.. 

Forest and specialty horticultural products. 



SOURCE: 1964 U.S. Census of Agriculture, Pre 1 

scale operations and extern?' 
altered the character of fa' 

The sharp decline in 4 
is a well-known trend. T 
decline has been less f 
employed and the v 
total employment r 
lion, only one out 
when total agrir 
of three jobs v 
farming has 7 
ing relative 1 

Other a T 
is true tr 
when t T 
equal) 
Call* 
rep 
w 



COMMITTEE REPORT ON FINANCE AND INSURANCE 

COVERAGE IN OTHER STATES AND NATIONS 

experience with unemployment insurance for farmworker is 

\ly in Hawaii is there mandatory coverage that applies gen- 

>st farm employment. Puerto Rico has a special provision 

nly to fieldworkers in sugar cane, and even this protection 

"e and in certain respects from that afforded to workers 

^ industry generally. Coverage of farmworkers in other 

voluntary and very few employers have elected to 

\e experience Hawaii has had, it should be realized 
s at state is not representative of mainland agri- 
ulture economy is dominated by large pineapple 
^hese highly integrated enterprises handle all 
n the growing of the crop to the preparation 
are some large vertically integrated corpo- 
operating in this manner in certain crops 
e some relevance. Clearly, however, such 
•e of California's agricultural economy, 
urance program for agriculture work- 
mate law independent of the regular 
This approach avoided conflict with 
T nemployment Tax Act. 
cultural and unemployment in- 
cover their workers on a self- 
nly benefit costs incurred by 
it of the normal unemploy- 
Mx>st employers, accounting 
^yment, have chosen this 
mlar unemployment in- 
basis pay a flat tax of 
■>f the taxable payroll 
' only if they hire 20 
iar year. For self- 
> averaged about 
''or contributory 
cost data are 
t of taxable 

ted which 
r. 
• stable 
'cance 

>ns 
d 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 55 

Effective April 1, 1967, mandatory coverage of farmworkers will be 
provided in Canada. There is no minimal size of farms specified. 
Workers will be entitled to benefits on the same basis as other workers 
covered under the Canadian act and no special seasonal limitations 
are provided. A separate accounting for benefits paid to agricultural 
workers will be maintained and the government will underwrite the 
added costs of the program pending a realignment of present contribu- 
tion rates of both employers and employees (unemployment insurance 
in Canada is financed by contributions from employers, workers, and 
the government). It is estimated that 100,000 farms will be covered and 
200,000 workers will be affected. 

Twenty other foreign countries have compulsory unemployment in- 
surance. Eleven of these countries include some or all agricultural 
workers under the protection of their programs. A compilation of unem- 
ployment insurance and other social insurance benefits provided em- 
ployees in these countries are presented in Table 5. 

Cypress exempts farms employment fewer than five workers. A size 
limitation applies in no other industry. West Germany excludes agri- 
cultural employees who have yearly contracts. Ireland excludes female 
farm employees. Italy excludes seasonal workers, regardless of industry. 
None of the 11 countries which cover agricultural employees make any 
distinction in eligibility and benefit provision between employees and 
those covered in other industries. Such provisions are applied uniformly 
to all workers who have coverage. Both employers and workers con- 
tributed the financing of unemployment insurance in all of these 11 
countries, except in Italy where workers do not contribute. Government 
contributions to unemployment insurance funds are made in six of these 
countries — Belgium, Cypress, Holland, Ireland, Norway and the United 
Kingdom. 



56 COMMITTEE REPORT ON FINANCE AND INSURANCE 

AUSTRIA 



Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


Qualifying conditions 


OLD AGE, INVALIDITY, 
DEATH , . a 
First laws: 1906 (salaried 
employees) and 1938 (wage 
earners). 

Current laws: 1955 (em- 
ployees) and 1957 (self- 
employed). 

Social insurance tyslem 

(1 schilling equals 3.8 U.S. cents) 


Wage earners and salaried em- 
ployees, with separate sys- 
tem for each; provisions 
largely uniform for both. 

Exclusions: Family labor, and 
casual employees. 

Special systems for miners, 
notaries, public employees, 
nonagricultural self-employed, 
and agricultural self-em- 
ployed. 


Insured person: Wage earners, 
7.5% of wages; salaried em- 
ployees 7% of salary. 

Employer: For wage earners, 
7.5% of payroll (agriculture, 
8.5%; mining, 13%); for 
salaried employees, 7%. 

Government: Annual grants to 
wage-earner and agricultural 

systems. 

Maximum earnings for contri- 
bution and benefit purposes: 
5,200 schillings a month. 


Old-age pension: Age 65 (men) 
or 60 (women); and 180 
months of contribution, in- 
cluding 12 months in last 
36 months (payable at 60 and 
55, respectively, after year of 
sickness or unemployment). 
Reduced by current wages 
above 710 schillings a month. 
Reciprocity required for pay- 
ments abroad beyond 2 
months. 

Invalidity pension: Loss of 50% 
of normal earning capacity. 
60 months of contribution, 
including 12 months in last 
36 months. 

Survivor pensions: 60 months of 
contribution, including 12 
months in last 36 months. 


SICKNESS AND 
MATERNITY 

First law: 1888. 

Current law: 1955. 

Social insurance system (cash 
and medical benefits) 


Employed persons; and pen- 
sioners (for medical benefits 
only). 

Exclusions: Family labor and 
casual employees. 

Special systems for railway 
employees, public employees, 
and nonagricultural self- 
employed. 


Insured person: Wage earners, 
up to 3.65% of wages; salaried 
employees, up to 2.4%; pen- 
sioners, 1-2.5% of pension 
(sick funds fix exact rates). 

Employer: For wage earners, up 
to 3.65% of payroll; for sala- 
ried employees, up to 2.4% 
(sick funds fix exact rates). 

Government: 50% of cash mater- 
nity benefits (Pension Insur- 
ance Institutions contribute 
8.7% of pensions paid for 
medical insurance of pen- 
sioners). 

Maximum earnings for contri- 
bution and benefit purposes: 
3,250 schillings a month. 


Sickness and maternity benefits: 
Currently in covered em- 
ployment (funds may require 
6 months of contribution in 
last 12 months for optional 
benefits only). 


WORK INJURY 
First law: 1887. 
Current law: 1955. 

Social insurance system 


Employed and self-employed 
persons. 


Insured person: None, except 30 
schilings a year payable by 
self-employed. 

Employer: For wage earners, 2% 
of payroll; for salaried em- 
ployees, 0.5%. 

Government: None. 

Maximum earnings for contri- 
bution and benefit purposes: 
5,200 schillings a month. 


Work-injury benefits: No mini- 
mum qualifying period. 



Continued on next left hand page 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



57 



AUSTRIA 



Cash benefits for insured 

workers (except permanent 

disability) 



Old-age pension: 30% of aver- 
age earnings during last 5 
years, plus increments per 
year of insurance of 0.6% of 
earnings (first 10 years), 
0.9% (11-20 years). 1.2% 
(21-30 years), and 1.5% 
(after 30 years). Paid for 14 
months a year. 

Constant-attendance supple- 
ment (if helpless): 50% of 
above; minimum, 300 sch. a 
month. 

Child's supplement: 5% of earn- 
ings per child under 18 (25 if 
student, no limit if invalid). 

Supplemental equalization pay- 
ment (if pension small): 
Amount raising pension to 
870 schillings a month, plus 
345 sch. for wife and 100 sch. 
per child. 



Permanent disability and 

medical benefits for insured 

workers 



Invalidity pension: 30% of aver- 
age earnings during last 5 
years, plus increments per 
year of insurance of 0.6% of 
earnings (first 10 years), 
0.9% (11-20 years), 1.2% 
(21-30 years), and 1.5% 
(after 30 years). Paid for 14 
months a year. 

Special supplement: If pension 
below 40%, increased by 10% 
of earnings; if 40-49%, in- 
creased to 50%. 

Constant-attendance supple- 
ment: 50% of above; mini- 
mum, 300 sch., and maximum, 
600 sch. a month. 

Child's supplement: 5% of earn- 
ings per child under 18 (25 if 
student, no limit if invalid). 

Supplemental equalization pay- 
ment (if pension small): 
Amount raising pension to 
870 schillings a month, plus 
345 sch. for wife and 100 sch. 
per child. 



Survivor benefits and medical 
benefits for dependents 



Widow's pension: 50% of basic 
invalidity pension of insured; 
minimum for widow over 40 
or caring for child, 25% of 
earnings of insured. Also pay- 
able to invalid dependent 
widower. 

Orphans' pensions: 40% of wid- 
ow's pension, or 60% if full 
orphan, for each orphan under 
18 (25 if student, no limit if 
invalid). 

Maximum survivor pensions: 
100% of invalidity pension of 
insured. 

Supplemental equalization pay- 
ment (if pension small): 
Amount raising widow's pen- 
sion to 870 sch. a month, plus 
315 sch. per child; or raising 
full orphan's pension to 475 
schillings. 

Funeral grant: 20 days' earn- 
ings on death of insured (funds 
may raise to 40 days); 1 
month's pension on death of 
pensioner. 



Administrative organization 



Ministry of Social Administra- 
tion, general supervision. 

Manual Workers' Pension Insur- 
ance Institution and Sala- 
ried Employees' Pension In- 
surance Institution, adminis- 
tration of pensions (separate 
institutions for agriculture, 
railroads, mining, and self-em- 
ployed). Self-governing agen- 
cies managed by elected 
representatives of insured 
persons and employers. 

Sick funds collect contributions, 
transmitting them to pension 
insurance institutions. 



Sickness benefit: At least 50% of 
earnings (60% after 6 weeks) ; 
funds may add up to 10% of 
earnings for wife and 5% for 
each child, subject to maxi- 
mum of 75% of earnings. 

Payable after 3-day waiting 
period (salaried employees, 
42-day waiting period), for 
up to 26 weeks (funds may 
pay up to 52 weeks). 

Maternity benefit: 100% of earn- 
ings, for 6 weeks before and 
6 weeks after confinement. 

Nursing benefit of 2 sch. a day 
(funds may pay up to 5 sch.), 
for 8-12 weeks after con- 
finement (funds may pay up 
to 26 weeks). Also, lump- 
sum maternity grant of 40 
sch. (funds may pay up to 
100 sch.). 



Medical benefits: Service bene- 
fits, ordinarily provided by 
doctors, hospitals, and drug- 
gists under contract with and 
paid directly by sick funds; 
some funds operate own clin- 
ics or hospitals. 

Medical care, hospitalization, 
medicines, maternity care, 
dental care, appliances, and 
home nursing. 

Patients pay 3 schillings per 
visit to doctor, 2 sch. per pre- 
scription, and up to 20% of 
dental care cost. 

Duration: No» limit, except 26 
weeks for hospitalization 
(funds may provide up to 52 

weeks). 



Medical benefits for dependents: 
Same as for insured, but with 
10-20% cost-sharing for hos- 
pitalization and medicines; 
maximum hospitalization, 26 
weeks. 

Wife receives same maternity 
care and nursing benefit as 
insured woman, and lump- 
sum maternity grant of 600 
schillings (funds may raise to 
1,000 schillings). 



Ministry of Social Administra- 
tion, general supervision. 

Nine district, 10 establishment, 
and 9 agricultural sick funds, 
administration of contribu- 
tions and benefits (special 
funds for mining, railroads, 
government employees, and 
self-employed). Self-govern- 
ing agencies managed by 
elected representatives oj 
insured persons and em- 
ployers. 



Temporary disability benefit: 
(work injury): Ordinary sick- 
ness benefit as above payable 
after 3-day waiting period 
for first 26 weeks, under sick- 



ness msurance. 



Permanent disability pension 
(work injury): 66%% of aver- 
age earnings during last year, 
if totally disabled. 

Child's supplement: 10% of 
pension for each child under 
18 (25 if student, no limit if 
invalid); maximum supple- 
ment, 33H% of earnings. 

Constant - attendance supple- 
ment: 50% of pension. 

Partial disability: Percentage of 
full pension corresponding to 
loss of earning capacity (con- 
verted to lump sum if below 
25% of full pension). 



Widow's pension (work injury): 
40% of earnings of insured, if 
age 60 or invalid: otherwise, 
20% of earnings. Also pay- 
able to dependent widower. 

Orphans' pension (work injury): 
20% of earnings for each 
orphan, or 30% if full orphan. 

Other eligible survivors (if above 
pensions below maximum): 
Parents, brothers and sisters, 
and grandparents receive 20% 
of earnings. 



Ministry of Social Administra- 
tion, general supervision. 

General Accident Insurance 
Institution, administration of 
long-term benefits (separate 
institutions for agriculture 
and railways). 

Sick funds collect contributions, 
transmitting them to acci- 
dent insurance institutions; 
such funds also provide tem- 
porary disability benefits and 
first 45 days of medical care. 

Continued on next right hand page 



53 COMMITTEE REPORT ON FINANCE AND INSURANCE 

AUSTRIA-Continued 



Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


Qualifying conditions 










UNEMPLOYMENT 

First law: 1920. 

Current law: 1958. 
Compulsory insurance system 


Employed persons. 

Exclusions: Family labor, casual 
employees, and public em- 
ployees. 


Insured person: 1% of earnings 

Employer: 1% of payroll. 

Government: None (pays cost of 
emergency assistance). 

Maximum earnings for contri- 
bution and benefit purposes: 
2,400 schillings a month. 


Unemployment benefit: 20 weeks 
of contribution in last 12 
months (52 weeks in last 24 
months, if first claim); 12 
months extended for sick- 
ness, unemployment, nonin- 
sured employment, etc. 

Capable of earning K of wages 
of similar worker, willing to 
work, and registered. 

Unemployment not due to vol- 
untary leaving, misconduct, 
work stoppage, or refusal of 
suitable offer (disqualification 
usually up to 4 weeks). 

Benefit reduced by other in- 
come over 1,200 schillings a 
month. 


FAMILY ALLOWANCES 

First law: 1948. 

Current laws: 1949 (em- 
ployees) and 1954 (self- 
employed). 

Employment-related system 


Employed and self-employed 
persons, social insurance bene- 
ficiaries, and assistance recip- 
ients, with 1 or more children. 


Insured person: 3% of income 
tax payable by all income tax- 
payers. 

Employer: 6% of payroll. 

Government: Grants by Prov- 
inces. 


Family allowances: Child must 
be under 21 (25 if student or 
full orphan ; no limit if invalid 
and taxable income of child 
not over 500 schillings a 
month). 



BELGIUM 



Dates of basic laws and 
types of programs 




OLD AGE, INVALIDITY, 
DEATH 

First law: 1924. 

Current laws: 1955 (wage earn- 
ers), 1956 (self-employed), 
and 1957 (salaried employ- 
ees). Invalidity pensions 
provided under sickness in- 
surance. 



Gainfully occupied persons; 
coverage effected through 3 
separate systems for wage 
earners, salaried employees, 
and self-employed. 

Special systems for miners, rail- 
road employees, seamen, and 
public employees. 

(Coverage for invalidity pen- 
sions same as for sickness and 
maternity below.) 



Source of funds 



Insured person: 5% of earnings 
(1965, 5.25%; 1966, 5.5%). 

Employer: 6% of payroll (1965, 
6.75%; 1966, 7%). 

Government: Annual subsidies, 
according to rising scale. 

Maximum earnings for contri- 
bution and benefit purposes 
(salaried employees only) : 
9,000 francs a month. 



Qualifying conditions 



Old-age pension: Age 65 (men) 
or 60 (women) ; payable up to 
5 years earlier, with 5% re- 
duction a year. For full pen- 
sion, actual or credited em- 
ployment in all years from 
1926; or 45 years for men and 
40 for women ; otherwise, pro- 
portionately reduced pension. 
Substantial retirement neces- 
sary. Pensions not payable 
abroad; those of aliens re- 
duced 20% unless reciprocity. 



Continued on\nexQeft hand page 



UNEMPLOYMENT INSURANCE FOR FAR M WORK KRS 



AUSTRIA-Continued 



Cash benefits for insured 

workers (except permanent 

disability) 


Permanent disability and 

medical benefits for insured 

workers 


Survivor benefits and medical 
benefits for dependents 


Administrative organization 




Medical benefits (work injury): 
Comprehensive care, includ- 
ing appliances and rehabili- 
tation (first 45 days provided 
under sickness insurance). 


Maximum survivor pensions: 
80% of earnings. 

Funeral grant: Vi& of annual 
earnings of insured; mini- 
mum, 400 schillings. 




Unemployment benefit: About 
30-60% of earnings, inversely 
according to 12 wage classes. 
Maximum benefit, 156 schil- 
lings a week. 

Dependents supplements: 30 
schillings a week for 1st de- 
pendent, and 22 sch. for each 
other dependent, up to maxi- 
mum benefit of 80% of earn- 
ings. 

Payable after 7-day waiting 
period, for up to 12 weeks, 
20 weeks (if 52 weeks of cov- 
age in last 24 months), or 30 
weeks (if 156 weeks of cover- 
age in last 60 months). 

Unemployment assistance pay- 
able to needy citizens when 
insurance benefits exhausted. 






Ministry of Social Administra- 
tion, administration of bene- 
fits and placement through 
its provincial and local em- 
ployment offices; employ- 
ment offices managed by 
tripartite committees. 

Sick funds collect contributions 
with those for other social 
insurance programs. 


Family allowance: 155 sch. a 
month for 1st child, 175 sch. 
for 2nd, 205 sch. for 3rd, 235 
sch. for 4th, and 265 sch. for 
5th and each additional child 
(paid for 14 months a year). 
Also, supplement of 175 
schillings a month if 3 or more 
children in family. 

Birth grant: Lump sum of 500 
schillings for each birth, plus 
2 infant's grants of 600 sch. 
each during first 6 months. 






Ministry of Finance, adminis- 
tration of program through 
Family Allowances Equaliza- 
tion Fund attached to Minis- 
try. 

Employers (or social insurance 
institutions) pay allowances 
directly to recipients, and 
settle only surplus or deficit 
of contributions due with 
equalization fund. 



BELGIUM 



Cash benefits for insured 

workers (except permanent 

disability) 



Old-age pension: For full pen- 
sion, 60% (single person) or 
75% (married person) of 
average lifetime earnings; in 
computing average, earnings 
for each past year rpvalued 
for changes in retail price 
index. 

Reduced pension (if full quali- 
fying period not met): Per- 
centage of full pension corre- 
sponding to proportion of 
period complefr d. 



Permanent disability and 

medical benefits for 

insured workers 



Invalidity pension: 60% of 
earnings. 

Maximum pension: 410 francs 
a month. 



Automatic adjustment of out 
standing pensions to 2.h°/ { 
changes in retail price index 



Survivor benefits and 

medical benefits for 

dependents 



Widow's pension: 60% of old- 
age pension of insured. Pay- 
able to widow age 45, % 
incapacitated, or caring for 
child. 

Automatic adjustment of out- 
standing pensions to 2.5% 
changes in price index. 

Adaptation grant (widows not 
eligible for pension): Lump 
sum of 1 year's pension. 



Administrative 
organization 



Ministry of Social Welfare, 
general supervision. 

National Social Security Office, 
in Ministry, collection of 
contributions and distribu- 
tion to national agencies ad- 
ministering benefits. 



National Retirement and Sur- 
vivors Pension Fund, admin- 
istration of old-age and 
survivor pensions; managed 

Continued on next right hand page 



60 COMMITTEE REPORT ON FINANCE AND INSURANCE 

BELGIUM-Continued 



Date of basic laws and 
types of programs 



Social imurance system 



(1 franc equals 2 U.S. cents) 



SICKNESS AND 
MATERNITY 

First law: 1894 (mutual benefit 
societies). 

Current law: 1963. 



Coverage 



Social insurance system (cash 
and medical benefits) 



Employed persons (must enroll 
with mutual benefit society 
or else with public auxiliary 
fund). 

Pensioners covered for medical 
benefits. Coverage of stu- 
dents, public utility employ- 
ees, and self-employed for 
medical benefits also author- 
ized. 

Special systems for miners, rail- 
road employees, seamen, and 
public employees. 



Source of funds 



(Invalidity pensions financed 
through sickness and ma- 
ternity insurance.) 



Insured person: 5.0% of earn- 
ings. 

Employer: 5.0% of payroll. 

Government: 32% of medical 
benefit costs (95% for speci- 
fied serious diseases); 50% 
of invalidity pensions in 2nd 
and 3rd year of payment, 
95% thereafter. 

Maximum earnings for contri- 
bution and benefit purposes: 
11,550 francs a month; varies 
with retail price index. 



Qualifying conditions 



Invalidity pension: Loss of % of 
earning capacity in usual 
occupation. 6 months' cover- 
age, including 120 days of 
actual work (3 months and 
60 days, if below 25), and 
coverage during last quarter. 

Survivor pensions: Coverage 
during last 12 months, and 
in Yi of period since age 20, 
or 1926 if later; otherwise, 
proportionately reduced pen- 



Cash sickness and medical bene- 
fits: 6 months of insurance, 
including 120 days of actual 
work (3 months and 60 days, 
if below 25), and insurance 
during last quarter. 

Cash maternity benefits: 10 
months of insurance immedi- 
ately prior to confinement. 



WORK INJURY 
First law: 1903. 
Current law: 1931. 



Employed persons. 



Voluntary insurance 
private carrier 



with 



Insured person: None. 

Employer: Whole cost, through 
direct provision of benefits or 
insurance premiums (non- 
insured employers with fewer 
than 500 workers must con- 
tribute to special guarantee 
fund). 

Government: None. 

Maximum earnings for benefit 
purposes: 10,000 francs a 
month. 



Work-injury benefits: No mini- 
mum qualifying period. 



UNEMPLOYMENT 

First law: 1920 (subsidized 
voluntary insurance). 

Current law: 1945. 



Employed persons. 

Exclusions: Railroad employees, 
domestic servants, public 
employees, and family labor. 

Special systems for miners, 
seamen, port workers, and 
building workers. 



Insured person: 1% of earnings. 

Employer: 1% of payroll. 

Government: Regular subsidy of 
2% of earnings, plus amount 
of any deficit. 

Maximum earnings for contri- 
bution purposes: 11,550 
francs a month; varies with 
retail price index. 



Compulsory insurance system 



Unemployment benefits: From 75 
days of insured employment 
in last 10 months to 600 days 
in last 36 months, rising by 
age of claimant. 

Ability to earn \i of earnings 
of similar worker, willingness 
to accept suitable work, and 
registration at exchange. 

Unemployment not due to vol- 
untary leaving, discharge for 
misconduct, strike, or unjusti- 
fied refusal of suitable offer 
(disqualification for 4-52 
weeks according to gravity of 
fault and frequency of oc- 
curence). 



Continued on next left hand page 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



61 



BELGIUM-Continued 



Cash benefits for insured 

workers (except permanent 

disability) 


Permanent disability and 

medical benefits for 

insured workers 


Survivor benefits and 

medical benefits for 

dependents 


Administrative 
organization 


Automatic adjustment of out- 
standing pensions to 2.5% 
changes in retail price index. 




Funeral grant: Lump sum of at 
least 15 days' maximum 
cash sickness benefit. 

(Special allowances for orphans 
paid under family allowance 
program.) 


by administrator representing 
Ministry, assisted by em- 
ployee-employer council. 

National Sickness and Invalid- 
ity Insurance Institute, gen- 
eral administration of invalid- 
ity pensions. 


Sickness benefit: 60% of earnings. 

Payable after 3-day waiting 
period (salaried employees, 
30 days, during which em- 
ployer must pay full wages), 
for up to 1 year; payable for 
additional 2 years if prolonged 
incapacity. 

Maternity benefit: 60% of earn- 
ings. 

Payable for 6 weeks before and 
6 weeks after confinement 
(not payable to salaried em- 
ployees during 30 days of 
paid maternity leave employ- 
ers required by law to provide 
them). 


Medical benefits: Cash refunds 
of part or all of medical 
expenses. 

General and specialist care, 
surgery, hospitalization, med- 
icines, laboratory services, 
maternity care, dental care, 
nursing, and appliances. 

Insured normally pays for serv- 
ices, and is then reimbursed 
by society of which a member 
for up to 75% of amount 
listed for such services in 
official fee schedule; 100% 
reimbursement for ward care 
in hospital, specified serious 
diseases, specialist services, 
mid-wifery, appliances, and 
to pensioners. 

Duration: No limit. 


Medical benefits for dependents: 
Same as for insured. 


Ministry of Social Welfare, 
general supervision. 

National Social Security Office, 
in Ministry, collection of 
contributions. 

National Sickness and Invalid- 
ity Insurance Institute, co- 
ordination of program to- 
gether with 2 Management 
Committees for cash and 
medical benefits. 

Local agencies paying benefits: 
(1) about 2,000 approved 
private mutual benefit so- 
cieties, federated into 5 
national unions; and (2) dis- 
trict offices of public auxiliary 
fund, for persons not belong- 
ing to mutual society. 


Temporary disability benefit 
(work injury): 80% of earn- 
ings for first 28 days of in- 
capacity; thereafter, 90%. 

Payable from 1st day of dis- 
ability, until recovery or 
certification of permanent 
disability. 


Permanent disability pension 
(work injury) : 100% of earn- 
ings, if totally disabled. 

Constant-attendance supple- 
ment: Up to 50% of earnings. 

Percent of full pension corre- 
sponding to degree of in- 
capacity, if partially disabled 
(converted to lump sum in 
specified circumstances). 

Medical benefits (work injury): 
Medical treatment, surgery, 
dental treatment, hospitaliza- 
tion, medicines, and appli- 
ances. 


Widow's pension (work injury): 
30% of earnings of deceased. 
Also payable to dependent 
widower. 

Orphans' pensions (work in- 
jury): 15% of earnings per 
orphan, or 20% if full orphan; 
payable for not more than 3 
orphans. 

Other survivors (in absence of 
above): Parent, 20% of earn- 
ings; grandchild, brother, or 
sister, 15%. 

Funeral grant: Lump sum of 
30 days' earnings. 


Ministry of Social Welfare, 
general supervision. 

Employment Accident Commis- 
sion, under Ministry, and 
local accident boards and 
inspectors, administration of 
program; tripartite repre- 
sentation. 

Employers may insure liability 
with employer mutual asso- 
ciations or private insurance 
companies. 

Courts approve awards. 


Unemployment benefit: Flat daily 
amounts equal to 50-60% of 
average wages of unskilled 
worker. Amounts vary ac- 
cording to marital status, 
sex, age, and size of locality. 

Maximum benefit: 124 francs a 
day, or 66%% of earnings 
(75% if 4 or more children). 

Payable after 1-day waiting 
period, with no limit on dura- 
tion except in special cases. 






Ministry of Employment and 
Labor, genfral supervision. 

National Social Security Office, 
collection of contributions. 

National Employment Office, 
receiving and decision of 
claims, supervision of paying 
agencies, and operation of 
employment service, through 
about 30 regional offices; 
managed by tripartite com- 
mittee. 

Local agencies paying benefits: 
Public paying offices, or trade 
unions for own members. 



Continued on next right hand page 



62 COMMITTEE REPORT ON FINANCE AND INSURANCE 

BELGIUM— Continued 



Dates of basic laws and 
types of programs 

FAMILY ALLOWANCES 

First laws: 1930 (employees) 
and 1937 (self-employed). 

Current law: 1947. 



Employment-related syskm 



Coverage 



All gainfully occupied persons 
and social insurance bene- 
ficiaries, with 1 or more 
children. 

Coverage effected under two 
separate systems for employ- 
ees and self-employed per- 
sons. 

Special systems for miners, 
seamen, and public em- 
ployees. 



Source of funds 



Insured person: Employee, none. 
Self-employed, contributions 
varying with income and 
occupation. 

Employer: 10.25% of payroll. 

Government: Subsidies to both 
employee and self-employed 
programs covering any defi- 
cits. 

Maximum earnings for contri- 
bution purposes: 11,550 
francs a month; varies with 
retail price index. 



Qualifying conditions 



Family allowances: Child must 
be under age 14 (21 if student, 
no limit if invalid). 

Parent must have 100 days of 
employment a year, or be a 
social insurance beneficiary. 

Eligible children may include 
dependent grandchildren, 
brothers, sisters, nephews, 
and nieces. 



CHILE 








Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


Qualifying conditions 


OLD AGE, INVALIDITY, 
DEATH 

First law: 1924. 

Current laws: 1952 (2 laws es- 
tablishing separate programs 
for wage earners and salaried 
employees). 

Social insurance system 

(1 escudo equals about 33 U.S. 
cents) 


Wage earners program: Wage 
earners, and urban self-em- 
ployed whose annual income 
not above Santiago minimum 
wage. 

Salaried employees program: 
Salaried employees in private 
employment. 

Special systems for railroad em- 
ployees, seamen and port 
workers, public employees, 
and about 30 other occupa- 
tions. 


Insured person: Wage earners, 
6% of wages (7% in arduous 
occupations) ; self-employed, 
10% of earnings; salaried em- 
ployees, 8% of salary. 

Employer: For wage earners, 
12.5% of wages (14% in 
arduous occupations) ; for 
salaried employees, 17.83% 
of salaries. 

Government: For wage earners, 
5.5% of wages (full amount 
not paid regularly in past). 

Above contributions also finance 
sickness and maternity bene- 
fits. 


Old-age pension: Wage earner, 
age 65 and contributions in 
800 weeks and 50% of weeks 
since initial coverage (men); 
or age 55 and contributions in 
500 weeks (women); retire- 
ment unnecessary. 
Salaried employee, age 65 or 
35 years of contribution 
(men); age 55 and 20 years, 
or any age if 30 years (wom- 
en; retirement necessary. 
Payable abroad. 

Invalidity pension: Wage earner, 
70% incapacity (total inva- 
lidity) or 40-69% (partial in- 
validity); contributions in 50 
weeks, 40% of weeks in last 5 
years, and 50% of weeks since 
initial coverage. Salaried em- 
ployee, 67% incapacity; 3 
years of contribution, plus 1 
year for each 5 years above 
age 30. 

Survivor pensions: Deceased was 
pensioner, or met contribution 
requirements for invalidity 
pension. 


SICKNESS AND MATERNITY 

First law: 1924. 

Current laws: 1952 (wage earn- 
ers) and 1953 (medical serv- 
ices for salaried employees). 

Social insurance system (cash 
and medical benefits) 


Wage earners program: Wage 
earners; urban self-employed 
whose annual income not 
above Santiago minimum 
wage; and pensioners (medi- 
cal benefits only). 

Salaried employees program: 
Salaried employees in private 
and public employment (medi- 
ca' services only). 

Special systems for railroad em- 
ployees, bank employees, 


Insured person: See pension con- 
tribution above. (Pensioners, 
5% of pension.) 

Employer: Same. 

Government: Same. Also, direct 
subsidy raising total govern- 
ment share to about % of 
cost. 


Cash benefits (wage earners 
only): Currently insured, 6 
months of insurance, and 13 
weeks of contribution in last 
6 months. 

Medical benefits: Wage earners, 
currently insured (eligibility 
continues during 3 months of 
involuntary unemployment) ; 
self-employed, contributions 
throughout last 3 months. 
Salaried employees, currently 
insured, 6 months of insur- 



Continued on next left hand page 





UNEMPLOYMENT INSURANCE FOR FARMWORKERS 63 

BELGIUM-Continued 


Cash benefits for insured 

workers (except permanent 

disability) 


Permanent disability and 

medical benefits for 

insured workers 


Survivor benefits and 

medical benefits for 

dependents 


Administrative 
organization 


Family allowance: 457 francs a 
month for 1st child, rising to 
1,000 francs for 4th and 
others, plus 107 frs. if age 
6-10, 198 frs. of 10-14, and 
251 frs. if over 14. 

'Birth grant: 7,250 francs for 1st 
birth, 5,000 frs. for 2nd, and 
2,690 frs. for each other birth. 

Allowances adjusted automati- 
cally for 2.5% changes in re- 
tail price index. 






Ministry of Social Welfare, 
general supervision. 

National Social Security Office, 
collection of contributions. 

National Family Allowance 
Office, distribution of con- 
tributions among individual 
funds. 

Family allowance funds paying 
allowances: About 70 ap- 
proved occupational and re- 
gional funds, auxiliary public 
fund for persons not other- 
wise covered, and several 
special funds. 



CHILE 



Cash benefits for insured 

workers (except permanent 

disability) 


Permanent disability and 

medical benefits for 

insured workers 


Survivor benefits and 

medical benefits for 

dependents 


Administrative 
organization 


Old-age pension (wage-earners): 
50% of average wages during 
last 5 years, plus 1% of wages 
for each 50 weeks of contribu- 
tion beyond 500 weeks; maxi- 
mum, 70% of wages. 

Increment of 10% of contribu- 
tions paid for each 150 weeks 
of contribution after pension 
awarded. 

Child's supplement: 10% of 
average pension paid in pre- 
ceding year, for each child. 

Maximum total pension: 100% 
of wages. 

Salaried employees: J-Ss of 
average salary during last 5 
years, times years of contri- 
bution; maximum pension, 
100% of salary. 

If ineligible, refund of employee- 
employer contributions in 
installments. 

Automatic adjustment of all 
pensions. 


Invalidity pension (wage-earn- 
ers) : For total invalidity, 50% 
average wages during last 5 
years, plus 1% of wages for 
each 50 weeks of contribution 
beyond 500 weeks; maximum, 
70% of wages. 

Partial invalidity: 50% of pen- 
sion for total invalidity. 

Salaried employees: 70% of av- 
erage salary during last 5 
years, plus 2% of salary for 
each year of contribution 
beyond 20 years. 

Automatic adjustment of all 
pensions. 


Survivor pensions (wage-earn- 
ers): Widow or invalid de- 
pendent widower, 50% of 
pension of insured paid at age 
65 or if invalid; otherwise, 
payable for 1 year only. Each 
orphan under 15 (18 if 
student, no limit if invalid), 
20% of average pension paid 
in preceding year. Maximum 
survivor pensions, 100% of 
pension of insured. 

Salaried employees: Widow or 
invalid dependent widower, 
40% of pension or average 
salary of insured in last 5 
years. Each orphan (or 
parent), 15% of pension or 
average salary. Maximum 
survivor pensions, 100% of 
pension or salary of insured. 
If ineligible, refund of con- 
tributions. 

Funeral grant: Wage earners, 1 
month's minimum wage in 
district; salaried employees, 
3 months' minimum salary 
in Santiago. 


Ministry of Labor and Social 
Welfare, general supervision. 

Social Insurance Service, ad- 
ministration of program for 
wage earners, through branch 
offices; managed by tripartite 
board and director-general. 
Tripartite local councils super- 
vise administration in indi- 
vidual regions. 

Private Salaried Employees' 
Welfare Fund, administra- 
tion of program for most 
salaried employees; about 25 
smaller funds cover salaried 
employees in particular occu- 
pations. 


Sickness benefit (wage-earners): 
100% of average wages during 
last 6 months. 

Payable after 3-day waiting 
period, for normal maximum 
duration of 52 weeks; may be 
extended to 78 weeks in 
special cases. 

Salaried employees: No insur- 
ance benefit (employer must 
pay 100% of earnings during 
1st month, 75% during 2nd, 


Medical benefits: (wage earners): 
Medical services ordinarily 
provided directly to patients 
through facilities of National 
Health Service. 

General and specialist care, 
periodic medical examination, 
hospitalization, medicines, 
dental care, and maternity 
care. 

Duration: No limit. 


Medical benefits for dependents 
(wage-earners only): Same as 
for insured. Wife also receives 
same nursing allowance as 
insured woman. 

All children in country under 15: 
Medical and surgical care as 
out-patient, and part of cost 
of hospitalization. 


Ministry of Health, general 
supervision. 

National Health Service, ad- 
ministration of benefits and 
services for wage earners, 
through 13 health zones; 
managed by tripartite board 
and director-general. Service 
operates own dispensaries 
and hospitals. 

National Salaried Employees' 
Medical Service, provision of 



Continued on next right hand page 



64 COMMITTEE REPORT ON FINANCE AND INSURANCE 

CHILE-Continued 



Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


Qualifying conditions 




seamen and port workers, 
and other groups. 




ance, and 13 weeks of contri- 
bution in last 6 months. 


WORK INJURY 
First law: 1916. 
Current law: 1931. 

Voluntary insurance with public 
or private carrier 


Employed persons. 

Exclusion: Temporary em- 
ployees of small firms. 

Special systems for railroad and 
public employees. 


Insured person: None. 

Employer: Most of cost, through 
direct provision of benefits or 
insurance premiums. 

Government: Special grants to 
guarantee fund operated by 
Work Accident Fund. 


Work-injury benefits: No mini- 
mum qualifying period. 


UNEMPLOYMENT 

First and current laws: 1937 
(salaried employees) and 
1953 (service-indemnities for 
wage earners). 

Compulsory benefit systems 


Wage earners program: Wage 
earners covered by service- 
indemnity program. Includes 
all wage earners except those 
under special systems or con- 
tracted-out at start. 

Salaried employees program: 
Salaried employees in private 
employment. 


Insured person: None (wage 
earners), or 1% of salary 
(salaried employees). 

Employer: 2% of wages to aa 
count from which service-in- 
demnities paid (wage earners), 
or none (salaried employees). 

Government: None. 


Unemployment benefit: 156 weeks 
of coverage (wage earners), 
or 12 months of contribution 
in salaried employment (sal- 
aried employees). 

Able and willing to work; regis- 
tration for employment; and 
resources insufficient for 
maintenance (salaried em- 
ployees only). 

Unemployment not due to 
reasons within claimant's 
control, or to refusal of offer 
of at least 50% of previous 
earnings. 


FAMILY ALLOWANCES 
First law: 1937. 
Current law: 1953. 

Employment-related system 


Employed persons and social in- 
surance beneficiaries, with 1 
or more children or other 
eligible dependent. 

Separate systems for wage earn- 
ers, salaried employees in 
private employment, bank 
employees, seamen, public 
employees, and other groups. 


Insured person: 2% of earnings 
or pension (not applied in 
practice). 

Employer: 22% of payroll. 

Government: None. 


Family allowances: Child must 
be under 18 (23 if student, no 
limit if invalid) ; also payable 
from 5th month of pregnancy. 

Allowances also paid for wife 
and aged or invalid parent. 





UNEMPLOYMENT INSURANCE FOR FARMWORKERS 65 

CHILE-Continued 


Caah benefits for insured 

workers (except permanent 

disability) 


Permanent disability and 

medical benefits for 

insured workers 


Survivor benefits and 

medical benefits for 

dependents 


Administrative 
organization 


50% during 3rd, and 25% 
during 4th month). 

'alernity benefit (wage-earners 
only): 100% of wages, pay- 
able for 6 weeks before and 6 
weeks after confinement; may 
be extended to 12 weeks after 
confinement. 

ursing allowance: 25% of 
maternity benefit, or allow- 
ance in kind, payable after 
maternity benefit ends until 
mother ceases nursing child. 


Salaried employees: Limited 
preventive and curative medi- 
cal services. 




limited medical services to 
salaried employees, on behalf 
of Private Salaried Em- 
ployees' Welfare Fund and 
other auxiliary funds. 


'emporary disability benefit 
(work injury): 75% of earn- 
ings. 

ayable from day injury sus- 
tained, for up to 1 year. 


Permanent disability pension 
(work injury): 60% of earn- 
ings, if totally disabled. 

Constant-attendance supple- 
ment: Up to 20% of pension. 

Partial disability: Lump sum of 
up to 2 years' earnings, ac- 
cording to degree of disability. 
If above specified amount, 
may be paid in 12 monthly 
installments. 

Medical benefits (work injury): 
Necessary medical and phar- 
maceutical services, including 
occupational retraining; pro- 
vided for duration of need. 


Widow's pension (work injury): 
30% of earnings of insured. 
Also payable to invalid 
widower. 

Orphans' pensions (work injury): 
20% of earnings for 1 orphan 
under age 18, and 40% for 2 
or more; 60% of earnings for 
3 or more full orphans. 

Other dependent relatives (if 
none of above): 10% of earn- 
ings each, up to maximum of 
30%; payable to parents, 
grandparents, grandchildren, 
or other dependents living 
with deceased. 

Funeral grant: Cost of burial. 


Ministry of Labor and Social 
Welfare, general supervision. 

Work Accident Fund, adminis- 
tration of program including 
guarantee fund for all em- 
ployers; government agency 
managed by tripartite board. 

Employers may insure liability 
with Fund, employer mutual 
association, or private com- 
pany, though insurance not 
compulsory. 


Jnemployment benefit (wage 
earners): 75% of wage loss. 
Payable after 3-day waiting 
period, for up to 6 months or 
exhaustion of individual in- 
demnity account if earlier. 

lalaried employees: 75-200% of 
legal minimum salary in San- 
tiago. Uniform rate for all 
beneficiaries, though reduced 
if employee earns less than 

j minimum salary in district. 
Payable from 1st day of un- 
employment for up to 90 days, 
or 180 days in special cases. 






Ministry of Labor and Social 
Welfare, general supervision. 

Social Insurance Service, ad- 
ministration of program for 
wage earners. 

Private Salaried Employees' 
Welfare Fund, administra- 
tion of program for most 
salaried employees; about 25 
smaller funds cover salaried 
employees in particular oc- 
cupations. 


7 amily allowance (wage earn- 
ers): 0.13 escudos per depend- 
ent for each day worked. 

salaried employees: About 11 
escudos a month per depend- 
ent. 






Ministry of Labor and Social 
Welfare, general supervision. 

Social Insurance Service, ad- 
ministration of program for 
wage earners. 

Private Salaried Employees' 
Welfare Fund, administra- 
tion of program for most 
salaried employees; about 
25 smaller funds cover partic- 
ular occupations. 

Employers usually pay allow- 
ances directly to own em- 
ployees, and settle only sur- 
plus or deficit of contributions 
due with administrative 
agency. 



66 



CYPRUS 



COMMITTEE REPORT ON FINANCE AND INSURANCE 



Dates of basic laws and 
types of programs 



OLD AGE, INVALIDITY, 
DEATH 

First and current law: 1956 



Social insurance system 



(1 pound or 1,000 mils equals 
U.8. $2.80) 



Coverage 



Employed persons. 

Exclusions: Employees on farms 
with fewer than 5 workers, 
some part-time employees, 
and family labor. 

Voluntary coverage for self- 
employed and persons leav- 
ing compulsory coverage. 



Source of funds 



Insured person: 60 mils (men) 
or 30 mils (women) a week; 
married women exempt from 
contribution. 

Employer: 60 mils (men) or 30 
mils (women) a week per 
employee. 

Government: 60 mils (men) or 
30 mils (women) a week per 
insured employee. 

Above contributions also finance 
cash sickness, maternity, and 
unemployment benefits. 



Qualifying conditions 






Old-age pension: Age 65 
weeks of paid contributk 
and annual average of 
weeks paid or credited 
incapacity or unemploymj 
(reduced pension if aver 
of 20-49 weeks). Retirem 
unnecessary. Not paya, 
abroad unless reciprocj 
treaty. 

Invalidity pension: None p, 
able. 

Survivor pensions: 156 weekf 
contribution paid by j 
ceased, and annual aver:, 
of 50 weeks paid or credi 
(reduced pension if 20 
weeks). Preceding conditii 
waived, if death due to wi 
injury. For full orphans, < 
week of paid contribut 
by either parent. 



-:■ 



SICKNESS AND 
MATERNITY 

First and current law: 1956. 



Dual social insurance (cash 
benefits) and national health 
(medical care) systems 



Cash benefits: Employed per- 
sons, except employees of 
farms with fewer than 5 
workers, part-time employ- 
ees, and family labor. 

Medical care: All residents 
(within limits of facilities 
available). 



Insured person: See pension 
contribution above. 

Employer: Same. 

Government: Same; also, whole 
cost of medical care. 



Cash sickness benefit: 26 we», 
of paid contributions, and 
weeks paid or credited in 1, 
year (reduced benefit if 
49 weeks). Married worn, 
and persons under 18 a 
over 65, ineligible. 

Maternity grant: 26 weeks 
paid contributions by won 
or husband, and 50 we< 
paid or credited in last yi 
(reduced grant if 20-, 
weeks). 

Medical care: Residence 
country. 



WORK INJURY 
First and current law: 1942. 



Voluntary insurance with pri- 
vate carrier. 



Wage earners, and salaried em- 
ployees earning £450 a year 
or less. 

Exclusions: Salaried employees 
earning over £450 a year, 
agricultural employees un- 
less using power machinery, 
domestic servants, casual 
employees, and family labor. 



Insured person: None. 

Employer: Whole cost, through 
direct payment of benefits or 
insurance premiums. 

Government: None. 



Work-injury benefits: No mi ; 
mum qualifying period. 



UNEMPLOYMENT 
First and current law: 1956. 



Compulsory insurance system. 



Employed persons. 

Exclusions: Employees on farms 
with fewer than 5 workers, 
various part-time employ- 
ees, and family labor. 



Insured person: See 
contribution above. 



Employer: Same. 



Government: Same. 



pension 



Unemployment benefit: 26 wee, 
of paid contributions, and 
weeks paid or credited in k 
year (reduced benefit if 2; 
49 weeks). Married womt 
and persons under 18 a;. 
over 65, ineligible. 

Capable of and available f; 
work, and daily reporting I 
employment exchange. 



Continued on next left hand pa 



=5 f 


UNEMPLOYMENT INSURANCE FOR FARMWORKERS 67 

CYPRUS 


:^!ash benefits for insured 

„ orkers (except permanent 

disability) 

~* 1 


Permanent disability and 

medical benefits for 

insured workers 


Survivor benefits and 

medical benefits for 

dependents 


Administrative 
organization 


' age pension: £1.200 a week. 

! endents' supplements: 600 
M ils for 1st, and 300 mils for 
™ id dependent. 

18 tuced pension: 600 mils-£l 
'» \week, plus 300-500 mils for 
* It and 150-250 mils for 2nd 
ijpendent, according to aver- 
se annual weeks of contri- 
'ation. 

ip sum: Refund of employ- 
i contributions paid, if over 
5 in 1957 and ineligible for 
fension at 65. 

• 
1 

i 

1 
I 


Invalidity pension: None. 


Widow's pension: £1.200 a 
week, if over age 50 at hus- 
band's death, over age 40 
when last child exceeds age 
limit, permanently incapable 
of self support, or caring for 
child. 

Dependents' supplements: 600 
mils for 1st, and 300 mils for 
2nd half orphan under 14 
(18 if student). 

Reduced pension: 600 mils-£l 
a week, plus 300-500 mils for 
1st and 150-250 mils for 2nd 
half orphan, according to 
average annual weeks of con- 
tribution. 

Full orphan's benefit: 600 mils 
a week, for each full orphan. 

Funeral grant: £10 (reduced 
grant of £5-8, according to 
weeks of contribution in last 
year). 


Ministry of Labor and Social 
Insurance, administration of 
program through employ- 
ment exchanges and insur- 
ance officers. 


tness benefit: £1.200 a week, 
lus 600 mils for 1st and 300 
lils for 2nd dependent. 

fable after 3-day waiting 
'eriod, for up to 26 weeks 
jt for number of days equal 
o number of weeks of paid 
bntributions, if less). 
i 

ternity grant: £5 (reduced 
rant of £2.500-4, according 
b weeks of contribution in 
wt year). 


Medical benefits: Medical serv- 
ices provided directly to 
patients in government dis- 
pensaries and hospitals. 

Medical treatment, hospitali- 
zation, maternity care, and 
medicines. 


Medical benefits for dependents: 
Same as for family head. 

Wife receives same cash mater- 
nity grant as working woman. 


Ministry of Labor and Social 
Insurance, administration of 
cash benefits through em- 
ployment exchanges and 
insurance officers. 

Ministry of Health, provision 
of medical services through 
public clinics and hospitals. 


nporary disability benefit 
work injury): QQ%% of earn- 
ngs; maximum, £15 a month. 

/able after 3-day waiting 
•eriod (unless incapacity ex- 
eeds 4 weeks), for up to 26 
/eeks. 

,y be commuted into lump 
urn. 


Permanent disability grant (work 
injury): Lump sum of 48 
months' earnings (72 months, 
if under 18), if totally dis- 
abled. 

Minimum and maximum grants: 
£100 and £800. 

Partial disability: Lump sum 
equal to proportion of total 
disability grant correspond- 
ing to percentage loss of 
earning capacity. 

Medical benefits (work injury): 
Necessary medical treatment; 
provided in part at govern- 
ment facilities. 


Survivor grant (work injury): 
Lump sum equal to 42 
months' earnings of deceased 
(less any benefits paid to 
worker). 

Minimum and maximum grants: 
£100 and £600. 

Court determines allocation of 
grant among surviving de- 
pendent relatives. 

Funeral grant (if no eligible 
survivor): Up to £30. 


Ministry of Labor and Social 
Insurance, general supervi- 
sion. 

Individual cases decided by 
agreement between employ- 
er and injured worker, sub- 
ject to court review, or other- 
wise by a court. 

Insurance voluntary unless 
specifically prescribed for 
employer or class of employ- 
ers. Insurance available only 
with private companies. 


'employment benefit: £1.200 
, week, plus 600 mils for 1st 
nd 300 mils for 2nd depen- 
lent. 

duced benefit: 600 mils-£l 
i week, plus 300-500 mils 
r or 1st and 150-250 mils for 
2nd dependent, according to 
'yeeks of contribution in last 
fear. 






Ministry of Labor and Social 
Insurance, administration of 
program through employ- 
ment exchanges and insurance 
officers. 



Continued on next right hand page 



68 COMMITTEE REPORT ON FINANCE AND INSURANCE 
CYPRUS— Continued 




Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


1 
Qualifying conditions 








i 
Unemployment not due 
voluntary leaving, nuV 
duct, direct participator 
trade dispute, refusal of s 
able offer, or failure to a 
self of job opportunity ( 
qualification of up to 
weeks). , 


FAMILY ALLOWANCES 






■ 











GERMANY (WEST) 






i 


Dates of basic laws and 






1 


types of programs 


Coverage 


Source of funds 


Qualifying conditions 


OLD AGE, INVALIDITY, 


Wage earners and salaried em- 


Insured person: 7% of earnings 


Old-age pension: Age 65 (pay; 


DEATH 


ployees, with separate system 


(none if earnings below 10% 


at age 60 if unemployed 




for each; provisions uniform 


of ceiling). 


year, or if woman with 


First law: 1889. 


for both systems. 




years of employent in i 






Employer: 7% of payroll (14% 


20 years). 180 months of c ( 


Current law: 1911 (insurance 


Exclusion: Salaried employees 


for employee whose earnings 


tribution. Retirement 


code), as extensively amended 


earning over 15,000 marks a 


below 10% of ceiling). 


necessary unless pension p 


in 1957. 


year. 




before 65. Pension not r. 






Government: Annual subsidy of 


alien while residing abroa 




Special systems for miners, 


about l A of cost of wage- 




public employees, self-em- 


earners' system and 1/5 that 


Invalidity pension: Inability. 




ployed artisans, and self- 


of salaried employees' system 


exercise any gainful acth 




employed farmers. 


(in principle, covers non-old 


(general invalidity) or to e 






age costs). 


50% of normal wages in m 


Social inturance system 






occupation (occupational 






Maximum earnings for contri- 


validity). 60 months of c 






bution purposes: 2 times na- 


tribution. 






tional-average earnings in 








past 3 years (1964 ceiling, 


Survivor pensions: Deceased I 






1,120 marks a month). 


60 months of contribution 
was pensioner, at death. 


(1 mark equals 25 U.S. cents) 








SICKNESS AND MATERNITY 


Employed persons. Pensioners 


Insured person: 4% to 5 . 5% of 


Cash sickness and medical bt< 




also covered for medical bene- 


earnings, according to fund. 


fits: Membership in sickc 


First law: 1883. 


fits. 


Employer: 4% to 5.5% of pay- 


fund. 


Current law: 1911 (insurance 


Exclusion: Salaried employees 


roll, according to fund. 


Maternity benefits: 10 months 


code). 


earning over 7,920 marks a 




insurance in last 2 years, 1 




year. 


Government: None. (Pension 


eluding 6 months in last ye: 






agencies pay % of employer- 




All persons covered required to 


employee contribution to sick- 






be member of appropriate 


ness funds for medical insur- 






sickness fund. 


ance of pensioners.) 






Special system for miners. 


Maximum earnings for contri- 


' 






bution and benefit purposes: 


1 






660 marks a month. 


j 


Social insurance system (cash and 






medical benefits) 












Continued on next left hand p 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



69 



. 



CYPRUS-Continued 



Cash benefits for insured 

workers (except permanent 

disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



/able after 3-day waiting 
rcriod, for up to 26 weeks 
or for number of days equal 
b number of weeks of paid 

1 (ontributions, if less). 

it I 

k 



GERMANY (WEST) 



Cash benefits for insured 

workers (except permanent 

disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



l-age pension: 1.5% of 
A worker's assessed wages times 
* /ears of insurance (latter in- 

lude credited periods of in- 

apacity, unemployment, and 

Ichooling after 15). 

i 

Inker's "assessed wages" com- 
muted by applying average 
Percentage which his wages 
vere of national-average 
vages throughout coverage 
*.o national-average wages in 
( ast 3 years before claim 
flatter national-average wage 
igure for pensions awarded 
h 1964, 560 marks a month). 

ild's supplements: 10% of 
'ast 3 year national-average 
vage for each child (56 marks 
i month in 1964). 



Invalidity pension: 1 . 5% of 
worker's assessed wages times 
years of insurance, for general 
invalidity (see Old-age pen- 
sion for computation of as- 
sessed wages and years of 
insurance). 

Occupational invalidty: 1% of 
worker's assessed wages times 
years of insurance. 

Pensions computed as if worker 
insured to age 55, if 36 months 
of contribution in last 5 years 
or if contributions in Yi of 
months since entered insur- 



Child's supplements: 10% of 
last 3 year national-average 
wage for each child (56 marks 
a month in 1964). 



Widow's pension: 100% of gen- 
eral invalidity pension of in- 
sured, payable to all widows 
for 3 months. Thereafter, 
60% of general invalidity 
pension if widow age 45, in- 
valid, or caring for child; 
otherwise, 60% of occupa- 
tional invalidity pension. Also 
payable to dependent widow- 



Orphans' pensions: 10% of gen- 
eral invalidity pension of in- 
sured, or 20% if full orphan, 
for each orphan under 18 (25 
if unmarried student, no 
limit if invalid). 

Maximum survivor pensions: 
100% of general invalidity 
pension of insured. 

Funeral grant: Lump sum of 20- 
40 days' earnings, or 3 
months' pension if pensioner. 



Federal Ministry of Labor and 
Social Affairs, general super- 
vision. 

State Insurance Office in each 
State, administration of wage- 
earners' progam in State. 

Federal Salaried Employees' 
Insurance Office, administra- 
tion of program for salaried 
employees. 

Sickness funds, collection of 
contributions. 



^kness benefit: 65% of earn- 
ngs, plus 4% of earnings for 
1st and 3% each for 2nd and 
Jrd dependents. 

yable after 1-day waiting 
)eriod for up to 78 weeks in 
i years (during first 6 weeks, 
employer must pay wage 
parner difference between 
jenefit and 100% of wages, 
ind also pay full salary to 
salaried employee). 

jiernity benefit: 75-100% of 
sarnings, according to fund, 
ibr 4-6 weeks before and 6 
weeks after confinement. 

Hiring allowance: 50% of ma- 
arnity benefit, for 12-26 
weeks. 

iternity grant: 10-25 marks, 
iccording to fund. 



Medical benefits: Service benefits 
provided to patients by doc- 
tors, hospitals, and druggists 
under contract with and paid 
directly by sickness fund. 

General and specialist care, nec- 
essary hospitalization, pre- 
scribed medicines (small fee 
per prescription during first 
10 days of illness), dental care, 
attendance of midwife or doc- 
tor at confinement, specified 
appliances, and travel ex- 
penses (some funds provide 
additional benefits). 

Duration: No limit, except 78 
weeks for hospitalization in 
a 3-year period. 



Medical benefits for dependents: 
Same as for insured, except 
that some funds require larger 
cost-sharing for medicines. 

Wife of insured man also re- 
ceives same maternity grant 
as insured woman, and small 
nursing allowance. 



Federal Ministry of Labor and 
Social Affairs, general super- 



State Insurance Office in each 
State, enforcement of law and 
regulations in State. 

Sickness funds, administration 
of contributions and benefits 
for members. Include about 
2,000 local, establishment, 
occupational, agricultural, 
and miner's funds; managed 
by elected representatives of 
insured persons and employ- 
ers, and federated into state 
and national federations. 



Continued on next right hand page 



70 COMMITTEE REPORT ON FINANCE AND INSURANCE 
GERMANY (WEST)-Continued 




Dates of basic laws and 
t\[H's of programs 


Coverage 


Source of funds 


Qualifying conditions 


WORK INJURY 
First l»l : 
Current law: 1963. 

Compulsory insurance with semi- 
private carrier 


Employed persons, most cate- 
gories of self-employed per- 
sons, and students. 


Insured person: None. 

Employer: Contributions vary- 
ing according to risk; average, 
about 1.5% of payroll. 

Government: None. 


Work-injury benefits: No ii 
mum qualifying period. 

I 

i 

I 

t 
1 


UNEMPLOYMENT 
First law: 1927. 
Current law: 1957. 

Compulsory insurance system 


Employees in private employ- 
ment. 

Exclusions: Salaried employees 
earning over 15,000 marks a 
year; agricultural employees 
with yearly contracts; part- 
time employees; and family 
labor. 

Special systems for building 
workers and dock workers. 


Insured person: . 65% of earn- 
ings. 

Employer: 0.65% of payroll. 

Government: None (pays whole 
cost of unemployment assist- 
ance). 

Maximum earnings for contri- 
bution and benefit purposes: 
750 marks a month. 


Unemployment benefits: 26 W| 
of insured employment in; 
2 years. 

Capable of work, available 
work, and registration ati 
ployment office. i 

Unemployment not due toj 
untary leaving, discharg* 
misconduct, strike or loci* 
refusal of job offer, or re , 
of training (disqualificst 
2-8 weeks). 

i 

; 

! 

I 

i 


FAMILY ALLOWANCES 

First and current law: 1954 
(allowances for 2nd chUd 
provided by 1961 law). 

Employment-related system 


Employed and self-employed 
persons, and social insurance 
beneficiaries, with 2 or more 
children. 


Insured person: None, except 
about 1% of income by self- 
employed persons. 

Employer: 1% of payroll. 

Government: Whole cost of allow- 
ances for 2nd child. 


Family allowances: Child i. 

be under 18 (25 if studeii 

invalid). 

i 
Payable for 2nd child on^ 

family earnings not ove* 

marks a month. 











UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



71 



GERMANY (WEST)-Continued 



Cash benefits for insured 

,/orkers (except permanent 

disability) 



\nporary disability benefit 
work injury): Same as for 
■rdinary sickness, including 
upplementary payments by 
mployer. 

lially paid by sickness fund 
or first 18 days, if worker 
overed under sickness in- 
urance; thereafter, borne by 
.ccident insurance fund. 



Permanent disability and 

medical benefits for 

insured workers 



Permanent disability pension 
(work injury): 66?^% of earn- 
ings, if totally disabled; mini- 
mum and maximum pension, 
90 and 2,000 marks a month. 

Special supplement (if cannot 
work and no other pension): 
10% of earnings. 

Constant-attendance supple- 
ment: 100-350 marks a month. 

Child's supplements: 10% of 
pension for each child under 
18. 

Partial disability: Percent of 
full pension corresponding to 
loss of earning capacity, if 
latter 20% or more. 

Medical benefits (work injury): 
Comprehensive care. Usually 
provided by sickness fund dur- 
ing first 18 days, unless 
specialized care required. 



Survivor benefits and 

medical benefits for 

dependents 



Widow's pension (work injury): 
40% of earnings of insured if 
age 45, invalid, or caring for 
child; otherwise, 30% of earn- 
ings. Also payable to depend- 
ent widower. 

Orphans' pensions (work injury): 
20% of earnings for each 
orphan under 18 (25 if stu- 
dent, no limit if invalid), or 
30% if full orphan. 

Parents or grandparents (if 
needy): 20% for 1, 30% for 
couple, 60% for 4. 

Maximum survivor pensions: 
80% of earnings of insured. 

Funeral grant: Lump sum of 1 
month's earnings; minimum, 
400 marks. 



Administrative 
organization 



Federal Ministry of Labor and 
Social Affairs, general super- 



Federal Insurance Office, in 
Ministry, direct supervision. 

Industrial and agricultural acci- 
dent insurance funds, insur- 
ance carriers and administra- 
tion of program; autonomous 
associations managed by 
elected employer and em- 
ployee representatives. Em- 
ployer must affiliate with 
association for his industry 
and region. 



[employment benefit: 40%- 
10% of earnings, varying in- 
versely according to wage 
lass. 

pendents' supplements: 9 
narks a week each for wife 
,nd 1st child, 3 marks for 
!nd child. 

yable after 3-day waiting 
>eriod (unless recipient has 
lependents), for up to 13-52 
veeks according to weeks of 
)f insured employment; 156 
veeks of employment in last 
t years required for 52-week 
naximum. 

^employment assistance pay- 
tble after exhaustion of bene- 
its, subject to income test.) 



mily allowance: 25 marks a 
nonth for 2nd child, and 40 
narks for 3rd and each addi- 
tional eligible child in a 
amily. 



Federal Ministry of Labor and 
Social Affairs, general super- 
vision. 

Federal Placement and Unem- 
ployment Insurance Institute, 
administration of benefits and 
employment service through 
regional and local employ- 
ment offices; Institute and 
offices managed by tripartite 
board and committees. 

Sickness funds, collection of 
contributions. 



Federal Placement and Unem- 
ployment Insurance Institute, 
administration of allowances 
for 2nd child. 

Union of Federations of Family 
Equalization Funds, national 
administration and equaliza- 
tion of costs for other allow- 
ances. 

Family Equalization Funds, ad- 
ministration of allowances 
and contributions; include 
about 50 funds for different 
industrial branches, and for 
districts in case of agricultural 
funds, set up within the acci- 
dent insurance funds. 






72 COMMITTEE REPORT ON FINANCE AND INSURANCE 

GERMANY (EAST) 



Dates of basic laws and 
types of programs 



OLD AGE. INVALIDITY, 
DEATH 

First law: 1889. 

Current law: 1950. 



Social insurance system 



(1 mark equals about 8 U.S. 
cents) 



Coverage 



Employees, members of coop- 
eratives, and students. 



Special systems for railroad 
and communications employ- 
ees and self-employed per- 



Source of funds 



Insured person: 10% of earnings 
(special rates for members of 
cooperatives, students, and 
family labor); self-employed 
normally pay 14% of income. 

Employer: 10% of payroll 
(mining employers, 20%; 
special rates for cooperatives) . 

Government: Any deficit. 

Maximum earnings for contri- 
bution and benefit purposes: 
600 marks a month. 

Above contributions also finance 
sickness, maternity, and 
unemployment benefits. 



Qualifying conditions; 



Old-age pension: Age 65 ( 
or 60 (women); miners 
50 according to lengt 
employment. 15 years <i 
surance (5 years if min«i 
age 50 when first cove 
and insurance during 
period since first entry (r: 
maintained by paymen 
monthly fee). Retirej 
unnecessary. 

Invalidity pension: Loss i 
of working capacity 
normal earning capacit 
similar worker. 5 yeaii 
insurance, and insurance: 
ing % of period since I 
entry. 

Survivor pensions: Dec* 
was pensioner, or mei; 
surance requirements for 
age or invalidity pensio 
death. 



SICKNESS AND 
MATERNITY 

First law: 1883. 

Current law: 1961. 



Employees, members of co- 
operatives, and students. 
Pensioners also covered for 
medical benefits. 



Special systems for railroad and 
communications employees 
and self-employed persons. 



Insured person: See 
contribution above. 

Employer: Same. 

Government: Same. 



pension 



Sickness and medical ben 
Currently insured. 

Cash maternity benefit: « 
months of insurance ini 
2 years. 



Social insurance system (cash 
and medical benefits) 



WORK INJURY 
First law: 1884. 
Current laws: 1947 and 1961. 



Employees, members of co- 
operatives, and students. 

Separate system for self- 
employed workers. 



Insured person: None. 

Employer: 0.3 to 3.0% of pay- 
roll, according to risk of 
undertaking. 



Work-injury benefits: No • 
imum qualifying period. ) 



Government: Part 
medical care. 



of cost of 



Maximum earnings for contri- 
bution and benefit purposes: 
600 marks a month. 



Social insurance system 



Continued on next left hand 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



73 



GERMANY (EAST) 



!ash benefits for insured 
orkers (except permanent 
disability) 



IB Hi 

ige pension: 60 marks a 
H ©nth, plus 1% of average 

:: ar ' onthly earnings per year of 
"i surance (higher rates for 
r «i Sners). 

imj j 

Dtr )1 pendent's supplements: 10 
'<*)'« larks a month for spouse 
wtin {e 60, invalid, or caring for 
did under 3 or 2 children 
ider 8; and 35 marks a 
M (onth for each child under 
«tf J (18 if student), 
ipaes j 

ya limum pension: 115 marks a 

r * »onth, or 125 marks with 

*i igible spouse. Maximum 

ijnsion, 80% of earnings. 

rial assistance for needy 
>;ed not receiving pension.) 

:.ife i 
n i 



h 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



Invalidity pension: 60 marks a 
month, plus 1% of average 
monthly earnings per year 
of insurance (higher rates for 
miners). 

Dependent's supplement: 10 
marks a month for spouse 
age 60, invalid, or caring for 
child under 3 or 2 children 
under 8; and 35 marks a 
month for each child under 
15 (18 if student). 

Minimum pension: 115 marks 
a month, or 125 marks with 
eligible spouse. Maximum 
pension, 80% of earnings. 

(Social assistance for needy 
invalids not receiving pen- 
sion.) 



Widow's pension: 50% of basic 
pension of insured (60% if 
latter was miner), payable to 
widow age 60, invalid, or 
caring for child. Also payable 
to invalid or aged widower. 

Orphans' pensions: 25% of pen- 
sion of insured for each 
orphan under 15 (18 if stu- 
dent), or 35% if full orphan. 
Minimum pension per orphan, 
40 marks a month or 70 
marks if full orphan. 

Maximum survivor pensions: 
100% of pension of insured. 

(Social assistance for needy 
survivors not receiving pen- 
sion.) 

Funeral grant: Lump sum of 20 
days' earnings; minimum, 
100 marks. 



Trade Union Federation, na- 
tional administration of pro- 
gram through its social in- 
surance department and 
regional executive commit- 
tees. 

Trade union committees in 
each establishment and social 
insurance departments of 
district executive trade union 
committees, local adminis- 
tration of program. 

German Insurance Institute, 
administration of pensions 
for self-employed. 

Finance departments of muni- 
cipal councils, collection of 
contributions. 



ness benefit: 50% of earn- 
gs (employer must pay 
iditional 40% of earnings 
3 sick pay) . Maximum bene- 
t, 10 marks a day. 

able from 1st day of inca- 
acity (except for 3-day 
■aiting period for members 
f cooperatives) for up to 26 
'eeks (may be extended to 
9 weeks if recovery likely 
ithin period) ; maximum 
uration of sick pay by em- 
ployer, 6 weeks. 

ternity benefit: 100% of earn- 
lgs, payable for 5 weeks 
•efore and 6 weeks after con- 
nement. Maximum benefit, 
marks a day. 



rsing allowance: 25% of 
arcings, for up to 12 weeks 
fter confinement. Also, lay- 
-tte grant of 50 marks. 



Medical benefits: Medical serv- 
ices provided to patients in 
government clinics and hos- 
pitals, or by doctors and hos- 
pitals under contract with 
and paid directly by social 
insurance system. 

General and specialist care, 
hospitalization, laboratory 
services, prescribed medi- 
cines, maternity care, dental 
care, appliances and trans- 
port. 



Medical benefits for dependents: 
Same as for insured. 

All pregnant women in country, 
and children under age 3, 
receive free medical care. 

Wife of insured man also re- 
ceives layette grant of 50 
marks. 



Trade Union Federation, na- 
tional administration of pro- 
gram through its social in- 
surance department and 
regional executive commit- 
tees. 

Trade union committees in 
each establishment, local 
administration. Benefits pro- 
vided directly by employer in 
nationalized and government 
establishments, and by social 
insurance department of local 
executive trade union com- 
mittees for private establish- 
ments. 

Medical benefits provided by 
public health facilities, or 
through private facilities 
with which social insurance 
system has contracts. 



nporary disability benefit 
work injury): 50% of eam- 
*gs (employer must pay ad- 
litional 40% of earnings as 
ick pay). 

ildren's supplement (if dis- 
.bility 50% or more): 10% of 
)enefit for each child under 
5. 



jrable from day following in- 
jury, until recovery or certifi- 
cation of permanent dis- 
ability. 



Permanent disability pension 
(work injury): 66^% of 
earnings plus 40 marks a 
month, if totally disabled. 

Supplement if constant attend- 
ance required. 

Minimum and maximum pen- 
sions: 115 and 400 marks a 
month (or 80% of average 
earnings). 

Partial disability: Percent of 
full pension proportionate to 
loss of working capacity, if at 
least 20% disability. 

Children's supplements (if dis- 
ability 50% or more): 10% 
of pension for each child 
under 15. 



Widow's pension (work injury): 
40% of earnings of insured 
plus supplement of 40 marks 
a month, if age 60, invalid, or 
caring for young child. Also 
payable to invalid or aged 
widower. Other widows re- 
ceive 20% of earnings plus 
supplement. 

Orphans' pensions (work in- 
jury): 20% of earnings for 
each orphan, or 30% if full 
orphan, plus flat-rate supple- 
ment for each child. 

Maximum survivor pensions: 
80% of earnings of insured. 

Funeral grant: Lump sum of 
20 days' earnings. 



Trade Union Federation, na- 
tional administration of pro- 
gram through its social in- 
surance department and 
regional executive commit- 
tees. 

Trade union committees in each 
establishment, local admin- 
istration. Benefits provided 
directly by employer in na- 
tionalized and government 
establishments; and by social 
insurance department of local 
executive trade union com- 
mittees for private establish- 
ments. 

Medical benefits provided by 
public health facilities, or 
through private facilities with 
which social insurance system 
has contracts. 

Continued on next right hand page 



74 COMMITTEE REPORT ON FINANCE AND INSURANCE 
GERMANY (EAST)-Continoed 





Dates of basic laws and 
tyj>es of programs 


Coverage 


Source of funds 


| 

i 

Qualifying conditions 






• 




UNEMPLOYMENT 
First law: 1927. 
Current law: 1947. 

Compulsory insurance system 


Employed persons. 


Insured person: See pension 
contribution above. 

Employer: Same. 

Government: Same. 


Unemployment benefit: 26 wn 
of insurance during last 
months. 

Capable of work, and regis 

tion at employment offic 

i 

Unemployment not due to 

fusal of suitable offer. 

; 

Other income less than ber 

and not living with relate 

able to support claimant, i 

i 


FAMILY ALLOWANCES 
First and current law: 1950. 

Public system for large families 


Residents, with 4 or more 
children. 


Insured person: None. 
Employer: None. 
Government: Whole cost. 


Family allowances: Family n 1 
contain 4 or more chilci 
under age 14. 

i 

: 
I 



IRELAND 



Dates of basic laws and 






i 
i 


types of programs 


Coverage 


Source of funds 


Qualifying conditions 


OLD AGE, INVALIDITY, 


Manual employees, and non- 


Insured person: Man, 5s. lid. a 


Old-age pension: Age 70, i 1 


DEATH 


manual employees earning 


week (3s. 8d. in agriculture). 


initial coverage before , 




£800 a year or less. 


Woman, 4s. lOd. a week 


60. 156 weeks of paid c 1 


First laws: 1908 (old-age 




(2s. lOd. if agricultural em- 


tributions, and annual a* 


assistance), 1911 (invalidity 


Exclusions: Nonmanual workers 


ployee). 


age of 48 weeks paid : 


insurance), and 1935 (sur- 


earning over £800 a year; 




credited (reduced pensior 


vivor insurance). 


casual employees; and family 


Employer: For each male em- 


24-47 weeks). Retirem 




labor. 


ployee, 5s. lid. a week 


unnecessary. Not pays- 


Current laws: 1952 (invalidity 




(3s. 8d. in agriculture). For 


abroad. 


and survivor insurance) and 


Special system for public em- 


each female employee, 5s. 7d. 




1960 (old-age insurance). 


ployees. 


a week (3s. 8d. if agricultural 


Invalidity pension: Incapa» 






employee) . 


for work. 156 weeks of r. 


Social insurance system 






contributions, and 48 we 






Government: Difference between 


paid or credited in last y 


(1 pound equals U.S. $2.80; 




expenditure and contribu- 


(reduced pension if 26 


Is. equals 14 cents; Id. 




tions (about 1/3 of cost); 


weeks) . 


equals about 1 cent.) 




also, entire cost of assistance, 


Survivor pensions: 156 week." 






Above contributions also finance 


contribution paid by 






cash sickness and maternity 


ceased or wife, and ann 






benefits and unemployment 


average of 39 weeks paid 






benefits. 


credited in last 3 or 5 ye; 
For full orphan's pension, 
weeks of contribution p 
by 1 parent. 



Continued on next left hand j 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



75 



GERMANY (EAST)-Continued 



Cash benefits for insured 
brkers (except permanent 
disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



Medical benefit (work injury): 
Necessary care, including 
medical treatment and surg- 
ery, hospitalization, medi- 
cines, appliances, and re- 
training. 



>'5« tmpjoyment benefit: 20% of 
k irnings, plus flat amount 
6r day for each dependent. 

teg ising allowance: Flat month- 
amount, varying according 
> size of locality. 



\k 



umum 
irnings. 



benefit: 100% of 



able after 7-day waiting 
eriod (unless unemployment 
>llows 4 weeks of incapacity 
r partial unemployment), 
>r up to 26 weeks. 



Trade Union Federation, na- 
tional administration of pro- 
gram through its social in- 
surance department and 
regional executive commit- 



Trade union committees in each 
establishment and social in- 
surance departments of dis- 
trict executive trade union 
committees, local administra- 
tion of program. 



lily allowance: 20 marks a 
iiijfionth for 4th child, and 25 
larks for 5th and each other 
igible child. 

h grants of 500 marks for 
st birth, rising progressively 
1,000 marks for 5th and 
ach subsequent birth. 



Ministry of Labor and Health, 
national administration of 
program. 



IRELAND 



Cash benefits for insured 

rorkers (except permanent 

disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



-age pension: £2 10s. a week. 

fe's supplement: £1 17s. 6d. 
» week (also payable for de- 
>endent invalid husband). 

i-age assistance of up to 
'] 15s. a week payable to 
ged persons whose other 
ncome below specified limits.) 



Invalidity pension: £2 2s. 6d. a 
week (represents ordinary 
sickness benefit, whose dura- 
tion unlimited if qualifying 
conditions met). 

Dependents' supplements: 
£1 10s. a week for 1 adult 
dependent, 13s. each for 1st 
and 2nd child, and 8s. for 
each other child. 

Reduced rates for married 
women and youths. 

(Assistance of up to £1 15s. a 
week payable to blind per- 
sons whose other income 
below specified limits.) 



Widow's pension: £2 2s. 6d. a 
week, or £2 5s. if has child 
under 16. 

Orphans' pensions: 13s. a week 
each for 1st and 2nd child, 
and 8s. for each other child 
under 16. Full orphans, 
£1 5s. a week per child. 

(Survivor assistance payable 
to widow and orphans whose 
other income below specified 
limits.) 



Department of Social Welfare, 
administration of program 
with assistance of local 
offices. 



Continued on next right hand page 



76 COMMITTEE REPORT ON FINANCE AND INSURANCE 




IRELAND-Contlnued 






- 








! 
i 


Dates of basic laws and 








types of programs 


Coverage 


Source of funds 


Qualifying conditions 


SICKNESS AND 


Cash benefits: Manual em- 


Insured person: See pension 


: 

Cash sickness benefit: 26 yi\ 
of paid contributions, so) 
weeks paid or credited ir' 
year (reduced benefit if 


MATERNITY 


ployees, and nonmanual 


contribution above. 




employees earning £800 a 




First law: 1911. 


year or less (excluding casual 


Employer: Same. 




employees, family labor, and 




47 weeks). 
Cash maternity benefit: 26 w 


Current laws: 1952 (cash 


public employee?). 


Government: Same; also, entire 


benefits) and 1953 (medical 




cost of medical services 


services). 


Medical services: Employees 


(shared equally by national 


of paid contributions, an 
weeks paid or credited in 1 




covered for cash benefits, and 


and local governments). 


Dual social insurance (cash 


all other persons with small 




year (maternity grant 


benefits) and public (.medical 


and moderate incomes. 




medically needy whV 
contribution test). 


services) systems 












Medical services: 1 weefe 








contribution in last 3 y 








Also available to any pe 








whose income below £8< 








year, who is medically ne 1 








or who is a small farmer 

i 


WORK INJURY 


Manual employees, and non- 


Insured person: None. 


Work-injury benefits: No n 1 




manual employees earning 




mum qualifying period. l 


First law: 1897. 


£600 a year or less. 


Employer: Whole cost, through 
direct provision of benefits or 


: 


Current law: 1934. 


Exclusions: Nonmanual work- 


insurance premiums. 






ers earning over £600 a year; 




! 


Voluntary insurance with pri- 


casual employees; and family 


Government: None. 


! 


vate carrier 


labor. 




1 


UNEMPLOYMENT 


Manual employees, and non- 


Insured person: See pension 


Unemployment benefit: 26 w 




manual employees earning 


contribution above. 


of paid contributions, am 


First law: 1911. 


£800 a year or less. 




weeks paid or credited in | 






Employer: Same. 


year (reduced benefit if 


Current law: 1952. 


Exclusions: Nonmanual workers 




47 weeks). 




earning over £800 a year; 


Government: Same; also entire 


; 




female employees in agricul- 


cost of unemployment assist- 


Capable of and available 1 




ture and domestic service; 


ance. 


work, and registration 




casual employees; family 




employment exchange. 




labor; and public employees. 




Unemployment not due 


Compulsory insurance 


Special system for manual 




voluntary leaving, misji 


system 


workers in building trades. 




duct, trade dispute w! 
employed, failure to at 
self of opportunity to ob i 
employment, or refusal 
suitable offer (disqualil 
tion up to 6 weeks). 


FAMILY ALLOWANCES 


Residents with 1 or more 


Insured person: None. 


Family allowance: Child mus 




children. 




under age 16. 


First and current law: 1944. 




Employer: None. 
Government: Whole cost. 




Universal public system 









UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



77 



IRELAND-Continoed 



"^ 3ash benefits for insured 
orkers (except permanent 
disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



ness benefit: £2 2s. 6d. a 
eek, plus £1 10s. for 1 
lult dependent, 13s. each 
1st and 2nd child, and 
for each other child. 

able after 3-day waiting 
h sriod, for up to 52 weeks; 
n |iration unlimited after 1 56 

J it leeks of paid contributions. 

ernity benefits: £2 5s. a 
eek, payable for 6 weeks 
I »fore and 6 weeks after 

ffi' infinement. 



pj i, lump-sum maternity grant 
£2 (£4 for medically 
iiedy). 



Medical benefits: Services fur- 
nished directly to patients by 
local health authorities. 

Hospital and convalescent-home 
care, including doctors' ser- 
vices and medicines for in- 
patients (patient may be 
charged up to 10s. a day). 

Specialist and laboratory serv- 
ices for out-patients (patient 
may be charged 2s. 6d. for 
specialist service and 7s. 6d. 
for X-ray). 

Obstetric and pediatric care by 
doctor or midwife, including 
necessary hospitalization. 

Dental care and spectacles 
(after 156 weeks of paid 
contributions). 

(General practitioner care pro- 
vided to medically needy but 
not to all employees.) 



Medical benefits for dependents: 
Same as for insured; wife of 
insured man also receives 
same lump-sum maternity 
grant as insured woman. 



Cash benefits: Department of 
Social Welfare, administra- 
tion of benefits through local 
offices. 

Medical services: Department 
of Health, administration of 
services through county and 
city health authorities; latter 
provide services in own insti- 
tutions, clinics, and dispen- 
saries, or elsewhere by ar- 
rangement. 



porary disability benefit 
vork injury): 75% of earn- 

; maximum benefit, £4 

a week. 

able after 3-day waiting 
jriod, which is paid for 
stroactively if incapacity 
sts 2 weeks. 



Permanent disability pension 
(work injury): 75% of earn- 
ings, if totally disabled; 
maximum pension, £4 10s. 
a week. 

Partial disability: Pension equal 
to 75% of loss of earnings. 

Medical benefits (work injury): 
Court may direct payment 
of medical expenses by em- 
ployer, subject to maximum 
fees of £5. 



- mployment benefit: £2 2s. 6d. 
week. 

endents' supplements: 
I 10s. a week for 1 adult 
;pendent, 13s. each for 1st 
id 2nd child, and 8s. for 
ch other child under 16. 

able after 3-day waiting 
riod, for up to 26 weeks 
r each spell of unemploy- 
jJient (if age 65-69 and have 
t f6 weeks of paid contribu- 
i pns, may draw benefit with- 
ft||t time limit until age 70). 

ipmployment assistance pay- 
)le after means test to 
sedy unemployed persons 
it eligible for benefit.) 



Survivor grant (work injury): 
For adult survivor, lump sum 
of 3 years' earnings of 
insured. Minimum and maxi- 
mum grants, £600 and £900. 

For orphans, lump sums vary- 
ing according to earnings of 
deceased, number of children 
under 16, and whether half 
or full orphans. 

Maximum survivor grants: 
£1,800. 

Payments to insured before 
death deducted, but not be- 
low minimum amounts. 

Funeral grant (if no survivors): 
Up to £15. 



Department of Social Welfare, 
enforcement of law. 

Individual cases settled by 
agreement between employer 
and injured worker, or by 
decision of Circuit Court; all 
agreements registered with 
Court. 

Employers may insure with 
private insurance company 
or employers' mutual associ- 
ation. 



Department of Social Welfare, 
administration of program 
together with employment 
service, through its employ- 
ment exchanges and their 
branches. 



- ily allowance: 10s. a month 
1st child. 15s. 6d. for 
id, and £1 6s. 6d. for 3rd 
id each other child. 



Department of Social Welfare, 
administration of program; 
payments made through post 
offices. 



78 COMMITTEE REPORT ON FINANCE AND INSURANCE 




ITALY 






-l 


Dates of basic laws and 








types of programs 


Coverage 


Source of funds 


Qualifying conditions] 


OLD AGE, INVALIDITY, 


Employed persons. 


Insured person: 6.65% of earn- 


Old-age pension: Age 60 ( i 
or 55 (women). J 5 yea 


DEATH 




ings. 




Special systems for seamen, 




contribution. Pension 


First law: 1919. 


industrial managers, liberal 


Employer: 13.35% of payroll, 


duced l /i if no retirer 




professions, railway employ- 


plus small wage-class contri- 


Payable abroad. 


Current law: 1952. 


ees, journalists, public em- 


bution equal to about 0.1% 


i 




ployees, self-employed artis- 


of payroll. 


Invalidity pension: Los 


Social insurance system 


ans, and self-employed 




66%% (wage earners) or 




farmers. 


Government: Contribution equal 


(salaried employees) of j 
ing capacity. 5 years of ! 






to 6.65% of total covered 






earnings, plus special grants. 


tribution, including 

months in last 5 years. 

1 

Survivor pensions: Deceased 
pensioner at death, or I 
years of contribution in 
ing 12 months in last 5 > 

; 


(1 lira equals 0.16 of 1 U.S. 






I 
1 


cent) 






1 


SICKNESS AND 


Employed persons, and pen- 


Insured person: 0.15% of earn- 


Sickness and maternity ber ] 
Currently insured. No ] 


MATERNITY 


sioners. 


ings. 








mum qualifying period. 


First and current laws: 1912 


Special systems for seamen, 


Employer: About 9-11% of pay- 


cept for salaried emph 


(maternity), 1927 (tubercu- 


liberal professions, railway 


roll according to occupation, 


who must be insured di 


losis), 1943 (sickness). 


employees, journalists, public 


plus contribution for medical 


last 30 days to receive i 




employees, self-employed 


care of pensioners. (Includes 


cal benefits (not entitle 


Social insurance system (cash 


artisans, and self-employed 


2% for tuberculosis insur- 


cash benefits). 


and medical benefits) 


farmers. 


ance.) 


Tuberculosis benefit: 2 yea 






Government: Special grants. 


contribution, including 

months in last 5 years. 

; 

( 
r 
i 
: 
: 


WORK INJURY 


Employed persons. 


Insured person: None. 


Work-injury benefits: No ]' 


First law: 1898. 


Special systems for seamen and 


Employer: 2 to 7.6% of payroll, 


mum qualifying period. 




self-employed farmers. 


according to industry (aver- 


1 


Current law: 1935. 




age contribution about 3.7% 








of payroll). 


[ 


Social insurance system 






1 






Government: None. 










Continued on next left hand 







UNEMPLOYMENT INSURANCE FOR FARMWORKERS 79 

ITALY 


-5 


Cash benefits for insured 
orkers (except permanent 
disability) 


Permanent disability and 

medical benefits for 

insured workers 


Survivor benefits and 

medical benefits for 

dependents 


Administrative 
organization 


I 

I 

': 
i 


■age pension: For men, an- 
ual pension equal to 72 
'mes 45% of first 1,500 lire 
f lifetime basic contribu- 
ons, plus 35% of next 1,500 
re, plus 30% of rest. 

i 

men: 72 times 33% of first 
,500 lire of contributions, 
lus 26% of next 1,500 lire, 
Jus 20% of rest. 

•ement for deferral of pen- 
on: Men, 6-40% of pension 
deferred 1-5 years; women, 
,-40% if deferred 1-10 years. 

dmum pensions: 12,000 lire 
month (15,000 lire if defer- 
>*I to 65); maximum, 80% 
f average earnings. 

Id's supplement: 10% of 
ension for each child under 
3 or invalid. 

l monthly pension paid 
ich December. 


Invalidity pension: For men, 
annual pension equal to 72 
times 45% of first 1,500 lire 
of lifetime basic contribu- 
tions, plus 35% of next 1,500 
lire, plus 30% of rest. 

Women: 72 times 33% of first 
1,500 lire of contributions, 
plus 26% of next 1,500 lire, 
plus 20% of rest. 

Minimum pension: 15,000 lire 
a month; maximum, 80% of 
average earnings. 

Child's supplement: 10% of 
pension for each child under 
18 or invalid. 

13th monthly pension paid each 
December. 


Widow's pension: 50% of pen- 
sion paid or payable to 
insured. Also payable to 
invalid widower. 

Orphans' pensions: 20% of pen- 
sion of insured for each 
orphan under 18 or invalid, 
or 30% if full orphan. 

Parents (inabsence of above): 
15% of pension of insured 
for each parent. 

Maximum survivor pensions: 
100% of pension of insured. 

Funeral grant: Lump sum of 
20,000 lire for wage earners; 
varies by industry for salaried 
employees. 


Ministry of Labor and Social 
Welfare, general supervision. 

National Social Insurance Insti- 
tute, administration of pro- 
gram through its branch 
offices; managed by tripartite 
governing body. 

Separate institutes or funds 
administer special systems. 


v 
: 

: 


mess benefit (wage earners 
oly) : 50% of earnings for 1st 
days; 66^% thereafter. 

jable after 3-day waiting 
sriod, for up to 180 days 
jnay be extended in special 
ises). 

>erculosis benefit: 300 lire a 
ay while in sanatorium, and 
)0 lire a day after leaving 
.tter. 

'.ernity benefit (wage earners 
ily): 80% of earnings, pay- 
Die for up to 13 weeks 
efore and 8 weeks after 
>nfinement. 


Medical benefits: Service bene- 
fits provided by doctors and 
hospitals under contract with 
and paid directly by Insti- 
tute. 

General and specialist care, 
hospitalization, prescribed 
medicines, 50% or more of 
cost of dental care, attend- 
ance of midwife or doctor at 
confinement, specified appli- 
ances, and spa treatment. 

Duration: 180 days in a year. 

Tuberculosis insurance provides 
curative and convalescent 
care in sanatorium, post- 
sanatorium care, and re- 
habilitation; no time limit. 


Medical benefits for dependents: 
Same as for insured. 

Tuberculosis benefit for depend- 
ents: 300 lire a day for 1st 
6 months, and 200 lire a day 
for next 6 months. 


Ministry of Labor and Social 
Welfare, general supervision. 

National Sickness Insurance 
Institute, administration of 
program through regional 
and district offices; managed 
by tripartite governing body. 

National Social Insurance Insti- 
tute, administration of tuber- 
culosis insurance program; 
Institute operates own sana- 
toria. 




xporary disability benefit 
vork injury): 60% of earn- 
igs for first 90 days of dis- 
oility; 75% thereafter. 

able after waiting period of 
days. 


Permanent disability pension 
(work injury): 100% of earn- 
ings, if totally disabled. 
Maximum pension, 450,000 
lire a year. 

Constant-attendance supple- 
ment: Up to 180,000 lire a 
year. 

Dependents' supplements: 5% 
of pension for wife and each 
child under 18 or invalid. 

Partial disability: Percent of 
full pension proportionate to 
degree of incapacity, if over 
10% disability. 

Medical benefits (work injury): 
Medical, surgical, and hospi- 
tal care; appliances; and 
rehabilitation. 


Widow's pension (work injury): 
33^% of earnings of insured. 
Also payable to aged or 
invalid widower. 

Orphans' pensions (work injury): 
13M% of earnings for each 
orphan under 18 or invalid, 
or 26.7% if full orphan. 

Parent (in absence of above): 
13 l A% of earnings for each 
parent. 

Maximum survivor pensions: 
66%% of earnings of insured. 

Survivor grant: Lump sum of 
up to 550,000 lire, according 
to category of dependents 
surviving. 


Ministry of Labor and Social 
Welfare, general supervision. 

National Accident Insurance 
Institute, administration of 
program through provincial 
offices; managed by tripartite 
governing body. Institute 
operates own traumatological 
centers and hospitals. 

Separate funds administer spec- 
ial systems. 








( 


Continued on next right hand page 



80 COMMITTEE REPORT ON FINANCE AND INSURANCE 




ITALY— Continued 






Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


Qualifying conditions 


UNEMPLOYMENT 


Employees in private employ- 
ment. 


Insured person: None. 


Unemployment benefit: 2 i 
of insurance, and 52 w 


First law: 1919. 




Employer: 2.3% of payroll. 


of contribution in last 2 y 


Exclusions: Domestic servants, 


Industrial employers also pay 




Current law: 1939. 


and occasional and seasonal 


0.2% of payroll to special 


Capable of work, employ 


workers. 


"wage supplement fund." 


available for work, 


Compultory insurance system 




Government: None. 


registered at employi, 
office. 

Unemployment not due 
voluntary leaving, disne 
for misconduct, refusa 
suitable offer or refusa 
prescribed training (disq 
float ion for 30 days). ! 


FAMILY ALLOWANCES 


Employees and social insurance 


Insured person: None. 


Family allowance: Child l| 




beneficiaries, with 1 or more 




be under 18 (26 if stue 


First law: 1936. 


children or other dependent. 


Employer: 17.5% of payroll 
(110 lire a day for agricul- 


no limit if invalid). 


Current law: 1961. 


Special systems for agriculture, 


tural employees). 


Other eligible dependents: 1 




insurance and credit, tax 




invalid husband, and 


Employment-related system 


collectors, and journalists. 


Government: Subsidy toward 


or invalid parent or gr 






allowances for agricultural 


parent, if their other im 






employees. 


is below 10,000 lire a mc 


NETHERLANDS 


Dates of basic laws and 








types of programs 


Coverage 


Source of funds 


Qualifying conditions i 


OLD AGE, INVALIDITY, 


All residents. 


Insured person: 8.1% of net 


Old-age pension: Age 65. Cc 


DEATH 




income payable by all resi- 


butions paid each year i 




Special system for public 


dents age 15-64. 


15 to 64, for full pen 


First law: 1913. 


employees. 




otherwise decrements a 






Employer: 1.5% of payroll. 


(no decrements for pre- 


Current laws: 1956 (old age), 






period, if resident citizep 


1959 (survivors), and 1962 




Government: Contributions for 


6 years of residence aftei 


(invalidity). 




low-income persons, and any 


58). Retirement unneces. 






deficits. 


Payable abroad. 






Maximum earnings for contri- 


Invalidity pension: Loss of 






bution purposes: 10,900 guild- 


of earning capacity in 






ers a year. 


able occupation. 150 ^ 
of contribution. 


Social insurance system 






Survivor pensions: Deceasec 
insured, and survivoi 
widow of specified cat* 
or full orphan. 


(1 guilder equals 27.6 U.S. 








cents) 














Continued on next left hand 



, 1 


UNEMPLOYMENT INSURANCE FOR FARMWORKERS 81 

ITALY-Continued 


Cash benefits for insured 
' workers (except permanent 
1 disability) 


Permanent disability and 

medical benefits for 

insured workers 


Survivor benefits and 

medical benefits for 

dependents 


Administrative 
organization 


* Unemployment benefit: 300 lire a 
1 day. Dependents' supple- 
■! ments: 120 lire a day for 
dependent spouse, each child, 
°I and dependent parent. 

»f Maximum duration: 180 days 
in a year. 

m Certain categories of workers in 
k specified localities may receive 
a | assistance grants if ineligible 
» 1 for ordinary benefits. 

1 1 

Industrial wage earners also 
i receive "wage supplements" 
equal to 66%% of lost wages, 
if employed less than 40 
hours a week (paid from 
wage-supplement fund) ; pay- 
able indefinitely if working 
24 hours a week or more, or 
otherwise for 3 months. 






Ministry of Labor and Social 
Welfare, general supervi- 
sion. 

National Social Insurance Insti- 
tute, administration of pro- 
gram through its branch 
offices. Also administers wage- 
supplement fund. 

Placement offices receive, in- 
vestigate, and pay claims in 
localities where no office of 
Institute is located. 


family allowance: 4,940 lire a 
1 month for 1st and each other 
; child. 

&.dult dependents: 3,588 lire a 
j month for spouse, and 1,430 
1 lire for each dependent parent 
1 or grandparent. 






Ministry of Labor and Social 
Welfare, general supervision. 

National Social Insurance Insti- 
tute, administration of pro- 
gram through Central Family 
Allowances Fund. 

Individual employers pay 
allowances directly to own 
employees (except in agri- 
culture), and settle only sur- 
plus or deficit of contribu- 
tions due with local branch 
of Institute. 









NETHERLANDS 


Cash benefits for insured 


Permanent disability and 


Survivor benefits and 




workers (except permanent 


medical benefits for 


medical benefits for 


Administrative 


disability) 


insured workers 


dependents 


organization 


\Old-age pension: Full pension, 


Invalidity pension: 3,924 guild- 


Widow's pension: 2,034 guilders 


Ministry of Social Affairs and 


1,770 guilders a year. 


ers a year. 


a year, or 2,910 guilders if 


Public Health, general super- 


1 




caring for 1 or more children. 


vision. 


Reduced by decrement of 2% 


Partial invalidity: 3,186 guilders 


Payable to widow age 50 at 




1 for each year of non-contri- 


a year if 66^-79% invalidity, 


husband's death, 50% inca- 


Social Insurance Bank, ad- 


I bution. 


or 2,454 guilders if 55-66% 


pacitated, or caring for child 


ministration of pensions with 




invalidity. 


under 18. 


assistance of employer-em- 


Wife's supplement (irrespective 






ployee regional Labor Coun- 


of age): About 55% of pen- 


Automatic half-yearly adjust- 


Temporary widow's allowance 


cils; Bank managed by 


sion. 


ment of all pensions for each 


(if ineligible for pension): 


tripartite board. 




3% change in wage index. 


2,034 guilders a year. Payable 


*Tt rm 


iAutomatic half-yearly adjust- 




for 6 months to widow under 


National revenue department, 


ment of all pensions for each 




27, and extended by 1 month 


collection of contributions. 


3% change in wage index. 




for each year by which widow 
is over 26, to maximum of 
24 months. 

Orphans' pensions: About M of 
widow's pension for each full 
orphan under age 10, X A if 
age 10-16, and % if age 16 
or over. 

Automatic half-yearly adjust- 
ment of all pensions for each 
3% change in wage index. 





Continued on next right hand page 



82 COMMITTEE REPORT ON FINANCE AND INSURANCE 
NETHERLANDS— Continued 


_ — , 


Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


i 
Qualifying conditions 


SICKNESS AND 
MATERNITY 

First law: 1913. 

Current laws: 1929 (cash 
benefits) and 1941 (medical 
benefits) . 

Social insurance system (sep- 
arate but interlocking pro- 
grams of cash and medical 
benefits). 


Employees earning not more 
than 10,900 guilders a year. 
Must enroll in approved 
sickness fund. 

Voluntary coverage for medical 
benefits available to other 
persons and pensioners, if 
annual income below specified 
levels. 

Special systems for miners, 
railroad employees, public 
employees, seamen, and cer- 
tain other groups. 


Insured person: 3.4% of earn- 
ings. Pensioners, 5.5 or 11 
guilders a month, according 
to marital status. 

Employer: From about 3% to 
9% of payroll, according to 
risk in industry. 

Government: None, except sub- 
sidy for voluntary low-income 
contributors. 


Sickness and maternity benefi 
Membership in approv 
sickness fund (i.e., in cover 
employment or volunta 
member); no minimum co ( 
tribution period. 

i 

! 

1 

! 


WORK INJURY 

First law: 1901. 

Current laws: 1921 (industry) 
and 1922 (agriculture). 

Compulsory insurance with 
public or private carrier 


Employed persons. 

Separate systems for agricul- 
tural employees and seamen. 


Insured person: None. 

Employer: Whole cost, through 
insurance premiums varying 
with risk; average rate, about 
2% of payroll. 

Government: None. 

Maximum earnings for contri- 
bution and benefit purposes: 
10,900 guilders a year. 


Work-injury benefits: No min, 
mum qualifying period. 

i 


UNEMPLOYMENT 
First law: 1916. 
Current law: 1949. 

Dual industry and general 
compulsory insurance sys- 
tems 


Employees earning not more 
than 10,900 guilders a year. 

Exclusions: Domestic servants, 
temporary employees, and 
public employees. 

Most employees covered under 
both an industry "waiting 
benefit" system and general 
unemployment benefit sys- 
tem; rest covered only under 
latter. 


Insured person: From about 1 
to 5% of earnings, according 
to industry (includes 0.3% 
for general program, and 
remainder for industry wait- 
ing-benefit program). 

Employer: From about 1% to 
5% of payroll, according to 
industry (includes 0.3% for 
general program, and re- 
mainder for industry waiting- 
benefit program). 

Government: 0.6% of total cov- 
ered earnings (for general 
program only). Also, cost of 
social assistance. 


Unemployment benefits: For in 
dustry waiting benefits, 15 
days of employment in in 
dustry concerned during las 
12 months. For general un 
employment benefits, 78 day 
of employment in any in 
dustry during last 12 months 

Capable of work; available fa 
and prepared to accept world 
making sufficient effort to 
find work; and registration a 
public labor exchange. 

1 

Unemployment not due ti 
voluntary leaving, dismiss* 
for misconduct, strike o 
lockout, refusal of suitabl 
offer, or refusal to undergi 
prescribed training. 



Continued on next left hand pag* 







UNEMPLOYMENT INSURANCE FOR FARMWORKERS 83 








NETHERLANDS-Continued 




Cash benefits for insured 


Permanent disability and 


Survivor benefits and 






yorkers (except permanent 


medical benefits for 


medical benefits for 


Administrative 


! 

-> 


disability) 


insured workers 


dependents 


organization 


i 


tjfcness benefit: 80% of earn- 


Medical benefits: Service benefits 


Medical benefits for dependents: 


Ministry of Social Affairs and 


.'ill 


ings. 


provided by doctors, hos- 


Same as for insured person. 


Public Health, general super- 


ve 




pitals, and druggists under 




vision. 


:; 


yable after 3-day waiting 
teriod for up to 52 weeks. 


contract with and paid direct- 


Maternity grant: Lump sum of 




I 


ly by sickness funds. 


55 guilders payable to wife 


Industrial association for each 








of insured man. 


industry, administration of 






General and specialist care, 




cash benefits within industry ; 






hospitalization, laboratory 




approved joint employer-em- 




•dernity benefit: 100% of earn- 


services, medicines, limited 




ployee bodies with compul- 




ngs, payable for 6 weeks 


dental care, obstetric care, 




sory nationwide membership 




Defore and 6 weeks after 


appliances, and transporta- 




and bipartite governing 




sonfinement. 


tion. 




boards. District and local 
offices of associations receive 




iternity grant: Lump sum of 


Patient shares cost of sanator- 




and pay claims. 




55 guilders. 


ium care, artificial limbs, and 










transportation. 

Maximum duration: No limit, 
except 70 days for hospitali- 
zation. 




Approved sickness funds, ad- 
ministration of medical bene- 
fits: supervision by tripartite 
Sickness Funds Council. 
About 115 funds now oper- 


ui 








ating. 


— — _ — . 

mporary disability benefit 


Permanent disability pension 


Widow's pension (work injury): 


Ministry of Social Affairs and 




(work injury): 80% of earn- 


(work injury): 70% of earn- 


30% of earnings of insured. 


Public Health, general super- 




ings during first 6 weeks; 


ings, if totally disabled. 


Also payable to invalid 


vision. 




thereafter, 70% of earnings. 


Constant-attendance supple- 


widower. 


Social Insurance Bank, ad- 




■yable from first day of in- 


ment: 30% of earnings. 


Orphans' pensions (work in- 


ministration of program. 




capacity for up to 1 year. 




jury): 15% of earnings for 








Partial disability: Pension equal 


each orphan under age 16, 


Employers must insure with 






to 70% of wage loss; may be 


or 20% if full orphan. 


Bank, unless authorized by 






commuted to lump sum under 




it to insure with special acci- 






specified conditions. 


Other eligible dependents (if 
above pensions below maxi- 


dent insurance association or 
private company. 






Medical benefits (work injury): 


mum): Parents, grandpar- 






. 


Medical treatment, surgery, 


ents, parents-in-law, grand 








dental treatment, hospitali- 


children, up to 30% of 








zation, medicines, and ap- 


earnings. 








pliances. 


Maximum survivor pensions: 
60% of earnings of insured. 

Funeral grant: Lump sum of 










30 days' earnings. 




i 


nemployment benefits: Mini- 






Ministry of Social Affairs and 




mum rate for waiting benefits 






Public Health, general super- 




'and rate of general benefits: 






vision. 




70% of going earnings in in- 








: 


•sured's occupation (60% if 






General Unemployment Fund, 




[■youth or not living alone). 






administration of general un- 




ipplement for dependent: 
10% of earnings. 






employment benefits and 
supervision of waiting bene- 
fits; directed by tripartite 




i 

■'aiting period: Varies among 






board. 




1 industries, as fixed by indus- 






Industrial association for each 




trial association. 

[aximum duration: Employees 
under industry systems re- 






industry, administration of 
waiting benefits within in- 
dustry. District and local 
offices of associations receive 


sBceive waiting benefits for 48 






and pay claims. 


F days, and then general bene- 








tlfits for 78 days. Others re- 








Til ceive general benefits for 126 








I days. 








|5ocial assistance for needy 








1 unemployed exhausting bene- 










fit rights.) 










—^ — -~— - - ^~-^— 






Continued on next right hand pag 













84 COMMITTEE REPORT ON FINANCE AND INSURANCE 
NETHERLANDS— Continued 




Dates of basic laws and 
types of programs 


Coverage 


Source of funds 


Qualifying conditions 1 


FAMILY ALLOWANCES 

First laws: 1939 (employees) 
and 1951 (self-employed). 

Current laws: 1962. 

Dual employment-related and 
general systems 


Employees, self-employed per- 
sons of limited income, and 
social insurance beneficiaries, 
with 1 or more children; and 
all other residents with 3 or 
more children. 


Insured person: Employee, none. 
Self-employed and non-em- 
ployed, 2% of net income. 

Employer: 5.3% of payroll. 

Government: Whole cost of allow- 
ances for 1st and 2nd child of 
self-employed persons, and 
for pensioners. 

Maximum earnings for contri- 
bution purposes: 10,900 guild- 
ers a year. 


Family allowances: Child r 
be under age 16 (27 if stu«' 
or invalid). 

Self-employed must earn 
than 4,000 guilders a yea 
receive allowances for 
and 2nd child. Non-emplc 
receive allowances only f 
3rd child. 


NORWAY 









Dates of basic laws aud 
types of programs 


Coverage 


Source of funds 


Qualifying conditions ' 


OLD AGE, INVALIDITY, 
DEATH 

First law: 1936. 

Current laws: 1957 (old age 
and survivors) and 1960 (in- 
validity). 

Universal pension system 

(1 crown equals 14 U.S. cents) 


All residents. 

Special systems for railroad em- 
ployees, seamen, fishermen, 
forestry workers, nurses, and 
public employees. 


Insured person: 3.25 to 18.25 
crowns a week, according to 
annual-income class, payable 
by all residents below age 70. 
No contribution if income 
below 4,000 crowns a year. 

Employer: Amounts equal to 
contributions of employees. 

Government: About 20% of cost, 
shared between national and 
local governments; latter also 
bear cost of supplemental 
pensions. 


Old-age pension: Age 70. B 
dence in country during 
8 years (aliens must also b 1 
15 years of residence after 
20). Retirement unnecessj- 
Pensions not payable abr 
except during tempo) 
absence. 

Invalidity pension: Loss of £ 
normal working capac 
Residence during last 5 y 
(aliens must also have 
years of residence after ' 
20). 

Survivor pensions: Widow* 
widower, spouse was I 
sioner at death. Orphan, 
der 18, resident in coun 
and supporting parent di 


SICKNESS AND MATERNITY 
First law: 1909. 
Current law: 1956. 

Social insurance system (cash 
and medical benefits) 


Medical benefits: All residents 
(dependent spouse earning 
below 1 ,000 crowns a year and 
children under 18 covered by 
insurance of family head). 

Cash benefits: All employees 
covered compulsorily; non- 
employees may be covered 
voluntarily. 

Special systems for seamen, 
fishermen, and public em- 
ployees. 


Insured person: From 2.20 to 
10 crowns a week, according 
to annual-income class. Self- 
employed pay additional pre- 
mium if covered voluntarily 
for cash benefits. Pensioners 
exempt from contributions, 
unless non-pension income 
above 1,000 crowns a year. 

Employer: 75% of contributions 
of employees. 

Government: National govern- 
ment, 20% of contributions 
of insured persons; local 
governments, 25% of same. 


Cash sickness and maternity I; 
fits: 14 days of in sun 1 
(nonemployees, 6 weeks) 

Medical benefits: Currently 
sored. 

1 
1 








Continued on next left hand j 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 85 

NETHERLANDS-Continued 



Cash benefits for insured 

irorkers (except permanent 

disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



Hi i 

ifyily allowance: 19.50 guilders 
! month for 1st child, rising 
o 32.50 guilders a month for 

in th and each additional child. 

J" I 



Ministry of Social Affairs and 
Public Health, general super- 
vision. 

Industrial associations, admin- 
istration of allowances within 
each industry; larger em- 
ployers pay allowances to 
own employees and settle 
surplus or deficit of contri- 
butions due with association. 

Social Insurance Bank, admin- 
istration of allowances for 
non-employees and pension- 
ers, with assistance of re- 
gional Labor Councils. 



NORWAY 



Cash benefits for insured 

workers (except permanent 

disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



\jl-age pension: 315 crowns a 
month. 



jpplement for wife age 60: 
'% of pension. 



Id's supplement: 75 crowns 
a month for each child under 
18. 



( pplementary pensions granted 
by some local governments, 
in some cases after income 
test. 



Invalidity pension: 315 crowns a 
month. 

Supplement for invalid or aged 
wife: 50% of pension. 

Child's supplement: 75 crowns 
a month for each child under 
age 18. 

Constant-attendance supple- 
ment: 60 crowns a month. 

Supplementary pensions granted 
by some local governments. 



Widow's pension (if pensioner 
dies): 315 crowns a month, 
payable to widow age 60 or 
invalid. Also payable to 
widower age 60 and invalid. 

Orphans' pensions: 75 crowns a 
month for each orphan under 
age 18, or 150 crowns for each 
full orphan. 

Supplementary pensions granted 
by some local governments, in 
some cases after income test. 

Funeral grant: Lump sum of 
300 crowns. 



Ministry of Social Affairs, gen- 
eral supervision. 

National Insurance Institution, 
national administration of 
program, supervision of local 
funds, and equalization of 
costs by distribution of 
government contribution. 

Local insurance funds, adminis- 
tration of program locally. 
Generally 1 fund in each 
municipality; funds managed 
by elected boards. 



pkness benefit: 3-19 crowns a 
day, according to annual- 
income class, plus 2 crowns a 
day for dependent spouse and 
each child under 18. 

,iyable after 3-day waiting 
period for up to 104 weeks 
(unlimited for tuberculosis, 
cancer, arthritis, and polio- 
myelitis, if under treatment). 



laternity benefit: 3-19 crowns a 
day, according to annual- 
income class, plus 2 crowns a 
day for dependent husband 
and each child under 18. 

ayable for 6 weeks before and 
, 6 weeks after confinement. 



Medical benefits: Cash refunds 
of part or all of medical ex- 
penses, or less commonly serv- 
ice benefits furnished by pro- 
viders under contract with 
funds. 

66-75% of cost of doctors' fees, 
dental care, and transport; 
free care in public hospital, 
maternity clinic, and sana- 
torium; and listed vital medi- 
cines and laboratory services. 

Duration: No limit while in re- 
ceipt of remedial treatment. 



Medical benefits for dependents: 
Same as for insured. 

Wife of insured employee also 
receives maternity grant of 
200 crowns, unless treatment 
provided in maternity clinic. 



Ministry of Social Affairs, gen- 
eral supervision. 

National Insurance Institution, 
national administration of 
program, supervision of local 
funds, equalization of costs 
by distribution of govern- 
ment contribution, and ap- 
proval of contracts with 
doctors. 

Local insurance funds, adminis- 
tration of contributions and 
benefits locally. 



Continued on next right hand page 



86 COMMITTEE REPORT ON FINANCE AND INSURANCE 

NORWAY— Continued 



Dates of basic laws and 






— - ' — rriB 


types of programs 


Coverage 


Source of funds 


Qualifying conditions | 


WORK INJURY 


Employees, fishermen, and stu- 


Insured person: None (fisher- 


Work-injury benefits: No vm , 




dents. 


men, 1% of income). 


mum qualifying period. 1 , 


First law: 1895. 










Self-employed may insure vol- 


Employer: 0.60 to 9 crowns a 




Current law: 1958. 


untarily. 


week per employee, accord- 
ing to risk of occupation. 

Government: Cost of benefits for 
students, and part of those 
for fishermen. 




Social insurance system 




Maximum earnings for benefit 
purposes: 1,667 crowns a 
month. 




UNEMPLOYMENT 


Employees with earnings above 


Insured person: 0.25 to 1.20 


Unemployment benefits: 30 we 




1,000 crowns a year. 


crowns a week, according to 


of contribution in last y* 


First law: 1906 (subsidized 




annual-income class. 


or 45 weeks in last 3 years: 


voluntary insurance). 












Employer: . 25 to 1 . 20 crowns 


Able and willing to work, i 


Current law: 1959. 


Exclusions: Fishermen, family 


a week per employee, accord- 


registration at public empl 




labor in agriculture and do- 


ing to income class. 


ment office. 




mestic service, temporary 








employees, and public em- 


Government: National govern- 


Unemployment not due to i 




ployees. 


ment, 60% of deficit of loca ] 


untary leaving, discharge 






funds; local governments, 


misconduct, labor dispute 


Compulsory insurance system 




25% of contributions of in- 


which participated, or reft f 




Special system for seamen. 


sured persons and employers. 


of suitable offer or retrain .1 
(disqualification for at led 
4 weeks). 


FAMILY ALLOWANCES 


Residents with 2 or more 


Insurtd person: None. 


Family allowances: Family m 




children. 




normally contain 2 or mi 


First and current law: 1946. 




Employer: None. 


children under age 16. 






Government: Whole cost. 


If both parents aliens, child 
1 parent must have 6 mon' 
of residence in country. 


Universal public system 












UNEMPLOYMENT INSURANCE FOR FARMWORKERS 87 

NORWAY-Continued 



Cash benefits for insured 

workers (except permanent 

disability) 



'emporary disability benefit 
(work injury): Ordinary sick- 
ness benefit as above also 
payable in case of work in- 
jury, for up to 52 weeks. 



Permanent disability and 

medical benefits for 

insured workers 



Permanent disability pension 
(work injury): 60% of aver- 
age earnings, if totally dis- 
abled. 

Constant-attendance supple- 
ment: Up to 200 crowns a 
month. 

Child's supplement: 75 crowns 
a month for each child under 
18 (21 if student, no limit if 
invalid). 

Partial disability: Percent of 
full pension proportionate to 
degree of disability (lump 
sum of 3 years' pension for 
15-29% disability). 

Medical benefits (work injury): 
Comprehensive care, includ- 
ing appliances; no sharing in 
cost by patient. 



Survivor benefits and 

medical benefits for 

dependents 



Widow's pension (work injury): 
40% of earnings of insured, if 
age 40 or caring for child; 
otherwise, 2 years' pension 
only. Also payable to invalid 
widower. 

Orphans' pensions (work injury): 
75 crowns a month for each 
orphan under 18 (21 if stu- 
dent, no limit if invalid). If 
full orphans, 1st receives 40% 
of earnings of insured. 

Other eligible survivors: De- 
pendent parents, grandpar- 
ents, brother, sisters. 

Funeral grant: Lump sum of 
300 crowns. 



Administrative 
organization 



Ministry of Social Affairs, gen- 
eral supervision. 

National Insurance Institution, 
national administration of 
program and supervision of 
local funds. 

Local insurance funds, adminis- 
tration of contributions and 
benefits locally. 



"Jnemployment benefit: 3-19 
crowns a day, according to 
annual-income class. 

dependents' supplements: 2 
crowns a day for dependent 
spouse and each child under 
18 (any age if invalid). 

'payable after 7-day waiting 
'' period for up to 20 weeks in 

a year (30 weeks if over age 

50). 

'^Various travel, removal, voca- 
tional training, and work- 
relief allowances also pro- 
vided. 



Ministry of Local Government 
and Labor, general super- 



Directorate of Labor, in Minis- 
try, national administration 
of program together with 
employment service. 

Local insurance funds, adminis- 
tration of program locally 
under supervision of regional 
and local labor boards; latter 
administer employment offices 
and decide claims. 



Jfamily allowance: 400 crowns a 
year for 2nd child under age 
16, 500 crowns for 3rd, 600 
crowns for 4th, etc. (rate rises 
100 crowns for each additional 
child under age 16). 

Allowance payable for 1st child 
also if orphan, invalid, or 
parents divorced. 



Ministry of Social Affairs, gen- 
eral supervision. 

National Insurance Institution, 
national administration of 
program and supervision of 
local funds. 

Local insurance funds, adminis- 
tration of allowances locally. 



88 COMMITTEE REPORT ON FINANCE AND INSURANCE 

UNITED KINGDOM 



Dates of basic laws and 
types of programs 



OLD AGE. INVALIDITY, 
DEATH 

First laws: 1908 (old-age 
pensions), 1911 (invalidity 
insurance), and 1925 (old- 
age and survivors insurance). 

Current laws: 1946 (national 
insurance) and 1948 (na- 
tional assistance). 

Social insurance system 

(£1 equals U.S. $2.80; Is. 
equals 14 cents; Id. equals 
about 1 cent) 



Coverage 



SICKNESS AND 
MATERNITY 

First law: 1911 

Current laws: 1946 (national 
insurance and national health 
service laws). 

Dual social insurance (cash 
benefits) and national health 
service {medical care) sys- 
tems 



All residents (coverage optional 
for married women, and for 
self-employed and nonem- 
ployed persons whose income 
below £208 a year). 

Graduated provisions cover 
only employees whose wages 
are above £9 a week (con- 
tracting out from graduated 
provisions permitted if pri- 
vate plan provides equiva- 
lent benefits). 



Cash sickness and maternity 
benefits: Employed and self- 
employed persons (coverage 
optional for married women, 
and for self-employed persons 
whose income below £208 
a year). 

Maternity grants: All mothers. 

Medical care: All residents. 



Source of funds 



Insured person: Employee, 
8s. 3Hd. (men) or 7s. 2Hd. 
(women) a week, plus 4%% 
of weekly wages between £9- 
18 (contracted-out man, 
10s. 8J^d.; women, 8s. 8Md.). 
Self-employed, 13s. 4d. (men) 
or lis. (women). Nonem- 
ployed, 10s. 2d. (men) or 
78. 10d. (women). 

Employer: 8s. 3 l Ad. (men) or 
7s. 2Md. (women) a week, 
plus 4J4% of weekly wages 
between £9-18 (contracted- 
out men, 10s. 8Md.; women, 
8s. 8Hd.). 

Government: Amount equal to 
}4 of above flat contribu- 
tions {Yz for self- and non- 
employed) ; lump-sum sub- 
sidy; and full cost of national 
assistance. 

Above flat and government 
contributions also finance 
cash sickness, maternity, and 
unemployment benefits. 



Insured person: For cash bene- 
fits, see flat pension contri- 
butions above. For national 
health service, 2s. 8Hd. a 
week (male employee), 
2s. OJ^d. (female employee), 
2s. lOd. (other men), or 
2s. 2d. (other women). 

Employer: For cash benefits, 
see flat pension contribu- 
tions above. For national 
health service, 7Hd. per 
employee a week. 

Government: For cash benefits, 
see pension contributions and 
subsidy above. For national 
health service, about 80% 
of total cost. 



Qualifying conditions 



Old-age pension: Age 65 (mei 
or 60 (women). 156 weeks « 
paid contributions, and ai 
nual average of 50 weeks paiiji 
or credited (reduced pensio 
if 13-49 weeks). RetiremeD - i 
necessary until age 70 (meui i 
or 65 (women); pension ni 
duced by earnings over £5 5: 
a week. Payable abroach 
except later increases. 



i 



Invalidity pension: Incapacity 
for work. 156 weeks of pal 
contributions as employee o 
self-employed, and 50 weekAi 
paid or credited in last ye&i 

Survivor pensions: 156 weeks c : 
paid contributions, and an 
nual average of 50 weeks pai« 
or credited (reduced pensio* 
if 13-49 weeks). For ful 
orphans, 1 parent insured 
(no minimum contribution 
period). 



Cash sickness benefit: 26 weeks 
of paid contributions as em 
ployee or self-employed, am 
50 weeks paid or credited ii 
last year (reduced benefit i 
26-49 weeks). 

Cash maternity benefit: 26 week 
of paid contributions in las 
year as employee or self 
employed, and 50 weeks pak 
or credited (reduced benefi- 
if 26-49 weeks). 

Maternity grants: 26 weeks o 
paid contributions by womai 
or husband, and 26 week; 
paid or credited in last year. 

Medical care: Residence ii 
country (no other condi 
tions). 



Continued on next left hand pag> 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



89 



UNITED KINGDOM 



Dash benefits for insured 
arkers (except permanent 
disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



k old-age pension: £3 7s. 6d. 
*b week. 

S A *endents* supplements: 

'ti 2 Is. 6d. for noninsured 

i« ife over 60; £1 for 1st 

(* bild; and 12s. for each other 

1 oild. 

i | 

n rement for deferred retire- 

lent: Is. a week for each 12 

reeks of contribution after 

^•pensionable age (Is. 6d. if 

noninsured wife over 60). 

J 

\duated old-age pension (if 
|ot contracted-out): 6d. a 
reek for every £7 10s. (man) 
tr £9 (woman) of graduated 
imployee contributions paid 
luring lifetime (payable in 
iddition to flat pension). 

ational assistance payable to 
sliged persons whose resources 
r>elow needs.) 



Invalidity pension: £3 7s. 6d. 
a week (represents ordinary 
sickness benefit, whose dura- 
tion unlimited if qualifying 
conditions met — there is no 
invalidity benefit as such). 

Dependents' supplements: 
£2 Is. 6d. for 1 adult depend- 
ent; £1 for 1st child; and 12s. 
for each other child. 

Reduced rates for married 
women and youths. 

(National assistance payable 
to invalids whose recources 
below needs; special rates for 
tuberculous and blind.) 



Temporary widow's benefit (1st 
13 weeks for all widows): 
£4 15s. a week plus £1 10s. 
for 1st child and £1 2s. for 
each other child. 

Widowed mother's benefit (if 
child in care): £4 17s. 6d. a 
week, plus £1 2s. for 2nd and 
each other child. 

Widow's pension (if age 50 at 
husband's death or when 
last child ineligible): £3 7s. 6d. 
a week. 

Full orphans (guardian's bene- 
fit): £1 17s. 6d. a week per 
child. 

Funeral grant: £25. 

Graduated widow's pension (if 
not contracted-out): 50% of 
graduated pension earned by 
husband before death, pay- 
able at age 60. 

(National assistance payable to 
survivors whose resources 
below needs.) 



Ministry of Pensions and Na- 
tional Insurance, administra- 
tion of flat contributions and 
flat and graduated pensions 
through its regional and local 
offices. 

Inland Revenue Department, 
collection of graduated con- 
tributions. 

Registrar of Non-Participating 
Employments, certification 
of contracted-out plans (plans 
must provide equivalent pen- 
sions, preserve pension rights 
if employment ends, and be 
financially sound). 

National Assistance Board, 
administration of assistance 
through its regional and area 
offices. 



tkness benefit: £3 7s. 6d. a 
ftreek, plus £2 Is. 6d. for 1 
■adult dependent, £1 for 1st 
lisbild, and 12s. for each other 

Erik 

i yable after 3-day waiting 
^period (no waiting period if 
4l42 days lost within 13 weeks), 
t for up to 52 weeks; duration 
■unlimited after 156 weeks of 
■contribution. 

i iternity benefits: £3 7s. 6d. a 
week, plus £2 Is. 6d. for 1 
■adult dependent, £1 for 1st 
fvchild, and 12s. for each other 
I child; payable for 11 weeks 
I before and 7 weeks after 
confinement. 

so, lump-sum maternity grant 
of £16, plus an additional £6 

f if confinement in home or at 

lown expense. 



Medical benefits: Medical serv- 
ices provided by doctors and 
druggists under contract 
with and paid directly by 
national health service, and 
by public hospitals. 

General practitioner care, spe- 
cialist services, hospitaliza- 
tion, maternity care, dental 
care, medicines, appliances, 
and home nursing. 

Patients pay Is. for each 
prescription item, £1 for each 
dental treatment (except 
children and expectant or 
new mothers), 10s. for each 
spectacle lens, and about 
50% of cost of dentures. 

Duration: No limit. 



Medical benefits for dependents: 
Same as for family head. 

Wife also receives same lump- 
sum maternity grants as 
working woman. 



Ministry of Pensions and 
National Insurance, adminis- 
tration of contributions and 
cash benefits through its 
regional and local offices. 

Ministry of Health, general 
administration of medical 
services through national 
health service. 

Medical services administered 
locally by Executive Council 
for each local health author- 
ity area (general medical, 
dental, and pharmaceutical 
services); about 15 Regional 
Hospital Boards; and local 
health authorities (home 
nursing, midwifery, etc.) 



Continued on next right hand page 



90 COMMITTEE REPORT ON FINANCE AND INSURANCE 

UNITED KINGDOM-Continued 



Dates of basic laws and 
types of programs 



WORK INJURY 
First law: 1897. 
Current law: 1946. 
Social insurance system 



Coverage 



All employees. 

Special system of supplemen- 
tary benefits for miners. 



Source of funds 



Insured person: 8d. a week 
(men) or 5d. (women). 

Employer: 9d. a week (men) or 
6d. (women). 

Government: Contribution equal 
to 1/5 of total contributions 
paid by employees and 
employers. 



Qualifying conditions 



Work-injury benefits: No 
mum qualifying period. 



UNEMPLOYMENT 

First law: 1911. 

Current laws: 1946 (national 
insurance) and 1948 (na- 
tional assistance). 

Compulsory insurance system 



All employees (coverage option- 
al for married women). 



Insured person: See flat pension 
contributions above. 

Employer: Same. 

Government: See pension con- 
tributions and subsidy above; 
also, full cost of national 
assistance. 



Unemployment benefit: 26 wee, 
of paid contributions as ei 
ployee, and 50 weeks paid 
credited in last year (reduc 
benefit if 26-49 weeks). 



k 



Capable of and available f 
work, and registration 
employment exchange. 

Unemployment not _ due 
voluntary leaving, industri 
misconduct, direct particip 
tion in trade dispute, refus 
of suitable job offer, or faihr 
to follow up job or traink 
opportunity (disqualificatic 
up to 6 weeks). 



F AMILY ALLOWANCES 
First and current law: 1945. 
Universal public system 



Residents, with 2 or more 
children. 



Insured person: None. 
Employer: None. 
Government: Whole cost. 



Family allowances: Child mui 
be under age 15 (16 if invalit 
19 if student). 

26 weeks of residence in last 1 
months (aliens must have, i 
addition, 156 weeks of res; 
dence in last 4 years). 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



91 



UNITED KINGDOM-Continued 



Cash benefits for insured 

workers (except permanent 

disability) 



Permanent disability and 

medical benefits for 

insured workers 



Survivor benefits and 

medical benefits for 

dependents 



Administrative 
organization 



nporary disability 
work injury): £5 



benefit 

15s. a 

reek. 

pendents' supplements: 
22 Is. 6d. for 1 adult depend- 
nt; £1 for 1st child; and 
for each other child. 

duced rates for married 
vomen and youths. 

yable after 3-day waiting 
period (no waiting period if 
12 days of incapacity), for up 
,o 26 weeks. 



Permanent disability pension 
(work injury): £5 15s. a week 
for 100% disablement. 

Unemployability supplement of 
£3 7s. 6d. a week, and de- 
pendents' supplements, pay- 
able if total incapacity per- 
manent. 

Constant-attendance sup- 
plement: Up to £2 10s. (in 
exceptional cases, £5). 

Partial disablement: From 23s. 
a week for 20% to £5 3s. 6d. 
for 90% disablement (lump 
sum of up to £380 for 1- 
19%). Special hardship sup- 
plement of up to £2 6s. if 
change in occupation neces- 
sary. 

Medical benefits (work injury): 
Provided under national 
health service. 



Widow's pension (work injury): 
£4 15s. a week for 13 weeks. 
Thereafter, £3 15s. if caring 
for child, invalid, age 50 at 
husband's death, or age 40 
when children reach age 
limit. 

Widower's pension (work in- 
jury): £3 15s. a week, if 
invalid and dependent. 

Orphans' pensions (work in- 
jury): £1 10s. a week for 1st 
child, £1 2s. for each other 
child (£1 and 12s., if not in 
widow's care). 

Other eligible survivors: Parents 
(first priority) and other rela- 
tives previously dependent 
on insured. 



Ministry of Pensions and 
National Insurance, adminis- 
tration of cash benefits 
through its regional and local 
offices. 

Ministry of Health, adminis- 
tration of medical benefits 
through national health serv- 
ice. 



.employment benefit: £3 7s. 6d. 
a week. Dependents' supple- 
ments: £2 Is. 6d. for 1 adult 
dependent; £1 for 1st child; 
and 12s. for each other child, 
educed rates for married 

I women and youths, 
lyable after 3-day waiting 
period (unless 12 days lost 
within 13 weeks), for up to 
180 days for one spell. After 
5 years of insurance, extend- 
ed 3 days for each 5 weeks of 
contribution in last 10 years, 
minus 1/10 of benefit days 
in last 4 years; overall maxi- 
mum duration, 492 days. 

National assistance payable to 
unemployed whose resources 
below needs.) 



] [amity allowance: 8s. a week 

•for 2nd child, and 10s. for 

3rd and each other child. 



Ministry of Pensions and 
National Insurance, adminis- 
tration of contributions and 
records. 

Ministry of Labor, administra- 
tion of benefits through its 
regional offices and employ- 
ment exchanges; includes 
receipt, decision, and pay- 
ment of claims. 

National Assistance Board, 
administration of assistance 
through its regional and area 
offices. 



Ministry of Pensions and 
National Insurance, adminis- 
tration of program through 
its regional and local offices. 



92 



COMMITTEE REPORT ON FINANCE AND INSURANCE 



FINANCIAL IMPLICATIONS OF UNEMPLOYMENT INSURANCE 
FOR AGRICULTURAL WORKERS 

Of serious concern to most groups interested in farm labor coverage 
under unemployment insurance is the cost of such coverage to agricul- 
tural employers not now paying unemployment insurance taxes and 
to presently covered employers who could be required to pay any deficit 
generated by agricultural coverage. Although most estimates will vary 
depending upon eligibility criteria established for coverage, a substan- 
tial deficit will result if any large number of agricultural employees 
are covered. Table 6 illustrates the cost of coverage if eligibility and 
benefit standards were the same as those presently applied for non- 
agricultural employees. This estimate is based upon a requirement of 
$720 of base period earnings with total benefits limited to 50 percent 
of base period wages. Although there are currently over 800,000 indi- 
viduals with noncovered agricultural earnings in any one year, only 
265,000 of these receive over $720 of farmworker wages in a calendar 
year. Table 6 indicates that benefit payments would equal $63 million 
per year in a year like 1966. With farm employer contributions of 3.5 
percent of taxable wages yielding only $25.2 million, a deficit of $37.8 
million would result. This would necessitate an average increase of 0.2 
percent of taxable wages paid by all other employers. 



TABLE 6 

ESTIMATED COST OF EXTENDING UNEMPLOYMENT INSURANCE 
COVERAGE TO FARM WORKERS 

Estimated full effect in a year like calendar year 1966 



Item 



Current coverage 



Farm workers 



Total coverage 
including farm workers 



Amount of taxable wages ($4,100 base) 

Amount of employer contributions, earned total 

Cost of benefit payments 

As a percentage of taxable wages ._ 

Average employment 



119,175.0 million 

$550.0 million 

$400.0 million 
2.1 percent 

4,695,000 



$720.0 million 

$25.2 million 

$63.0 million 
8.75 percent 

265,000 



$19,895.0 million 

$575.2 million 

$463.0 million 
2.3 percent 

4,960,000 



SOURCE: Department of Employment Report 440C No. 2. 

There is at present a significant subsidization of the currently covered 
seasonal industries by the stable or high-wage industries in this state. 
Table 7 indicates the present benefits paid and taxes paid per employee 
in various seasonal industries. Benefit to tax ratios in these industries 
are as high as 5 to 1. 

The committee is not willing to add a significantly large group of 
deficit accounts to unemployment insurance coverage at this time with- 
out accomplishing concomitant savings or outside financing to prevent 
an additional burden on those employers currently subsidizing seasonal 
industries. For that reason proposals have been made to institute a 



UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



93 



TABLE 7 
(1965 experience) 



Industry 



Benefits per 


covered job 


Benefits 


Taxes 


$386 


$182 


515 


105 


894 


166 


380 


170 


598 


195 


216 


129 


198 


108 


262 


137 


130 


91 



Construction other than building — general construction. 
Contract sorting, etc., of noncitrus fruits and vegetables 

Fisheries .- 

Building construction — general contractors 

Canning and processing fruits and vegetables 

Sugar refining . 

Apparel . 

Lumber and wood— . 

Hotels 



SOURCE: Department of Employment Research and Report 352 No. 21, July 29, 1966. 

weeks-of-work test to determine eligibility in lieu of the present flat 
monetary wage test now used. Tables 8 and 9 present coverage and cost 
estimates using a weeks-of-work test. Both estimates use a $20 per week 
earning requirement. Table 8 uses the present base period (approxi- 
mately the first four out of the last five calendar quarters prior to filing 
of an application), while Table 9 uses a base period equal to the 52 
weeks immediately preceding the filing of the claim. A number of other 
proposals concerning financing of unemployment insurance for agri- 
cultural labor have been presented to the committee. At this time the 
committee feels that all proposals including the ones presented here 
require further study of their soundness and fiscal impact on employers 
and employees generally before one is recommended. The committee 
will attempt to develop during the 1967 Regular Session a bill to extend 
coverage on equitable terms to farmworkers without placing an addi- 
tional financial burden on industrial employers. 



94 



COMMITTEE REPORT ON FINANCE AND INSURANCE 



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UNEMPLOYMENT INSURANCE FOR FARMWORKERS 



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Volume 15 



ASSEMBLY INTERIM COMMITTEE REPORTS 
1965-1967 

ASSEMBLY INTERIM COMMITTEE ON 
FINANCE AND INSURANCE 



Number 29 



BOB MORETTI, Chairman 
Jack R. Fenton, Vice Chairman 
Hale Ashcraft 
Anthony C. Beilenson 
Jack T. Casey 
C. George Deukmejian 
Houston I. Flournoy 
John Francis Foran 
Stewart Hinckley 
John T. Knox 
James R. Mills 

JANUARY 1967 



W. Byron Rumford 
Newton R. Russell 
Philip L Soto 
Robert S. Stevens 
Howard J. Thelin 
John G. Veneman, Jr. 
Victor V. Veysey 
George A. Willson 
George N. Zenovich 



Edward Levy, Consultant 

Errol Miller, Assistant Consultant 

Fern Appleton, Secretary 



GROUP INSURANCE 
TRADING STAMP ACT 



PART II 

INSURANCE INSOLVENCY FUND 



BROADENED LENDING AUTHORITY 
FOR SAVINGS AND LOAN 
ASSOCIATIONS 



HEALTH INSURANCE AND 
ANTIDUPLICATION PROVISIONS 




Published by the 

ASSEMBLY 

OF THE STATE OF CALIFORNIA 



JESSE M. UNRUH 
Speaker 

GEORGE N. ZENOVICH 
Majority Floor Leader 



JAMES DRISCOLL 
Chief Clerk 



CARLOS BEE 
Speaker pro Tempore 
ROBERT T. MONAGAN 
Minority Floor Leader 



TABLE OF CONTENTS 

Page 

Letter of Transmittal 5 

Group Insurance 7 

Trading Stamp Act 21 

Broadened Lending Authority for Savings and Loan Associations 41 

Insurance Insolvency Fund 57 

Health Insurance and Antiduplication Provisions 69 



(3 ) 
2— L-2517 



LETTER OF TRANSMITTAL 



January 31, 1967 
The Honorable Jesse M. Unruh 
Speaker of the Assembly, and Members of the Assembly 
State Capitol, Sacramento, California 

Gentlemen : 

In accordance with the provisions of House Resolution No. 710 of the 
1965 Regular Session, the Assembly Interim Committee on Finance 
and Insurance herewith submits Part II of a record of committee ac- 
tivities and a report on the subject matter studied by the committee. 



Respectfully submitted, 



Jack R. Fenton, Vice Chairman 

Hale Ashcraf t 
Anthony C. Beilenson 
Jack T. Casey 
C. George Deukmejian 
Houston I. Flournoy 
John Francis Foran 
Stewart Hinckley 
John T. Knox 
James R. Mills 



Bob Moretti 
Chairman 



W. Byron Rumf ord 
Newton R. Russell 
Philip L. Soto 
Robert S. Stevens 
Howard J. Thelin 
John G. Veneman, Jr. 
Victor V. Veysey 
George A. Willson 
George N. Zenovich 



(5) 



GROUP INSURANCE 



GROUP INSURANCE 

RECOMMENDATIONS 

1. That Insurance Code Section 10205 be amended to prohibit the 
delivery in this state of certificates of insurance providing group 
mortgage life insurance coverage unless the amount of such insur- 
ance conforms to that specified in Insurance Code Section 10203.5 
(a)(3)(A). 

2. That the Legislature in the 1967 General Session give consideration 
to raising the $10,000 limit on group mortgage life insurance con- 
tained in Insurance Code Section 10203.5(a) (3) (A). 

3. That the premium guarantee contained in Insurance Code Section 
11656.6 be limited to the amount that dividends are due the associa- 
tion or its members from the insurer and only if the insurer notifies 
the association within 60 days of any past due premium due the 
insurer from any insured member of the association. 



(8) 



GROUP INSURANCE 

Group Credit Life Insurance 

During the 1965 General Session, the committee was asked to under- 
take a study of the effectiveness of the existing statutory limitations 
governing the amount of group credit life insurance which could be 
written pursuant to Sections 10203.5 and 10205 of the Insurance Code. 

Limitations of these sections were called into question before the 
committee largely as a result of a certain master group creditor life 
insurance policy issued by the Metropolitan Life Insurance Company, 
a New York corporation, in the State of New York. However, the impli- 
cations raised by this issue go beyond the problems posed by the issu- 
ance of this one policy. They involve the degree to which a state's 
group insurance laws may be ignored while an insurer is providing 
group life insurance coverage to residents in that state under a master 
insurance policy issued elsewhere. 

Insurance Code Sections 10203.5 and 10205 provide as follows : 

Section 10203.5. (a) Life insurance conforming to all the fol- 
lowing conditions is another form of group life insurance : 

(1) Covering one of the following groups : 

(A) All members are or become borrowers from one financial 
institution, including subsidiary or affiliated persons, under an 
agreement to repay the sum borrowed. 

(B) All members are or become purchasers of merchandise or 
other property (exclusive of securities, investment certificates and 
bank deposits) under an agreement to pay the balance of the pur- 
chase price. 

(2) The group numbers not less than 100 new entrants yearly. 

(3) The amount insured on any one borrower or purchaser does 
not exceed : 

(A) The amount of the loan commitment in the case of an agri- 
cultural or horticultural loan commitment (as defined in Section 
10203.55) repayable in one sum or in irregular installments within 
a period not in excess of 18 months from the initial date of the loan 
commitment, or ten thousand dollars ($10,000), whichever is less, 
and 

(B) In all other cases the balance of the indebtedness to the 
institution or vendor, or ten thousand dollars ($10,000), which- 
ever is less, on any one life. 

(4) The repayment or payment of purchase price is to be made, 
under the agreement of loan or purchase; in substantially equal 
installments over a period not exceeding 32 years ; or in payments 
or installments in accordance with the usual terms of the creditor 
in the case of a revolving loan or revolving charge account ; or in 
one sum or irregular installments within a period not in excess 
of 18 months from the initial date of the commitment on an agri- 
cultural or horticultural loan. 

(9) 



]() COMMITTEE REPORT ON FINANCE AND INSURANCE 

(5) The policy is issued upon application of and made payable 
to the institution, vendor, or a creditor to whom such vendor may 
transfer title to the indebtedness, as beneficiary, and the premiums 
are paid by or through the institution, vendor, or such creditor. 

(b) A policy of insurance conforming to the provisions of this 
Section is not subject to the provisions of Section 10209 or 10213. 

Section 10205. A policy of group life insurance shall not be 
issued or delivered in this State nor, except as otherwise provided 
in Section 10205.5, shall an insurer provide or agree to provide 
group life coverage until a copy of the form of the policy is filed 
with the commissioner and approved by him. Except as provided 
in Section 10211, such policy shall not be so issued or delivered un- 
less it contains in substance the provisions set forth in Sections 
10206 to 10210 hereof. 

To more exactly define the issues, it will be necessary to examine 
the facts surrounding this one particular case. 

Under California law, life insurance companies may issue and de- 
liver a policy of group credit life insurance covering real estate mort- 
gage indebtedness, provided the amount of the insurance shall not ex- 
ceed the amount of unpaid indebtedness or $10,000, whichever is less. 
(California Insurance Code, Section 10203.5.) New York limits the 
amount of such insurance to the amount of indebtedness, or $30,000, 
whichever is less (New York Insurance Law, Section 204(C).) A group 
credit life insurance policy was issued and delivered in New York 
City by Metropolitan Life Insurance Company to Bankers Trust Com- 
pany as agent for multiple creditors including the insurance company 
and several mortgage loan correspondents of the insurance company. 
As required by New York law, the policy and certificate forms were 
submitted to the New York Insurance Department and, after review, 
they were approved. 

The Western Mortgage Corporation, a California corporation, is one 
of the mortgage loan correspondents of the insurance company. The 
insurance certificates are delivered by the mortgage loan correspondent 
to its mortgage borrowers who have requested the coverage. Most of the 
mortgage loans made by the mortgage loan correspondent are assigned 
to the insurance company as security for the money borrowed from it 
by the mortgage loan correspondent. Over 6,000 certificates of insurance 
have been delivered to California borrowers. 

The policy provides that upon receipt of proof of the death of any 
insured debtor of a creditor, the insurance company promises to pay 
the creditor the amount of insurance in force on the debtor at the date 
of his death to be applied by the creditor toward the discharge or the 
debtor's indebtedness to the creditor. The amount of the insurance is 
equal to the indebtedness, or $30,000, whichever is less. 

Group credit mortgage life insurance is a decreasing term insurance 
and provides protection to a mortgage borrower's family by paying off 
the mortgage up to the policy limits upon the death of the mortgagor. 
It is not permanent insurance and it has no cash surrender value or 
loan value. 

The California Attorney General ruled in 44 Ops. Atty. Gen. 55 
that the actions taken by the Metropolitan in providing group credit 



GROUP INSURANCE 11 

mortgage insurance to California residents in excess of the $10,000 
limitation imposed by California law did not violate California, law 
since the policy here in question was issued and delivered in New York 
and only the certificates of insurance were delivered in California. 
Since Insurance Code Section 10205 only prohibits the issuance or 
delivery of a policy in California in excess of $10,000 and the certifi- 
cates delivered here were not part of the policy or necessary thereto, 
their delivery in this state was not in violation of this statute ; therefore, 
it would appear that any insurer admitted in California may, in a 
group insurance contract, issued in another jurisdiction, provide cov- 
erage in excess of the California limitations to residents of California. 
For that matter, such a group policy could ignore California's regu- 
latory scheme in any number of ways in addition to the limitations on 
the amount of insurance coverage in the credit life insurance field. 

At the hearing of this committee held on November 12, 1965, a repre- 
sentative of the California Association of Life Underwriters argued 
that there were sound public policy reasons for the limitations placed 
upon the writing of group mortgage insurance. 

Mr. Burns: . . . There are three primary reasons for statu- 
tory controls on the amounts of group credit life insurance : the 
protection of life insurance companies from unwise group life in- 
surance underwriting ventures; the protection of the life insur- 
ance buying public from unwise purchases of certain forms or cer- 
tain amounts of group life insurance; and protection of the life 
insurance agency system against unfair competition from "mass 
marketing. ' ' 

In precluding the writing of group mortgage insurance, the Cal- 
ifornia Legislature has taken into account the fact that this form 
of insurance does not carry with it some of the typical guarantees 
of individual policy coverage under the insured's ownership and 
control. For example : 

The guaranteed right to continue coverage by timely payment 
of premiums. Under group credit insurance, coverage ceases if 
the debtor-creditor relationship is terminated — such as when a 
creditor sells the mortgagor's note to another creditor — and the 
law requires no guaranteed conversion privilege, as is the case 
with employee group coverage. Moreover, there are no nonforfei- 
ture rights to the insured person as are required by law under 
individual permanent forms of insurance. Loss of coverage can oc- 
cur by missing one mortgage payment. 

There is no guaranteed premium rate. The mortgagor who takes 
the coverage in good faith may, by action of others exercising de- 
liberate antiselection against the program, be forced to pay an in- 
creased premium rate for which he was not responsible. 

And, thirdly, the group policyholder (the creditor) may termi- 
nate the coverage without the consent of the insured persons, at a 
time when they may not be able to get insurance because of poor 
health. 

Arrangements for the discharge of this kind of indebtedness 
in the event of death are a primary consideration of the individ- 
ual's overall estate plan. Because of the long period of time usu- 
ally involved, factors such as the insured's age, the ages of other 
3— L-2517 



12 COMMITTEE REPORT ON FINANCE AND INSURANCE 

members of his family, and desirable provisions for the support 
of the widow and surviving children all require that the discharge 
of mortgage indebtedness be individually programmed as part of 
a personal estate plan. These factors are uniquely dependent upon 
the individual homeowner's particular situation and do not lend 
themselves to stereotyped treatment under a group insurance plan. 
In addition, in a great many instances there is a substitution of 
mortgages — and perhaps several such substitutions — in the period 
of an individual's lifetime. As you know so well, California's pop- 
ulation is mobile. Group mortgage insurance does not take into 
consideration this increasing mobility of Californians as a result 
of employment transfer, family growth, income improvement, job 
promotions, etc. Certainly this factor indicates a need for specially 
tailored, flexible life insurance to meet changing circumstances 
adequately. The mortgagor, relying on group mortgage insurance 
in lieu of individual life insurance, may have little or no conversion 
privileges upon the transfer of the mortgage. He therefore loses 
part or all of this insurance and may be uninsurable at a time when 
he is faced with the need for an even greater amount of insur- 
ance. A further danger in this kind of insurance is seen in the fact 
that the group policy may be terminated by the insurance com- 
pany without the consent of the mortgagor himself. 

As pointed out by Mr. Burns, the problem is that : 

... a blueprint has now been developed by which an insurer 
may circumvent California Insurance Code Section 10203.5 by 
claiming California group borrowers are now national groups by 
virtue of the source of the lender's money supply. By this remark- 
able logic, we are all part of one big national group, since there 
is just one, hopefully, source of money, the federal government. 

Representatives of the Metropolitan Life Insurance Company ar- 
gued that the $10,000 limitation on group mortgage life insurance con- 
tained in California law was unreasonably small and unrealistic tak- 
ing into consideration today's price levels and the size of the average 
new mortgage loans in California today. They pointed out that In- 
surance Code Section 10203.5 was last amended in 1945 to raise the 
limitation to $10,000 from the then-existing figure of $2,500 and to ex- 
pand the period of amortization of the permitted loans under this sec- 
tion from 10 years to 20 years (amended in 1947 to extend this period 
to 32 years). 

There was no evidence submitted to the committee which would lead 
to the conclusion that purchasers of this type of decreasing term credit 
insurance do not realize that it is not permanent insurance. Sales 
literature submitted to the committee and carrying the letterhead of 
the "Western Mortgage Corporation clearly states that this insurance 
applies only to the payment of the mortgage if it is less than $30,000. 
However, no specific reference is made to the fact that this is decreasing 
term insurance. It also appears likely that a purchaser of this type of 
insurance is not aware that it may be canceled at any time or that 
the premium may be raised (unlike permanent life insurance) or 
that the insurance coverage under the group policy may be terminated 



GROUP INSURANCE 13 

if the mortgage is sold to another lender or to an agency such as the 
Federal National Mortgage Association (FNMA). Although the rep- 
resentative of the insurance company here involved testified that the 
mortgagor did have a conversion right if the mortgage were sold with- 
out recourse to another lender, the price on such a policy might be sub- 
stantially higher than it would have been at an earlier date due to the 
age of the borrower-mortgagor. It should also be pointed out that le- 
gally no such conversion right is required in a credit life policy such 
as this. 

An additional important point raised at the committee hearing was 
whether this insurance agreement could even qualify under Section 
10203.5 if the amount of insurance offered was less than $10,000. Insur- 
ance Code Section 10203.5(a) (1) (A) requires that the members of the 
group "... are or become borrowers from one financial institution, 
including subsidiary or affiliated persons, under an agreement to repay 
the sum borrowed." The position of the insurance company appar- 
ently is that all persons borrowing money from its mortgage loan cor- 
respondents meet this requirement since the mortgage loan correspond- 
ents receive their money from the insurance company. This position 
seems open to question. The financial institution in this transaction 
could be considered to be the mortgage loan correspondent itself and 
not the insurance company, its source of money. The mortgage loan cor- 
respondent may not even be an affiliated person in the meaning of the 
statute even if the insurer is a financial institution. 

If this is the case, the legal group eligible for mortgage insurance 
would only be the 6,000 borrowers from the California mortgage loan 
correspondent and not all the borrowers nationwide from the 78 mort- 
gage loan correspondents located in 35 states with which the insurance 
company does business. 

However, under the Attorney General's interpretation of our group 
insurance laws, it is irrelevant whether all the borrowers from all the 
mortgage loan correspondents are a "bona fide" group since our statute 
will not apply when the policy is issued and delivered in another state. 

The insurance carrier here involved argues that if California were 
to amend its statutes to require that all group certificates delivered 
here conform to California law the group mechanism itself would be 
seriously hampered and the state would be attempting to assert its 
laws over contracts entered into elsewhere. As to the first point, we must 
point out that the group being insured in California — presently over 
6,000 insureds — is large enough to constitute a bona fide insurable 
group within itself and it would not be impracticable for the master 
policy to state different coverage limits for certificates issued in differ- 
ent states. 

In passing upon the problems raised by this one policy it must be 
remembered that there is no national insurance law governing inter- 
state sales of group or individual policies. Congress in enacting the 
McCarren Act in 1944 specifically exempted the insurance industry 
from regulation under the Interstate Commerce Clause of the federal 
Constitution. This was the wish at that time not only of Congress 
but of the insurance industry as well. It seems strange now to find a 
leading member of that industry arguing that a state should now 
exercise no control over the insurance offered to its citizens, thus ac- 



14 COMMITTEE REPORT ON FINANCE AND INSURANCE 

oepting the rights and privileges of the license to do insurance business 
in the°state and at the same time bypassing the conditions and limita- 
tions imposed by the group insurance laws of that state. 

Five states (New Jersey, Ohio, Texas, Wisconsin and Maryland) 
have already recognized the problem under discussion and are exer- 
cising either through statute or administrative ruling extraterritorial 
control over group insurance offered in these states. There has been no 
evidence submitted demonstrating an adverse effect on the availability 
of sound group life insurance coverage in those states. 

Since the question raised before the committee was primarily con- 
cerned with assuring that the $10,000 group credit life limitation in 
our statute was observed under policies issued in another state, we 
shall confine our recommendation for specific legislation to this ques- 
tion. In recommending that Section 10205 of our Insurance Code be 
amended to require that certificates of insurance providing group 
mortgage life coverage not exceed that amount specified in Section 
10203.5 (a)(3)(A) ($10,000 at present), we do not pass at this time 
on whether the present statutory limit of the amount of such insurance 
should be raised. We do, however, recommend that the Legislature in 
its 1967 General Session give consideration to the merits of raising 
this limitation to more adequately reflect the size of the average 
mortgage in today's market. 

Group Workmen's Compensation Insurance 

An additional problem area in the field of group insurance brought 
to the committee's attention during its November 12, 1965, hearing 
concerns group workmen's compensation insurance. Such insurance is 
provided for in Sections 11656.5-11656.7 of the Insurance Code. These 
sections provide as follows : 

11656.6. An insurer may issue a workmen's compensation 
policy insuring an organization or association of employers as a 
group if such organization or association complies with the follow- 
ing conditions : 

(a) Files with the commissioner or a licensed workmen's com- 
pensation rating organization designated by him : 

(1) A copy of its articles of incorporation and by-laws or its 
agreement of association and rules and regulations governing 
the conduct of its business, all certified by the custodian of the 
originals thereof ; 

(2) A statement setting forth its reasons for desiring insurance 
as a group ; 

(3) A statement certifying that at least 75 percent of its regular 
membership is engaged in a common trade or business, and an 
agreement that such percentage of membership will be maintained 
during such time as a group workmen's compensation policy issued 
to such organization or association is in force ; 

(4) An agreement that only those members who are engaged in 
a common trade or business shall be named by the organization 
or association in any statement to the commissioner, a licensed 
workmen's compensation rating organization or insurer as eligible 
for insurance as a member of the group, and an agreement that 



GROUP INSURANCE 15 

it will immediately notify its insurer if any member of such or- 
ganization fails to remain a member in good standing in accord- 
ance with the basic law, rules and regulations of such organization 
or association ; 

(5) A statement in writing undertaking to establish and main- 
tain a safety committee which by education and otherwise will 
seek to reduce the incidence and severity of accidents. 

(6) An agreement in writing duly executed guaranteeing the 
payment of the premiums of all its members while insured under 
a group policy issued to the organization or association. A copy of 
the resolution of the governing board of such organization or 
association authorizing the execution of the guarantee agreement 
shall be filed with the commissioner or a licensed workmen's 
compensation rating organization designated by him and with any 
insurer issuing a group policy. 

(b) "Common trade or business" as used in this article shall 
mean 

(1) In agricultural enterprises, operations in which the prin- 
cipal pay roll of the employer develops under any combination of 
the classifications of the Manual of Rules, Classifications and 
Basic Rates of Workmen's Compensation Insurance approved by 
the Insurance Commissioner as applicable to farms; nurserymen; 
cultivating or gardening of flowers; and classifications embracing 
such other operations as may be conducted by a nonprofit coopera- 
tive association composed of producer members and combinations 
of nonprofit cooperative agricultural marketing associations hav- 
ing a central organization composed of member associations. 

(2) In the building and construction industry, operations in the 
construction or repair of commercial or residential buildings or 
in general engineering construction in which the principal pay 
roll develops under any combination of the classifications applica- 
ble to such construction or repair as they appear in the Manual 
of Rules, Classifications and Basic Rates for Workmen's Compen- 
sation Insurance approved by the Insurance Commissioner. Com- 
mercial buildings as defined in this subsection shall mean any non- 
residential buildings. 

(3) For all other enterprises, operations in which the principal 
pay roll develops under a single manual classification. 

(c) "Principal pay roll," for the purpose of this section, means 
not less than 51 percent of the total pay roll for the preceding 
policy year or in the case of an employer who has no preceding 
full year's pay roll, not less than 51 percent of his estimated an- 
nual pay roll. 

11656.7. Each member of an organization insured under a 
group policy shall be treated as a single and separate entity as 
respects rates, classifications and rating plans. 

Two or more policies whose experience is combined for any pur- 
pose whatsoever, shall be considered group insurance and subject 
to the provisions of this article unless employers insured by such 
policies are engaged in operations having a common pay roll or 
where any rating plan or rating system and the rules applicable 
to them approved by the commissioner under the provisions of 



j(J COMMITTEE REPORT ON FINANCE AND INSURANCE 

Article 2, Chapter 3, Part 3, Division 2, require or permit the in- 
surance of more than one employer in a single policy. 

At the committee hearing representatives of the Peninsula Builders' 
Exchange, the California Electrical Contractors' Safety Association, 
Inc., and the Building Contractors' Association of California raised 
objections to subsection (a) (6) of Section 11656.6. This subsection re- 
quires an association to enter into a premium guarantee agreement 
with the insurer when the insurer has issued a group workmen's com- 
pensation policy covering the association's members. If one member of 
the association which is covered by the policy issued to the association 
defaults in the payment of the workmen's compensation premium due 
the insurer the association as a whole must pay the past premium. This 
is the only form of group insurance in which a premium guarantee is 
required by law. 

In a sample of 25 major groups insured by the state fund under 
this code section the guarantee paid by the associations amounted to 

-4,730 out of a total premium volume of these 25 groups of $39,- 
063,000. The building association representatives argued at the com- 
mittee hearing that it is the insurance company through the Califor- 
nia Inspection Rating Bureau that sets rates, that it is the responsibility 
of the insurer to make the necessary credit checks on an individual 
contractor who applies for insurance through the group as each such 
contractor must be individually written even though he is a member 
of the association, and it is the insurer who has the primary respon- 
sibility to see that premiums due it from an association member are 
promptly paid. 

From the evidence presented to the committee, it would appear that 
with many such associations little credit checking is done by the asso- 
ciation itself of any individual member. The association has relied al- 
most exclusively upon the insurer to make any necessary credit check 
prior to issuance of an insurance policy. Since any member of the 
association is eligible for such insurance upon approval of the insurer 
and an individual contractor may have been a member of the associa- 
tion for a number of years prior to applying for the insurance, it 
may not be practical for the association itself to do the necessary 
credit check. 

With respect to the payment of the premium to the insurer, again 
it would appear that the responsibility rests with the carrier since 
premiums are not paid through the association by the member, but 
are paid directly to the carrier and each insured is separately rated 
as provided for in Insurance Code Section 11656.7. 

The association is notified by the insurer when there are past due 
premiums and the individual contractor is to be dropped from cover- 
age. However, it is the carrier's decision as to when the individual 
contractor is to be canceled under the policy and at what point his 
premium has become so overdue as to warrant cancellation. During this 
period of time w T hen the premium is overdue or increasing in size, 
the carrier may take little or no action to obtain payment, but the asso- 
ciation is continuing to build its liability to the carrier by virtue of 
the premium guarantee provision contained in the agreement between 
the association and the carrier. In effect, the association has little or 



GROUP INSURANCE 17 

no control over its exposure to overdue premiums prior to the time 
a member of the association is canceled by the carrier. At that time 
it may force the member out of the association but remains liable to 
the carrier for the overdue premium the individual member has gen- 
erated. 

It must be pointed out the liability of the association extends to all 
members of the association, not just to the members who are insured 
through the association's group insurance plan. In the case of the 
Building Contractors' Association, all 1,800 members of the associa- 
tion were liable for a guarantee of $30,000 which was generated by 
one insured over a two-year period even though less than 300 members 
of the association were insured under the group policy. 

Such a premium guarantee when due an insurer is collected in two 
ways from the association. First, it may be offset against any dividend 
due the association on the policy. The amount of such dividend, if 
any, will vary from year to year depending on the experience of the 
individual members of the group. Secondly, the overdue premium may 
be collected by an assessment upon each member of the association if 
the association has no permanent fund established to pay such over- 
due premiums. 

Apparently, the collection of the premium produces no real finan- 
cial problem on the members when it is offset against the dividends 
due to members insured through the group. "Where the dividend is 
sufficient to cover any past due premium guaranteed by the association 
the association as a whole and the noninsured members of the associa- 
tion do not have to contribute to make up the money due under the 
guarantee. 

Associations argue that the existence of the premium guarantee re- 
sults in the carriers adopting a lax attitude toward individual insureds 
who may be delinquent in the payment of premiums. Since the insurer 
can always collect the delinquent premium from the association, they 
do not adequately credit check, nor do they require adequate premium 
deposits from individual members based upon a check of the individ- 
ual's past payment record and do not move to collect the past due 
premiums or cancel the insurance of the delinquent member fast enough 
to protect the association from incurring sizable financial obligations 
based upon the guarantee. 

The Conro case is a case in point. Conro was a framing contractor. 
During one year he was insured by the State Compensation Insurance 
Fund, but was not a member of the Building Contractors' Association 
of California and was, therefore, not insured through the group work- 
men's compensation program. He was subsequently canceled by the 
state fund for nonpayment of premium. The next year he joined the 
Building Contractors ' Association and applied to the state fund for in- 
surance through the group. However, the state fund was aware of Con- 
ro 's previously overdue premium which was still owed it. It agreed to 
insure Conro through the association; it requested a $700 premium 
deposit from him and worked out an arrangement with him whereby 
he would pay up his back premium and the premium due for that 
current year. During the first three months of 1962 he generated $6,600 
of premiums, none of which were paid. He was subsequently canceled 



18 COMMITTEE REPORT ON FINANCE AND INSURANCE 

by the state fund, but by this time he had generated $30,000 of unpaid 
premiums. 

There is dispute over whether the Building Contractors ' Association 
has knowledge of Conro's previous unpaid premiums and whether it 
agreed to admit him to membership with this knowledge and had later 
knowledge of the overdue premiums generated while he was a member 
of the association. A state fund representative testified that the Build- 
ing Contractors' Association had knowledge of Conro's past dealings 
with the fund and acquiesced in the state fund subsequent decision 
to insure him. This the Building Contractors' Association denies. Nev- 
ertheless, the association is liable to the state fund for Conro's delin- 
quent premium. 

Recognizing the financial exposure of an association in establishing 
a group workmen's compensation insurance program, the question re- 
mains why they establish such programs. The answer is simply because 
premiums after dividends will in most cases be less than under individ- 
ual coverage. The association providing a group workmen's compensa- 
tion plan must maintain a safety program aimed to reduce accident 
frequency and severity. The existence of such programs has had some 
effect in reducing accidents and, therefore, workmen 's compensation in- 
surance costs. In addition, there are savings in the expense portion of 
the premium dollar due to the group insurance mechanism. As one 
witness testified this savings can be substantial. 

Mr. Maxwell: . . . normally, if you handle workmen's compen- 
sation insurance and you have a small contractor with premiums 
of $3,000 or $4,000 the best he can possibly expect is an 8 to 10 
percent dividend back on his workmen's compensation as an in- 
dividual. If he is put into a group there is a possibility of re- 
covering 20 to 30 to 35 percent back, which is a substantial saving. 

Mr. Maxwell further testified that the association insurance that he 
handles, California Carpentry Contractors' Association, has had no 
credit loss in two years because they require a complete credit check 
by the insurance carrier before the insurance is written and require a 
20 percent premium deposit subject to monthly adjustments from each 
insured. The amount of the deposit varies with the volume of premium 
generated by the insured during the previous year. 

It would appear to the committee that there are definite financial 
advantages accruing to the small contractors when he has obtained 
group insurance through an association. Such a contractor gains the 
benefits of a safety program carried on by the association and his 
premium rates reflect these savings in addition to expense savings 
through the group insurance mechanism. 

However, the insurer may tend to relax credit controls unless con- 
tinually pressured by the association. Such laxity may also be shown 
in a failure to require an adequate premium deposit from a contrac- 
tor. Nevertheless, it is the primary responsibility of the association 
itself to require that the insurer establish adequate procedures to check 
credit standings and determine necessary premium deposits. In lieu of 
this, it can either perform the credit checking function itself or seek 
another insurer to underwrite the group if dissatisfied with the per- 
formance of its present insurer. 



GROUP INSURANCE 19 

But the committee does view it as inequitable that the association 
as a whole and all its members, whether insured under the group plan 
or not, are liable for any premium due the insurer from a defaulting 
member. To the extent that the dividend due the association is suffi- 
cient to satisfy any premium guarantee, all the members who are in- 
sured through the association suffer if their dividend is reduced. How- 
ever, to the extent the dividend which might be due is insufficient to 
cover the guarantee and an assessment against the entire membership 
of the association is necessary, noninsureds as well as insureds are 
liable. Since these noninsured members share no benefit, it seems in- 
appropriate to require them to share the risk of loss. 

The committee, therefore, favors amendments to Insurance Code Sec- 
tion 11656.6 to limit the liability of the association to the extent that 
the insurer may only recover as against any dividend due the associa- 
tion or the insured members of the association, but only if the insurer 
notifies the association within 60 days of any past due premium owed 
the insurer by any insured member of the association. 



TRADING STAMP ACT 



TRADING STAMP ACT 

CONCLUSIONS AND RECOMMENDATIONS 

1. The Trading Stamp Act as it is now constituted is an ineffective 
regulatory tool. The act does not provide an effective statutory mech- 
anism for the public protection of stamp holders. 

2. That a minimum capital requirement supplement the existing statu- 
tory bond requirement. 

3. That merchant associations that collectively guarantee redemption 
of stamps issued by a member of the association be excluded from 
the act if the members of the association exclusively issue and re- 
deem such stamps and if the guaranteed collective redemption is 
from stock on the shelves of any and all members of the association. 
To effect exclusion, an association would file with the Corporation 
Commissioner a statement that stamps are issued and redeemed ex- 
clusively by members of the association and a copy of an agreement 
between the members of the association setting forth their collective 
liability to redeem from their stock in trade. 

4. That licensed companies should file semi-annual reports with the 
commissioner. The commissioner should prescribe the data that will 
be presented in the semiannual report as well as the year-end report. 
The commissioner should also prescribe a uniform basis for report- 
ing outstanding stamps and the statutory bond. 

5. That companies to be licensed under the act be required to maintain 
financial responsibility which will be defined by the commissioner 
in light of requirements set forth in the act. 



(22) 



TRADING STAMP ACT 

Since the California Legislature enacted the Trading Stamp Act 
(hereafter referred to as act) which took effect in 1960, two stamp 
companies licensed under this act have become insolvent and have been 
liquidated in accordance with procedures set forth in the act. In both 
instances of liquidation, the redemption value on the outstanding 
stamps was under 33 cents on the dollar. Not all stamps were tendered, 
however, so in both instances the actual redemption value on those 
that did turn up worked out to be under 50 cents on the dollar. The 
fact that in these cases the redemption value was relatively low, raised 
a question as to the effectiveness of the act in providing protection 
for stamp holders of insolvent companies, inasmuch as the act was 
passed with the intent that it would impart to stamp holders a greater 
degree of protection than that which existed or would exist in lieu of 
the act. These low-payout cases taken together with the fact that they 
arose from involuntary liquidations should cause some concern as to 
whether stamp holders are being provided with any added protection 
whatsoever. Perhaps history would have been no different absent the 
act, and if this is correct, then from a protection standpoint the act 
is indicated to be ineffective. Nevertheless, the act probably did impart 
to stamp holders some measure of protection, but as testimony at the 
hearing indicated, certain people feel the added protection brought 
about was, and is, minimal. 

It is conceded that some, a relatively few, of our economic endeavors 
will be unsuccessful with consequent adverse results. Those economic 
entities infringing upon the public interest are regulated so that the 
adverse effect of failure will be minimized. To this extent the regulation 
is oreinted toward minimizing the effect of a given situation rather 
than guaranteeing that a thorny situation will never occur. In looking 
at an imaginary curve where at the lower end are placed companies 
not vested with public interest and at the upper end are placed com- 
panies substantially interlaced with the public interest, such as banks, 
insurance companies, and savings and loan associations, the placing of 
a stamp company on that curve depends upon factors which are not 
easily resolved into a clear cut placement decision. 

Conclusions concerning whether protection of stamp holders is 
needed by virtue of some vesting of public interest in the stamp busi- 
ness are frequently drawn from assumptions or data which indicate 
the extent to which a consumer incurs an out-of-pocket expense for the 
stamps. If the stamps are paid for, then the stamps have value to the 
consumer and the public. Public interest comes into play because the 
consumer has paid for his stamps and, therefore, it is in the public 
interest to make sure that he can redeem, fulfill his expectation, just 
as it is in the public interest to make sure that the depositor can with- 
draw his money from a bank. If the stamp did not cost the consumer 
money, then the stamp could be classified as a free gift and, therefore, 
present a lesser case for protection for the public. This question of 

(23) 



04 COMMITTEE REPORT ON FINANCE AND INSURANCE 

whether the consumer has paid for a stamp or received that stamp 

atuitously is at this time unresolved. There exists considerable con- 
troversy as to whether the merchant's, or retailer's or manufacturer's 
cost of 'procuring stamps is passed on to the consumer in the form of 
higher product prices, or whether this cost is absorbed in their profit 
and loss account as an advertising expense. "While the question of price 
shifting remains for the most part unresolved, at least not free of 
controversy, there is another approach to resolving the problem as to 
whether the consumer pays for the stamps. 

This approach would be an opportunity cost analysis. An opportu- 
nity cost analysis could hold that a consumer does pay for his stamps if 
because of the inducement provided by the stamps this consumer has 
foregone better value available at a nonstamp store. This better value 
would be evidenced by lower price, better service or better quality. 

At any rate, there is a strong case for saying that stamps cost the 
consumer some money, at least cost some consumers some amount of 
money. Where this is the case, these stamps can represent the con- 
sumers' claim to offsetting lost value — an offset to lost opportunity 
provided in the form of lower price, better service or better quality or 
to offset a flat price paid for the stamps in the form of higher product 
prices. If the consumer redeems his stamps, he hopefully receives at 
least this offset to lost value or cost incurred. In a sense this process 
of offset through a redemption of stamps is like the process of with- 
drawing money from the bank. The stamp company, like the bank, 
holds value owed to a consumer, except, of course, that the stamp 
company pays no interest on the money held for redemption. There 
are, of course, a number of other significant differences between the 
operation of a bank and a stamp company. In summation, it would 
appear that the consumer in paying for his stamps, perhaps un- 
wittingly, finds himself, at least from an expectation standpoint, in 
the same camp as a bank depositor, and as a consequence of this 
expectation and value entrusted to another, it is in the public interest 
to see that he receives something in return for his stamps commen- 
surate with any risk he has assumed. A stamp holder, however, cannot 
be said to assume that same kind of risk that the equity owner and 
lender assume, primarily because the investment objectives of the 
stamp holder with respect to stamps are relatively limited. The equity 
owner and to a lesser extent the lender are looking for profit; their 
expectation of profit correlates in a general sense with the risk they 
assume. The stamp holder's implicit expectation is to get his money 
back. Certainly this is the case where he has paid for his stamps, and 
even where his stamps cost him nothing, an unlikely situation, the 
stamp holder still cannot be summarily pushed into a buyer-beware 
posture when he accepts the stamps. 

If it is conceded that for reasons of public interest or equity there 
is to be protection for the stamp holder, the protection then can come 
from one of three directions : from management, voluntary regulation ; 
from the marketplace, informal regulation; and from government, 
formal regulation. State regulation is embodied in the aforesaid Trad- 
ing Stamp Act found in the Business and Professions Code. Section 
17773 sets forth the bonding requirements of companies licensed under 
the act. This section provides in part that for each $100,000 in gross 



TRADING STAMP ACT 25 

income from trading stamp business in California in a company's last 
fiscal year, a company's correlative bond requirement is $15,000 with 
a cutoff when the bond reaches $150,000. This basic requirement is 
modified, however, to the extent that a company's gross income from 
trading stamp business is less than $65,000 during its last fiscal year 
or where a company has not previously done business as a trading 
stamp company in California. In either of these cases, the bond re- 
quirement is $10,000. Thus, the bonding requirement ranges from 
$10,000 to $150,000 and is either related exclusively to gross income 
or to the fact that a company is doing business as a stamp company 
in California for the first time. 

In the event of the liquidation of a stamp company, the statutory 
protection afforded stamp holders is represented by the bond. The bond 
is a guaranteed residual liquid asset, but by its very nature, it bears 
no relationship to the potential claims against a company. Since there 
is no control over potential claims, outstanding stamps, against the 
bond and furthermore as gross income for a given year is not directly 
related to outstanding stamps at the end of that given year, a situation 
arises where the size of a bond is no indication of protection afforded 
stamp holders. For example, company A has a $40,000 bond and com- 
pany B has a $20,000 bond, while company A has stamps outstanding 
representing $90,000 worth of claims and company B has claims out- 
standing worth $30,000. Taking these figures by themselves and in the 
event of liquidation of both companies, the size of the bond is of no 
consequence as far as relative protection to stamp holders is concerned. 
If in this situation assets are brought into the picture, then, of course, 
these would have to be taken into account along with the bond to 
ascertain in which case the stamp holders would redeem at the higher 
payout. In view of this analysis, protection to the stamp holder would 
appear to be better afforded by having some type of liquid asset re- 
serve requirement, for example, in the form of cash or marketable 
high grade securities — similar to a reserve requirement of a bank. Such 
a requirement would be related to outstanding stamps, and while this 
requirement would not be a 100 percent reserve requirement, at least 
it would bear some better relationship to stamp liabilities and at the 
same time act as a constraint on the issuance of stamps, at least to a 
point where a company cannot ignore the effect of incurring liabili- 
ties. This type of regulation would in effect represent an assurance of 
liquidity. The cash and deposits completing this requirement would be 
unpledged — not, for example, representing security for a surety bond. 
As previously stated, another effect of such a requirement would be 
to prevent the uncontrolled buildup of stamp liabilities or, conversely, 
prevent assets from being depleted to a point where the stamp holders' 
interest in assets is seriously diluted. This type of requirement could 
be so designed that if a company's ratio of liquid assets to stamp 
liabilities fell below a certain percent that bonds could be posted to 
the effect of bringing the ratio up to the minimum standard and thus 
preventing a statutory insolvency. This ratio would also have to take 
into account merchandise held for redemption, which merchandise 
would in a sense represent a liquid asset to a stamp holder. 

Another protection mechanism would be a requirement that stamp 
companies licensed under the act maintain a minimum capital account, 



26 COMMITTEE REPORT ON FINANCE AND INSURANCE 

which would not take into account any bond posted in accordance with 
the now existing bond requirement. Such a requirement would not en- 
tail the prohibitive cost that a strict bond requirement would. There 
could also be some required correlative relationship between capital 
and outstanding stamps. A minimum capital account, however, while 
providing some assurance that assets of a stamp company can shrink 
by an amount equal to the capital before the outstanding liabilities be- 
come impaired, at least on a book value basis, does not necessarily 
assure liquidity. A company can have most of its assets tied up in 
accounts receivable, stamp inventories, and fixed assets necessary to the 
maintenance of a stamp business and still satisfy a capital require- 
ment. Nonetheless, at some point a company's erosion of liquid assets 
will be reflected in its capital account to the extent that capital has 
fallen below some minimum ratio requirement. By the time the capital 
ratio reflects this erosion, however, the company's ability to redeem 
stamps may have been significantly vitiated. Reflecting this fact, banks 
have both a reserve requirement to assure liquidity for deposits and a 
minimum capital requirement to provide a base for some erosion of 
asset value before the ability to redeem deposits becomes impaired. It 
would appear that the stamp holder is afforded better protection by a 
stamp company having both a surplus capital account and liquid assets 
backing up outstanding stamps — at least backing up some percent of 
outstanding stamps. 

In addition to the question of adequate bonding and the related 
protection afforded stamp holders, the act was scored at the hearing 
for not excluding merchant associations which distribute their own 
coupons and which coupons are redeemable only by the issuing mer- 
chant. In this connection, there exists some confusion as to whether a 
stamp company that supplies coupons to merchants and then redeems 
for them is excluded from the act. Testimony was also taken on a 
number of other issues, including improved financial reporting to the 
Corporation Commissioner, improved procedures for the handling of 
insolvent companies and control over the issuance of promotional 
stamps. 

BONDING AND CAPITAL REQUIREMENTS 

Mr. Jerald Schutzbank, the Corporation Commissioner, testified that 
the bonding requirement which exists under present statute has proved 
to be of limited value as a residual reserve for stamp holders. 

Mr. Schutzbank ; The committee has asked us whether the bond- 
ing requirements are adequate and the answer is : taken alone to- 
day, they are not. In two examples in which they have been the 
only place to look for funds to pay stamp holders, they have proven 
insufficient. We doubt the validity of using bonding alone as the 
regulatory tool. . . . Probably a more desirable approach would 
be to combine net capital requirements and bond requirements. . . . 

Assemblyman John Foran raised a question as to the rationale of 
the present system of relating bonds to gross receipts when it appeared 
that relating the bonding requirement or a bonding requirement to- 
gether with a capital requirement to the number of stamps outstanding 
provided better protection to stamp holders. His question pointed out 



TRADING STAMP ACT 27 

the fact that the size of the bond is no indication by itself of con- 
sumer protection, for under the present system, a company can incur 
liabilities, in the form of outstanding stamps, with little regard, if it 
so chooses, to the bond which the company has pledged. 

Mr. Schutzbank : I think you are quite right, Mr. Foran. I 
don 't know what the reasons were ; however, one of them might 
have been ... an inconsistency among the various companies as to 
how to determine the outstanding liability. This is one of the 
major problems in the industry from our standpoint, at least 
. . . whether you use 100 percent of the outstanding liability or 
whether you make an appropriate reduction for the stamps which 
you know are not going to be redeemed because there is a certain 
loss through destruction or because people will not present them. 
... it is necessary for there to be some uniform gauge as to 
whether you use 95, 80, 70 or some other figure [representing the 
percentage of the total to be considered as certain to be redeemed]. 

Assemblyman Jack Casey pursued this matter further by raising a 
question as to problems that might be involved in reporting stamp sales 
and stamp redemptions to the commissioner so that his department 
could determine approximate outstanding liability on stamps and thus 
be in a position to measure that liability against a bond or bond plus 
the capital of a company. 

Mr. Schutzbank : We don 't think it is a substantial problem. We 
think it is one of the things which we should be receiving under a 
proper regulatory statute. 

A representative of Sperry and Hutchinson Company, Mr. Bur- 
leigh Pattee, challenged certain testimony concerning inadequacy of 
the statutory bond requirement. Mr. Pattee indicated that the bond re- 
quirement had been increased in 1964, and that the present require- 
ment was one of the highest under any licensing provision in the Cali- 
fornia codes and higher than similar bond requirements applicable to 
stamp companies in other states. He felt the present bond requirement 
was adequate in screening out financially unstable trading stamp com- 
panies, adding that bonding companies themselves screen those busi- 
nesses for which a bond is issued. He pointed out that there can be no 
guarantee of full liquidating value unless companies were required to 
post bond for 100 percent of the value of all stamps issued and out- 
standing, but that this type of requirement would impose a prohibitive 
cost on companies. It was further submitted that even a 100 percent 
bonding requirement, that is to say, relating the bonds to outstanding 
stamps, would not guarantee 100 percent payout in the event of liqui- 
dation, since liquidation expenses themselves would erode the amount 
available for disbursement. Mr. Pattee 's emphasis on screening out 
financially unstable companies implies that this is more or less the gen- 
eral purpose of a bond requirement — to act as a screening device first 
and secondarily to provide protection to stamp holders. The bond re- 
quirement taken in this context would be more on the order of a licens- 
ing fee or other licensing requirement rather than a mechanism for 
providing a guaranteed residual asset. 

4— L-2517 



28 COMMITTEE REPORT ON FINANCE AND INSURANCE 

As an alternative to a 100 percent bond requirement, Mr. Pattee in- 
dicated that the posting of a bond providing limited protection to 
stamp holders was the more reasonable approach. Assemblyman John 
Foran questioned Mr. Pattee about another alternative — a capital re- 
quirement. Specifically, Mr. Foran was interested in Mr. Pattee 's views 
on a capital requirement as a supplement to the existing bond require- 
ment or as a device to supersede such bond requirement. 

Mr. Pattee: I can't speak on behalf of my company because I 
haven't discussed that matter with them, but I can see nothing 
wrong with such a provision at the present time as long as we have 
exact standards. (Answer appeared to be with respect to a mini- 
mum capital requirement and not a capital correlation with out- 
standing stamps.) 

Concerning standards, Mr. Pattee felt that if any changes came 
about, that definite prescribed standards should be established by the 
Legislature as against being established by a state agency under au- 
thority granted by the Legislature. At this point Assemblyman New- 
ton Russell raised a question concerning the effect of statutory require- 
ments on smaller stamp companies and on competition within the trad- 
ing stamp industry. 

Mr. Pattee: Our company is a wealthy company, able to meet 
its redemption requirements, and I don't think we would be one 
of the ones under attack, if that is what you mean. But we think 
it is an unhealthy situation where you make it very difficult for 
the small companies in the state to operate. We think it is better 
to have competition — better for the industry as a whole. 

Assemblyman Russell: I am talking about the bonding and the 
reserves. . . . 

Mr. Pattee : Well, I made my statement that we are opposed to 
increasing the bonding provisions. 

Assemblyman Russell: But [whom] do you think it would fall 
more heavily upon ? 

Mr. Pattee : I think it would fall more heavily upon the smaller 
companies, because I think that a company that is as [wealthy as 
the company I represent] has no difficulty in getting bonds. 

Assemblyman Russell : Then would you say that based upon this 
and carried to a logical conclusion, that this type of legislation, as 
you understand it, would tend to eliminate competition ? 

Mr. Pattee : I think it would have a tendency to eliminate com- 
petition. 

Indicated in the foregoing discussion is the view that the bonding 
requirement could become a burden on some companies and force them 
to withdraw from competition. At the same time, these companies by 
virtue of their being flushed out of the industry would not necessarily 
take with them all of the unsound, mismanaged companies. Looking at 
the subject of prohibitive bonding requirements from another view- 
point, one might say, based on certain foregoing testimony, that the 



TRADING STAMP ACT 29 

price to be paid for a high degree of solvency is too high, and even 
with that price paid there is no certainy of solvency. 

FINANCIAL REPORTS FILED WITH THE COMMISSIONER 

Section 1.7764 provides in part that each licensed company will pro- 
vide the Corporation Commissioner with a short form balance sheet as 
of the licensed company's most recent fiscal year. Aside from this re- 
port, no other financial data are filed with the commissioner. Testimony 
regarding the short form balance sheet centered on the usefulness of 
the data contained in the report for use in the commissioner's supervi- 
sion of licensed stamp companies. Mr. Schutzbank referred to the short 
form balance sheet as being of minimal use as a regulatory tool. He 
pointed out that from some of the statements he receives, it is not clear 
whether the stated capital account includes the bond or whether the 
bond is not taken into account in the report. He added that there is 
no consistency in the way the licensed companies handle this matter. 
He contrasted this regulatory tool, the short form balance sheet, with 
some of the regulatory tools at his disposal in the regulation of in- 
dustrial loan companies. He noted that in his capacity as commissioner 
he has power to pass upon the business and personal reputation of the 
individuals that would be operating a new industrial loan company. 
If their reputations indicate that they are not capable of running an 
industrial loan company, the license may be refused on this basis alone. 
No such authority vests in the commissioner in his licensing of stamp 
companies. With respect to industrial loan companies, there is also a 
minimum capital requirement — specifically, a capital stock requirement 
and a required paid-in-surplus or reserve equal to 50 percent of the re- 
quired minimum capital stock requirement, and both requirements must 
be met before a company can commence operation or open a branch 
office. The capital stock requirement of an industrial loan company is 
based on the number of industrial loan business offices of that company, 
where those offices are located and the date the industrial loan com- 
pany commenced business in California. While the foregoing require- 
ments are not presented in more specific detail, they still suffice as an 
indication of the fact that such requirements give rise to authority 
that is broader than the commissioner's vested authority with respect 
to stamp companies. As a side note, state requirements concerning bank 
capital are oriented toward branches and population rather than de- 
posits. Deposits are, however, used as the base measurement for re- 
quired reserves, and in light of this fact, it is apparent that bank regu- 
lation does take into account certain bank liabilities. Returning to the 
commissioner's position on the short form balance sheet, the gist of his 
discussion was that this financial statement was of minimal value to 
his department. For comparative purposes Section 1930 of the Finan- 
cial Code concerning the filing of financial reports by banks is here set 
forth : 

Every bank and every trust company shall make and file with 
the superintendent whenever required by him a report in such 
form as he may prescribe, verified by two of its principal officers, 
showing its financial condition and such other information as the 
superintendent may require at the close of business on any past 



30 COMMITTEE REPORT ON FINANCE AND INSURANCE 

day designated by him. If such bank or trust company regularly 
keeps its books on an accrual basis the report may be prepared on 
an accrual basis. The verification shall state that each of the officers 
making it has a personal knowledge of the matters in the report 
and that each of them believes that each statement in the report 
is true. 

Section 1931 of the Financial Code reads as follows : 

The superintendent shall call for the report specified in Section 
1930 from all banks and trust companies at least three times each 
year, and for at least three times each year shall designate as the 
day as of which such reports shall be made the day designated 
by the Comptroller of the Currency for reports from national 
banking associations. 

Section 1934 of the Financial Code is also of comparative interest. 

The superintendent may at any time require any bank or trust 
company to make and file with him a special report furnishing 
such information as he may specify when necessary to inform him 
fully of the actual financial condition and affairs of the bank or 
trust company. 

A stamp company is, of course, not strictly analogous to a bank, 
and, therefore, application of bank requirements to stamp companies 
is out of order without some further analysis of the problems regula- 
tion seeks to alleviate for both types of industires. One thing that may 
be gathered from a look at some of the bank reporting requirements is 
that these requirements recognize the limitation of a year-end balance 
sheet. The balance sheet is basically a picture of a company at a given 
point in time. The figures in the balance sheet necessarily reflect pe- 
culiarities of a given company, such as seasonality and accounting pro- 
cedures for subsidiaries or correspondents and, therefore, may not give 
a worthwhile indication of the position of a company. 

In his discussion of financial reports, Mr. Schutzbank testified that 
other regulatory laws provided his department with relatively more 
control over accounting procedures and reporting. In this statement, 
the commissioner, for example, could have been referring to regula- 
tions concerning credit unions. In this connection, Section 15803 of 
the Financial Code, and which section follows that setting forth the 
power of the commissioner to receive an annual report, provides the 
commissioner with relatively broad power with respect to receiving 
financial data. That section reads as follows : 

Every credit union shall make other special reports to the com- 
missioner as the commissioner may from time to time require. 
Such reports shall be in the form and filed at such date as pre- 
scribed by the commissioner and shall, if required by him, be veri- 
fied in such manner as he prescribes. 

( Mr. Schutzbank was questioned as to whether his department could 
interpret the present statute as authorizing periodic audits. Mr. Schutz- 
bank indicated that an interpretation of this nature may or may not 
be justified and that such an interpretation, at any rate, would rep- 



TRADING STAMP ACT 31 

resent a very broad perspective of what the statute says. Even assum- 
ing such a broad interpretation had substance, the commissioner noted 
that his department is not budgeted to make such periodic audits. He 
then indicated that if periodic audits were statutorily prescribed, then 
the cost of such audits should be borne by the licensed companies. 

Mr. Schutzbank : ... in addition to which we have no provision 
for the charge for those audits which means that we have a sub- 
stantial budget problem. One of the things which is inherent in any 
traditionally regulatory statute is that the regulatory statute is 
self-sustaining, and we would suggest that any regulation include 
that. . . . That is not possible as we read the statute today, if we 
were to find that we had the authority to do these additional au- 
dits. 

Mr. Herbert Wenig, Assistant Attorney General, indicated that his 
office felt the Corporation Commissioner should have the authority to 
receive periodic financial reports. Within this context, Mr. Burleigh 
Pattee, however, testified that the licensed company he represented felt 
that there was no necessity for giving the commissioner authority to 
undertake periodic audits. The reason submitted for such a position 
was that periodic audits would result in a substantial increase in ad- 
ministrative expenses both to the state and the companies so audited. 
While on the subject of audits and interim reports, Mr. Pattee added 
that his organization felt the present annual short form balance sheet 
sufficed as far as the commissioner's requirements were concrened. As- 
semblyman Jack Casey then questioned Mr. Pattee concerning the 
added burden that would be imposed on the licensed stamp companies 
if they were required to submit quarterly reports to the commissioner 
(reports in this context meant statements which would include mean- 
ingful information on outstanding stamps). 

Mr. Pattee: Well, that involves a very serious problem, Mr. 
Casey, to my company for this reason : You have your sales in Cal- 
ifornia; you have thousands and thousands of transients who 
come here in the summer and bring their books with them and they 
are redeemed here. . . . Some of the California stamps are re- 
deemed in other states as well. The administrative burden of going 
over the literally millions of books of this company to determine 
which California stamps have been redeemed is almost insurmount- 
able. 

Mr. Casey: I mean just the reporting of the stamps that you 
have sold in California and redeemed. In regard to your company, 
there probably would ... be too much difficulty, but what you 
would do is to get to these smaller companies that . . . operate 
solely within the state. 

Mr. Pattee : ... it wouldn 't be very meaningful where my com- 
pany is concerned . . . because of the large visiting transient peo- 
ple who come to California, there are greater redemptions here 
than there are sales, so we have a negative figure each time. 

Mr. Casey: [We would not be too much concerned with your 
company] but we [would] be getting [information on] these other 
companies that are solely California operating. 



32 COMMITTEE REPORT ON FINANCE AND INSURANCE 

Mr. Pattee : Well, I will certainly take it up with [my company] 
and see if there is any reason they wouldn 't object to such a pro- 
vision. . . . 

COMPANIES INCLUDED AND EXCLUDED FROM THE ACT 

Testimony was taken at the hearing concerning the extension of the 
definition of trading stamps as contained in the act. As the act now 
reads, it appears that merchant associations who issue and redeem their 
own stamps are included. There is confusion, however, as to whether 
a stamp company which supplies stamps to and redeems stamps for 
merchants is included under existing statute. Gift Stars, Inc., is one 
such company. 

Apparently Gift Stars, Inc., forms contracts with various manufac- 
turers and packers, most of whom are large companies and advertise 
nationally. Gift Stars by virtue of the contract authorizes the other 
party to use the mark ' ' Gift Stars ' ' on stamps, and these stamps may 
be obtained by the other contracting party from Gift Stars or from 
a printer selected by the other party. When the stamps are obtained 
from Gift Star, the other party reimburses Gift Stars for the cost of 
paper and cost of printing. No other payment is indicated to be made 
at this time. Kegardless of the means by which the other party obtains 
stamps with a Gift Stars mark, such stamps must be capable of being 
identified by an Orth-Scanner, an electronic identification device, used 
by Gift Stars, since it is by this device that Gift Stars is able to deter- 
mine which contracting manufacturer or packer issued the stamps 
which have been returned to Gift Stars. When the manufacturer or 
packer is singled out, it is billed for the stamps redeemed, that is, the 
redemption value plus profit of those stamps redeemed. Concerning 
redemption, both Gift Stars and its parties to contract make available 
to the stamp collector a catalog indicating certain gifts that may be 
obtained with such stamps as well as a description of the redemption 
process. The reason for central redemption, at a Gift Stars center, 
rather than at the issuing manufacturers' or packers' place of business 
is so that stamp holders can collect Gift Stars' stamps issued by var- 
ious manufacturers and packers and present them collectively on a 
particular gift noted in the catalog. 

Some sections germane to the issue of exclusion are here set forth: 

Section 17750. "Trading stamp" means any stamp or similar 
device issued in connection with the retail sale of merchandise 
or service, as a cash discount or for any other marketing purpose, 
which entitles the rightful holder, on its due presentation for re- 
demption, to receive merchandise, service or cash. 

Section 17750.1. "Trading stamp" also means any stamp or 
similar device issued as a gift or as a consideration in any trans- 
action other than in connection with the retail sale of merchan- 
dise or service, by a trading stamp company which also issues 
such devices in connection with the retail sale of merchandise or 
service, as a cash discount or for any other marketing purpose, 
and which may be redeemed by the rightful holder on the same 
basis as, or interchangeably with, any trading stamp issued as 
described in Section 17750. 






TRADING STAMP ACT 33 

Section 17751. " Trading stamp" does not include any redeem- 
able device used by the manufacturer or packer of an article, in 
advertising or selling it, or any redeemable device issued and 
redeemed by a newspaper, magazine, or other publication. 

Section 17752. "Trading stamp" does not include any coupon, 
caused to be prepared by the merchant using the same and dis- 
tributed by him to his customers, which coupon, ticket, certificate, 
card or other similar device is redeemable only by such mer- 
chant for or in connection with the purchase of specific articles 
of merchandise carried in his stock. 

Section 17753. The Legislature finds and declares that the de- 
vices described in Sections 17751 and 17752 are classes of articles 
that are not employed in connection with practices which must 
be regulated as provided in this chapter to protect the people of 
California against improper activities of irresponsible trading 
stamp companies. 

In a letter opinion to the Corporation Commissioner concerning 
stamp companies, the Attorney General held that Gift Stars, Inc., 
is not excluded from the act. Parts of that opinion are here set forth : 

Section 17751, which excludes redeemable devices used by a 
manufacturer or packer, was designed to differentiate between 
concerns issuing their own trading stamps and those which use 
trading stamp companies, . . . Evidently the Legislature did 
not want to regulate manufacturers and packers which create and 
issue redeemable devices. Gift Stars, Inc., however, is not a manu- 
facturer but a separate company which furnishes and redeems 
coupons for the manufacturer. Indeed, there is no clause in the 
agreement between Gift Stars and the manufacturer which 
makes a manufacturer liable for the redemption of stamps. Since a 
manufacturer is not liable, it is arguable that the manufacturer 
is merely the agent of Gift Stars. The plan is promoted and 
initiated by Gift Stars, Inc., and Gift Stars, Inc., is the prin- 
cipal party in the development of this plan. 

The apparent purpose of the Legislature was to distinguish be- 
tween concerns which issue their own stamps and those which use 
stamps of a trading stamp company. This distinction was made so 
that the financial responsibility of trading stamp companies could 
be assured by the licensing and bonding requirements of the Trad- 
ing Stamp Law. 

Gift Stars, Inc., is in the same position as any trading stamp 
company, and its financial responsibility should be assured. Thus, 
a reasonable result, under the circumstances, is to treat Gift Stars, 
Inc., in the same manner as any other company which is not 
a manufacturer and which issues and redeems stamps. 

In light of this opinion, the Corporation Commissioner indicated 
that his department was not seeking statutory enlargement of the defi- 
nition of trading stamps. Thus, it can be inferred that the commis- 
sioner thought such "stamp suppliers" should be included in the 
act. 



34 COMMITTEE REPORT ON FINANCE AND INSURANCE 

A different argument to the inclusion of "stamp suppliers" was pre- 
sented by Mr. Robert Hays, who represented Gift Stars, Inc. He 
pointed out that Section 17751 excludes from the act a redeemable 
device used by the manufacturer or packer in advertising or selling 
an article. With this in mind, he added that the "stamp supplier" acts 
as an agent of the manufacturer or packer. With respect to the Attorney 
General's opinion on the matter of "stamp suppliers," Mr. Hays in- 
dicated that his research on this subject led him to reach an opposite 
conclusion. In support of his position, Mr. Hays pointed out significant 
differences between a "stamp supplier" and a nonsupplier type com- 
pany regulated under the act before the Attorney General's opinion. 
The thrust of his exposition was that the "stamp supplier "-merchant 
relationship was an agency relationship, with the supplier, therefore, 
being merely a longer arm of the merchant. Implied in this argument 
is the assumption that stamp holders can ultimately look to the 
merchant for redemption. In this respect, Assemblyman Anthony 
Beilenson questioned Mr. Hays as to the exact nature of the relation- 
ship that exists between Gift Stars and its customers. 

Assemblyman Beilenson : The manufacturer is not liable for the 
redemption, though, is he? Doesn't the public have to look to the 
stamp supplier ? 

Mr. Hays : No, sir. As I have said, these stamps, ... on their 
face will read that . . . legally the manufacturer [is] liable any- 
way. . . . Well, . . . the point is that it is now expressed on 
these [stamps] that it is the responsibility of the manufacturer to 
redeem if this is not done by [my company] . 

Assemblyman Beilenson: According to the Attorney General, 
there is no clause in the agreement . . . which makes the manu- 
facturer liable for the redemption of stamps ; therefore, it is argu- 
able that the manufacturer is not the principal of [your company] . 

Mr. Hayes : ... it is inconceivable to us how a manufacturer can 
cause the products to be sold bearing these representations that 
upon the [presentation] of these [stamps] certain gifts will be ob- 
tained and then avoid liability. 

Assemblyman Beilenson : If [your company] weren't there, went 
out of business or something, then each of these manufacturers 
would have to supply these little gifts ? 

Mr. Hays : It is our belief that this is the clear-cut responsibility 
of the manufacturer, even under the ordinary principles of law, 
but the company is now making that relationship [evident in] 
its contracts with the manufacturer. 

Comments were also made by Mr. Hays with respect to administra- 
tive problems which might arise if his company were regulated by 
the act. 

Mr. Hays: You run into a tremendous administrative problem 
here if regulation is attempted of this type of operation. We heard 
a lot this morning about the problem that exists even in the 
typical case, [but when my company] gives these manufacturers 
the right to print these [stamps] themselves, if they don't want 



TRADING STAMP ACT 35 

to order them, and since [my company] has an obligation only to 
redeem when these are presented, [the company] does not sell the 
stamps to these merchants or to the public, but only furnishes them 
to the manufacturer. [My company] is not in a position to know 
how many of these stamps have been issued until such time as they 
are actually presented for redemption, and for that reason, it 
would be impossible for a company operating in this manner to 
say, "Well, how many stamps have we got outstanding for which 
we are responsible?" Only the manufacturers know that and the 
manufacturers are exempt under the statute. [And] the manufac- 
turer in each instance is still holding these funds until these 
[stamps] are presented for redemption. 

Testimony on the definition of trading stamps was heard concerning 
merchant associations which print, distribute and redeem their stamps 
collectively. These merchant trading stamp associations are now in- 
cluded under the act. A representative of such an association felt that 
these types of organizations should register with the State of Cali- 
fornia, as nonprofit stamp associations as such and should, by virtue 
of this fact, be excluded from the requirements of the act. The Corpora- 
tion Commissioner, however, indicated that these associations should 
not escape regulation simply because they operate on a nonprofit 
basis. He pointed out that such associations issue stamps and are re- 
sponsible for the redemption of these stamps, so that if an association's 
reserves were inadequate for a given liability exposure, the problem 
of redemption could still arise. 

The commissioner, nonetheless, added under further questioning that 
if the aggregate capital, that is to say, the combined capital of all the 
merchants belonging to an association, stood behind the redemption 
of a stamp or stamps issued by one member of the association, then the 
potential problem of nonredemption is considerably minimized. 
Thus, according to the commissioner, these associations that stand 
behind stamps issued by their members present less of a problem than 
do the licensed companies. This lesser problem comes about not by the 
fact that these associations are nonprofit but rather arises from the 
fact that these associations for the most part have sufficient capital 
to assure redemption of their stamps. Assemblyman Newton Russell 
questioned the commissioner concerning the exemption of such asso- 
ciations from the act. 

Assemblyman Russell: ... it would be all right to exclude or 
minimize regulations in regard to this type, Mr. Schutzbank ? 

Mr. Schutzbank : No. . . . you still have to have sufficient regula- 
tions to say that those businesses in total do have enough to back 
up the redemption liability. 

Assemblyman John Foran questioned Mr. Schutzbank concerning the 
exclusion of certain associations which do stand behind the redemption 
of a stamp or stamps issued by a member of that association. 

Mr. Schutzbank: I think, for example, if there were an exclu- 
sion which said that whenever there was an association of mer- 
chants, all of them issue stamps and all of them mutually redeemed 
and all of them have a joint liability for the redemption of the 



3fi COMMITTEE REPORT ON FINANCE AND INSURANCE 

stamps, and if they are not redeemable by any body other than 
those who issue and are not issued by any one other than those 
who redeem, that I wouldn't have any great hesitation in exempt- 
ing that group. The main reason for this is the joint liability. 

PROCEDURES FOR HANDLING INSOLVENT COMPANIES 

Testimony was heard on the statutory liquidation procedures that 
were followed in two recent liquidations and which procedures entailed 
considerable administrative expense — at least relative to the funds 
available for claims. The commissioner was questioned as to the organi- 
zation of his department to undertake liquidation of licensed stamp 
companies. Mr. Schutzbank indicated that his department was not or- 
ganized to handle the redemption of a large number of stamps. He 
pointed out that a good part of liquidation expense is attributable 
to the processing of stamps, and he further indicated that this ex- 
pense of processing stamps also reflects the slow disposition of liqui- 
dation cases attributable to procedures set forth in statutes. Assistant 
Attorney General Herbert Wenig, presented testimony applicable to 
the procedures under question. 

Mr. Wenig: Now if a trading stamp company in a prior three- 
month period has not redeemed stamps, a person or persons may 
file a complaint with the commissioner. A notice is then served on 
the company, asking the company to redeem those . . . particular 
stamps represented by the complaint within 10 days. Now, pre- 
sumably at this point the company could prevent further investi- 
gation or involvement by merely redeeming those stamps repre- 
sented by that complaint. If the trading stamp company . . . failed, 
however, to redeem within 10 days, . . . the commissioner must 
publish a notice of the fact in three newspapers, advising that ad- 
ditional claims may be filed and this notice must be published over 
a period of three months. Then after completion of publication, the 
commissioner, within 30 days, must hold a hearing to determine 
that the company has failed to redeem its stamps. This hearing 
cannot be held until 20 days have elapsed from the date the com- 
pany is notified of the hearing. Then, at the hearing the company 
may pay the claims which have been presented to the commissioner. 
If the company does not pay, then the commissioner within 10 
days after the failure to comply with [his] demand . . . files an 
action against the trading stamp company and its surety. 

Now, under [this procedure] this represents an absolute mini- 
mum of 130 days from the date of the filing of the first complaint, 
and it is possible within the time allowed by the statute for 190 
or more days to elapse before even the lawsuit is brought. 

Mr. Wenig then proceeded to discuss a remedy for this lengthy statu- 
tory redemption process. His proposal was aimed at preventing insol- 
vency rather than at some shortening of the commissioner 's proceedings 
applicable to insolvent companies. 

Mr. Wenig : Because the gathering of the claims represents great 
time and effort, because approving and paying claims is [a] dis- 
proportionately [large expense], because many stamp holders, 



TRADING STAMP ACT 37 

though disappointed, do not file claims and because the bond will 
pay only a small percentage of claims, the approach to protecting 
stamp holders should be from an entirely different direction. It 
should be toward assuring at the outset that a company possesses 
adequate capital and reserves for its operation and that reserves 
will be commensurate with redemption liability. Because of wide 
spread public interest and because homemakers are unable to spend 
time in investigating and checking various companies, the State 
should have some means of assuring trading stamp customers that 
they are being dealt with fairly and equitably. 

Mr. Wenig added that once the commissioner went through the 
aforesaid liquidation procedures, he might still have to go through 
a court trial and an appeal before he could reach the assets of a non- 
redeeming company. In response to a question about notifying mer- 
chants to cease issuing stamps of a stamp company that has not re- 
deemed, Mr. Wenig had this to say : 

Mr. Wenig: Well, presumably you would have this time lag of 
the 10 days and then the three-months publication notice and then 
another possible 30 days before anyone could undertake to notify 
a retailer that he shouldn't continue to use the stamps. 

The commissioner commented briefly on the possible granting of au- 
thority for him to issue cease-and-desist orders. He merely indicated 
that the question of issuing such orders to prevent unsound practices 
is akin to the general question of strengthening the Trading Stamp 
Act. Mr. Burleigh Pattee, however, speaking for the company he repre- 
sented took a position against extension of the commissioner's author- 
ity so as to permit issuance of cease and desist orders to prevent un- 
sound business practices. 

Mr. Pattee : Such power on the part of state officers to issue 
cease-and-desist orders to prevent undefined, unsound practices is 
unprecedented. ... in the case of a public utility, a supervisory 
commission is authorized to issue cease-and-desist orders against 
a few specified and clearly defined unlawful practices. However, 
private businesses are generally subject to injunctions concerning 
the conduct of their business only upon application to a court. 
In such circumstances, the court makes an appropriate order pur- 
suant to generally accepted legal standards. 

PROMOTIONAL STAMPS 

The use of promotional stamps as a competitive device to attract 
new business can in certain instances weaken a company's ability to 
redeem stamps. Since promotional stamps represent a gift by the stamp 
company, when these stamps are presented for redemption the assets 
available for such redemption are taken from net capital or assets 
held to redeem nonpromotional stamps issued and outstanding. If the 
company issuing promotional stamps has just begun business, capital 
would represent the principal source of funds for the redemption of 
such stamps. If the company had been doing business for some period 
of time, then the funds used to redeem such stamps might be traced 
to a source other than capital. Thus, if a company does not practice 



38 COMMITTEE REPORT ON FINANCE AND INSURANCE 

some degree of restraint commensurate with its financial ability to re- 
deem gratuitously issued stamps, the issuance of such stamps could 
cause a real solvency problem. 

The Corporation Commissioner indicated that promotional stamps 
by themselves present no real problem for his department. "When pro- 
motional stamps, however, are issued beyond that amount which the 
reserves of the given company will support, then the commissioner 
pointed out that a problem does arise with respect to the security af- 
forded the stamp holders of that given company. 

Mr. Schutzbank: We think that this is one of any number of 
perfectly legitimate methods which free enterprise anticipates in 
the operation of a company. On the other hand, there must be 
control only in the sense that the issuance of promotional stamps 
does not undermine the entire structure of the company; so if a 
company which has a capital of one million dollars would care to 
issue promotional stamps of one-half million dollars, so they still 
have plenty of available funds and assets to meet the redemption 
of those stamps when they come in, we see no objection [to this 
practice]. So that the problem of the stamps is solved when you 
talk in terms of sufficient capital, sufficient bonding requirements, 
sufficient accounting requirements, and sufficient control over the 
definition of redemption liability. 

Mr. Burleigh Pattee argued that any interference with a company's 
right to issue promotional stamps would be illegal as that interference 
would infringe upon the right of a business to establish its own prices. 
An exchange took place between Assemblyman Beilenson and Mr. Pat- 
tee over the question of whether restrictions on the issuance of promo- 
tional stamps thwarted free trade. 

Assemblyman Beilenson: What would be illegal about that? 

Mr. Pattee : This is a price fixing. Are you talking of the ques- 
tion of prohibiting a man to set his own price on his stamps? 

Assemblyman Beilenson : We are talking about the giving out of 
free stamps. 

Mr. Pattee : Free stamps, I say that, in effect, is legislation which 
sets the price of the stamps. 

The discussion of promotional stamps also focused on the distinction 
between a gift per se and a piece of paper which represents a claim for 
a gift. The latter would include a promotional stamp. Where promo- 
tional stamps are issued, stamp holders must look to the company for 
value. Based on this fact, it was argued that a stamp company might 
overemphasize business development simply because of the fact that no 
account need be made for such stamps until some time beyond the date 
of issuing stamps. With the case of a gift that has value upon issu- 
ance, this type of promotional device would appear to have a built in 
restraint, at least more so relative to any restraint that may exist in the 
issuance of promotional stamps. 



TRADING STAMP ACT 39 

SUBSEQUENT DEVELOPMENTS 

Thrifty Green Stamps, Inc., a licensed California stamp company 
with a maximum $150,000 bond, has ceased to redeem its outstanding 
stamps. In June 1966, rumors apparently began circulating that this 
company would be unable to redeem its stamps. These rumors led to 
subsequent runs on company redemption centers, and, eventually, the 
State Board of Equalization filed against the company a sales and use 
tax lien of $22,894 and attached the company's bank account. The com- 
pany's inability to redeem stamps reflects these factors along with an 
undercapitalized financial position. 

As of December 1966, the company had an estimated $431,000 of out- 
standing stamps indicated to be stated on a 70 percent reserve basis. 
Against this claim, there is the $150,000 bond and whatever amount 
these creditors can obtain on their proration share of other assets 
available for all unsecured creditors. It appears, however, that the bond 
will represent the principal asset available for stamp holder claims; 
thus, the indicated redemption value for these claims is 35 cents on the 
dollar. 

On April 30, 1966, while licensed and issuing and redeeming stamps, 
this company was indicated to have liquid assets in the form of cash 
and government securities of $1,233.39. Merchandise inventory, which 
is assumed to be exclusively available for the redemption of outstand- 
ing stamps, was stated at $325,073.33. On this same date, the company 
had outstanding stamps stated on a 70 percent reserve basis of $631,- 
562.81. The company had a deficit capital account (capital stock plus 
surplus) of $238,324.38. For the four-month period ending April 30, 
1966, the company had stamp sales of $799,738.96. 

As an operating concern and on the basis of the figures presented, the 
company, while licensed, was, in April 1966, indicated to be signifi- 
cantly undercapitalized. 



BROADENED LENDING AUTHORITY FOR 
SAVINGS AND LOAN ASSOCIATIONS 



BROADENED LENDING AUTHORITY FOR 
SAVINGS AND LOAN ASSOCIATIONS 

CONCLUSION 

While there may be a good case for broadening the lending author- 
ity of savings and loan associations, the committee is not prepared at 
this time to make a recommendation. On this subject there is need for 
more analysis and information concerning the effect upon the competi- 
tive structure of the consumer loan industry and the real estate market 
were savings and loan associations allowed to broaden their lending 
authority. 



(42) 



DEVELOPMENT OF LENDING POLICY 

The early American savings and loan associations (savings and loan 
associations hereafter referred to as SLA) were cooperative building 
societies patterned after English building societies. With the advent of 
the industrial revolution, urban migration increased and, in turn, 
strained the urban housing facilities then available. During this period 
of history, a sophisticated mortgage loan market had not yet developed 
to handle the financial requirements of low-paid workers, and tenancy, 
therefore, was the principal means of urban shelter for these workers. 
From this background, cooperative building societies developed as so- 
cial ventures aimed at providing a mechanism through which low-paid 
workers could finance homeownership. 

In America, SLA over a period of time gradually changed their finan- 
cial programs and form of business and eventually assumed the char- 
acter of today's mutual companies and stock companies. Among the 
many changes which occurred during this evolution were: (1) SLA ac- 
ceptance of savers who had no intention of buying a home ; (2) continu- 
ity of existence — in the early cooperative, the organization terminated 
when all cooperative members had purchased homes and had paid up 
their shares; and (3) incorporation under state laws. 

SLA have always specialized in home mortgage loans, which special- 
ization is now mandatory owing to restrictive statutes enacted at both 
the federal and state levels. This policy of restricting the allocation of 
SLA assets, rather than resorting to free market allocation, developed 
from the following tenets and was shaped by the following historical 
facts : 

(1) Specialized lending is traditionally what the SLA have always 
done, and, therefore, SLA should restrict themselves to familiar mar- 
kets. 

(2) The construction industry and homeowners' organizations lob- 
bied effectively for a specialized homeowner credit system and lobbied 
effectively against measures which might stem the flow of mortgage 
credit. 

(3) The health of the construction industry is considered vital to 
the well-being of the economy, and, therefore, such industry should have 
priority access to savings as compared with other industrial sectors of 
the economy. 

(4) Public policy has been to stimulate homeownership, since such 
ownership is held to create better citizenship, family stability, and a 
better environment for the future generation. In each of these in- 
stances, homeownership is viewed asa" socially desirable investment. ' ' 

(5) A ''specialized financial institution philosophy" of the 1930 's 
underlies much of the present restrictive lending legislation. Adher- 
ents to this philosophy felt that (a) competition among savings insti- 
tutions had to be restricted in order to save man from himself, i.e., 
institutions in direct competition would push up deposit rates and reach 
out for inferior or marginal loans, both of these actions being to the 

(43) 



44 COMMITTEE REPORT ON FINANCE AND INSURANCE 

detriment of the stability of the overall economy; and that (b) liabili- 
ties should be matched with liquidity requirements, i.e., liquidity re- 
quirements of SLA deposits are better fitted, as compared with bank 
deposits, for long-term mortgage investment. 

In order to effectuate a specialized financial institution, SLA were 
given certain statutory competitive advantages over banks so that the 
SLA might effectively compete for funds and then be in a position 
to channel a large amount of such funds into the mortgage market. 
In furtherance of this specialized financial institution policy, SLA 
then, relative to banks, generally operated under and continued to do 
so, less restrictive reserve requirements. Until the recent advent of bank 
certificates of deposit, together with relatively higher rates paid on 
these deposits and the overall increase in interest rates, the SLA were 
able to compete effectively with alternative investment opportunities 
for savings. 

PROBLEMS ASSOCIATED WITH PRESENT LENDING POLICY 

Basically, when SLA offer a depositor a higher rate of interest than 
alternative investment opportunities offer, depositor savings at SLA 
will tend to be relatively more stable than those savings in the alterna- 
tive investments. By alternative investments is meant investments of 
comparable risk, e.g., bank savings deposit and high-grade corporate 
and government debt. In the instant example the liquidity require- 
ments are different for SLA and the comparable alternative invest- 
ments. Looking at SLA debt investments, i.e., loans and investments 
which are assets to a company but at the same time are a borrowed 
source of funds for the company, such investments will tend to be 
less convertible into cash over a short period of time relative to aggre- 
gate conversion of total bank liabilities or high-grade government and 
corporate bonds. SLA do, therefore, tend to place their depositors' 
funds in relatively less marketable investment opportuniites, to wit, 
mortgage lending. Underlying this type of SLA lending policy is the 
axiom previously stated that investments should be matched more or 
less with liquidity requirements. 

On July 27, 1966, a hearing concerning the subject of broadened 
lending authority for state chartered SLA was held in San Francisco. 
At this hearing, representatives of the Council of Savings and Loan 
Financial Corporations as well as a representative of the California 
Savings and Loan League spoke in favor of broadening the lending 
authority of these associations. 

Mr. James Rittermal of the Council of Savings and Loan Financial 
Corporations testified that California statute does not control the 
lending and investment policies of federal chartered SLA. Associations 
of this type do operate in California. Mr. Rittermal pointed out that 
broadening of the lending power of such associations by congressional 
action would, therefore, have an effect on the competitive balance be- 
tween the federal chartered associations and the state chartered asso- 
ciations in California. In this connection, he noted that there are two 
programs before Congress that seek to broaden the lending power of 
the federal chartered associations. One of these programs seeks to es- 
tablish federal chartered mutual savings banks. While state chartered 



BROADENED LENDING AUTHORITY 45 

mutual savings banks are not operative in California, they are impor- 
tant in certain areas of the Northeastern United States. If Congress 
were to adopt legislation allowing for the federal chartering of mutual 
savings banks, such institutions would become an active factor in Cali- 
fornia 's financial market. This could come about because of the fact 
that this proposed program would allow for conversion of federal char- 
tered SLA to federal chartered mutual savings banks, and as the latter 
type of institution would have broader lending power relative to that 
lending power of federal chartered SLA, it is highly likely that the 
federal chartered SLA would convert so as to acquire greater lending 
flexibility. Greater flexibility would arise, for example, from the fact 
that federal chartered mutual savings banks would be able to make 
educational loans, unsecured personal loans up to $5,000 and invest 
in common stock. In the event Congress established the federal char- 
tering of these banks, Mr. Rittenmal felt that the Legislature should 
follow this move by enacting legislation to provide for the conversion 
of state chartered SLA to such mutual savings institutions. 

Another program before Congress calls for the broadened investment 
and lending authority of existing federal chartered SLA. It is proposed 
that these SLA be allowed to make, for example, unsecured loans for 
the purchase of home furnishings and mobilehomes, and to make in- 
dividual consumer loans for any purpose up to $5,000. This type of 
program is supported by the US Savings and Loan League and the Na- 
tional League of Insured Savings Associations. These two supporting 
groups differ as to the specific recommendations for broadened lending 
power of the SLA, but it is sufficient, nevertheless, to say that both 
groups would have federal SLA lending authority be more liberal 
than that authority now possessed by California's state chartered SLA. 

Apart from congressional interest in the lending power of federal 
chartered mutual savings banks and SLA, the council expressed an in- 
terest in liberalizing the lending power of California's state char- 
tered SLA irrespective of congressional trends or action. In essence, 
the council felt there was a definite need for broader lending power 
rather than just a need arising out of competitive conformity with 
federal chartered institutions. With respect to the basic need for 
broader authority, the council presented Dr. Preston Martin, Professor 
of Finance at the Graduate School of Business Administration of the 
University of Southern California, who testified as to the analysis and 
conclusions of a paper prepared by himself, dated July 1966, and titled, 
"The Consumer's Changing Financial Needs, State and National 
Trends Compared." 

Related to Dr. Martin's comments is the fact that the policy of bal- 
ancing liquidity requirements with investments runs into trouble if 
(1) the SLA liquidity profile changes and/or (2) available investment 
opportunities are inadequate. An association's liquidity profile will 
change if the association competes with alternative investment oppor- 
tunities at a lower interest rate or for that matter, even a narrowed 
premium rate of interest. As is generally known, bank certificates of 
deposit with their relatively high yield as well as the significant overall 
increase in interest rates in the money market have had an impact 
on the liquidity profile of SLA. This fact was alluded to by Dr. Preston 
Martin. 



46 



COMMITTEE REPORT ON FINANCE AND INSURANCE 



Dr. Martin : As the committee well knows, savings inflows to banks 
and the saving and loans have fluctuated widely over the period 
. . . 1958 to and including the first five months of 1966. In Cali- 
fornia, savings and loans had a peak net inflow of savings of $3.2 
billion in 1963 compared to the net inflow [to banks] of savings . . . 
in that year of $1.75 billion. As the committee also knows, by 
1 !)(;() savings and loans had fallen behind commercial banks and 
other seekers for the saver's dollar: and one estimate of the first 
five months of 1966 is that savings and loan associations had a 
savings net loss, or outflow, of somewhere in the neighborhood 
of $125 million, at the same time that commercial banks in this 
state were gaining in excess of $1.0 billion in savings deposits, time 
deposits and certificates of deposit added together. 

A chief factor in the decline of savings and loan market share 
of savings, both at the state level and the national level, has been 
their inability to compete fully in the market for savings on a 
rate basis. 

Besides a changing liquidity profile, SLA can run into another prob- 
lem which arises as an outgrowth of their present lending policy. SLA 
primarily have one investment outlet, real estate lending. In this lend- 
ing market, the California associations' principal loan is the conven- 
tional trust deed, which unlike an FHA or VA loan is not capable 
of discount in the secondary market provided by the Federal National 
Mortgage Association. Thus, relative to the FHA and VA loan, the 
conventional trust deed is less marketable. This being the case, 'it is 
not ideally suited for the investment of depositor funds when 'those 
funds are likely to be withdrawn from a given association in response 
to a change in interest rates. 

Given an inflow of funds into an association, that association 
has little opportunity to invest these funds in anything other than 
real estate lending opportunities. Table I provides a statistical profile 
of the assets of insured California SLA, and this profile clearly demon- 
strates that SLA opt for real estate loans over their statutory 
alternative investment opportunities, cash and government securities 



TABLE I 

TOTAL ASSETS BY MAJOR CLASSIFICATIONS, INSURED CALIFORNIA 
AND ALL U.S. SAVINGS ASSOCIATIONS 

(in Millions of Dollars) 



1965 
1964 
1963 
1962 
1961 
1960 

1955. 



Total assets 



Calif. 



125,834 
23,851 
20,675 
16,460 
13 292 
10 728 

4,107 



Total 
real estate loans 



U.S. 



"$129,442 

119,355 

107,559 

93,605 

82,135 

71,476 

37,656 



Calif. 



$22,176 
20,529 
17,677 
13,941 
11,241 
9,141 

3,516 



U.S. 



*$1 10,202 
101,333 
90,944 
78.770 
68,834 
60,070 

31,408 



*°P^e C l?mi;ary 0rm ' a *"*"• d L ° an Data B °° k > 1966 Edition. 



Cash and U.S. 
govt, securities 



Calif. 



U.S. 



$1,932 


*$1 1,304 


1,915 


10,981 


1,827 


10,424 


1,587 


9,489 


1.271 


8,526 


989 


7,275 


421 


4,401 



BROADENED LENDING AUTHORITY 



47 



Statutory considerations aside, the reason for this selective alloca- 
tion is obvious as cash is a nonearning asset and government secur- 
ities may not afford a high enough yield to cover the deposit and 
operating costs of an association. On this latter point, the average 
yearly rate paid on deposits in SLA in California is about 5.25 per- 
cent, while high-grade bond yields, in relation to this rate, do not afford 
a return that is sufficient to cover SLA deposit costs and all other costs, 
in addition to earning a profit. This squeeze is apparent from the 
data presented in Illustration 2, which is taken from Dr. Martin's 
report. The average yearly rate paid through about mid-1966 on de- 
posits at California SLA lies slightly below 5J percent. As can also 
be seen from the data in this illustration as well as in Illustration 1, 
the average rate on government bonds and treasury bills at mid-1966 
does not fall above that deposit rate of SLA (which is a cost to SLA). 
In fact, the average government bond rate is below the SLA average 
deposit rate of about 5^ percent. Obviously, neither of these statutory 
alternative investments for SLA offers an outstanding profit-making 
opportunity. The average government bond rate is such that SLA would 
on investment incur a loss. The same situation would probably prevail 
with investment in treasury bills, especially when effect is given to the 
nondeposit costs of SLA, which costs must also be covered before 
profit is realized. 

As can also be seen from the data in Illustration 2, the conventional 
loan rate in California at mid-1966 was about 7 percent. When fees 
and points are worked into this figure, the gross rate of return to SLA 
would be higher than 7 percent. It appears, however, that the SLA 
gross rate of return earned on conventional loans made at current 
relatively high rates and earned on older portfolio loans at lower rates 
(which loans represent the major portion of an association's portfolio) 
is not high enough to provide SLA with the funds necessary to com- 
pete in a rate war and at the same time maintain profitability. 

While the term rate war is not really the appropriate term to de- 
scribe the situation the SLA find themselves in — tight money is more 
appropriate — the term, nonetheless, indicates the type of competi- 
tion that has been developing for the saver's dollar. Illustration 1 
provides data which when taken together with that data presented in 



ILLUSTRATION 1 
SELECTED INTEREST RATES 




1962 



1963 



1964 



1965 



PEBCEIT 
1966 



FB* I0ME M0ITU6ES 



y 




Source : Monthly Economic Letter, First National City Bank of New York 



48 



COMMITTEE REPORT ON FINANCE AND INSURANCE 

Illustration 2 

Interest Rates Paid and Charged 
California 4 U.S. 



The cut in the lavingi pie change* . . . 

1965 ,^ ... „ ,966 

Stocb and Bends 



Percent 

6 
5 
4 
3 
2 



U....U- 



•»*»* 



...«•• 



,.!»• 



.*•»" 



„%*••••! 




Percent 



S^ ^^^'^ZZ^' 



Paid by: 



1958 59 60 

— Savings and Loans, 

"'-Banks, Calif. 



61 



62 



63 64 65 

Charged for: -— Conventional Loans, U.S.; 

by: '"" Treasury Bills, U.S. 



1966 
Calif. 



Source : Dr. Preston Martin, "The Consumer's Changing Financial Needs, State and 
National Trends Compared." 

Illustration 2, presents a picture of the rate competition the SLA have 
been faced with. The two charts visually point out the substantial 
increase that has occurred in the average treasury bill rate and the 
rate paid on certain other money market obligations. The rate paid by 
banks to depositors has also increased, certainly so for a certain class 
of depositors, but this fact is not fully reflected in Illustration 2. This 
illustration does not give effect to the real competitiveness of banks in 
the market for savings, because the bank rate shown includes the rate 
paid on certificates of deposit as well as the rate paid on savings 
deposits. If exclusive effect were given to the rate paid on bank certifi- 
cates of deposit rather than to this rate lumped together with the 
relatively low r er rate paid on the banks ' other deposits, the bank rate 
shown in Illustration 2 as of mid-1966 would be considerably higher. 
From an analysis of these graphs, it can be determined that the compe- 
tition for savings is intense. It was certainly so at mid-1966. In intense 
competition for savings, SLA appear to be restricted from profitably 
competing on a rate basis because of the peculiarities of their long- 
term mortgage investment market, i.e., their older, lower rate loans do 
not turn over fast engouh (a point developed further in the report). 

As SLA cannot make worthwhile profits on their alternatives to real 
estate lending, the present restricted lending policy of the SLA gives 
rise to another problem when the real estate market is weak and the 
SLA are, to the contrary situation discussed above, effectively compet- 
ing for savings. This successful competition would result in a substan- 
tial, steady inflow of dollar deposits to the SLA. Keeping in mind 
the profit problems SLA would have with government bonds and treas- 



BROADENED LENDING AUTHORITY 49 

ury bills, it appears that the SLA would tend to place depositor funds 
in a weak real estate market as against their other alternatives. Table 
II indicates the cyclical nature of a segment of the California con- 
struction industry. 

TABLE II 

NUMBER OF NEW PRIVATE DWELLING UNITS 

AUTHORIZED BY BUILDING PERMITS IN CALIFORNIA 

FOR STANDARD METROPOLITAN AREAS 

1965* 140,376 1960 165,961 

1964* 213,670 1959 195,905 

1963* 260,997 1958 166,644 

1962 210,958 1957 148,481 

1961 176,167 1956 156,712 

Source: California Savings d Loan Data Book, 1966 Edition 
* Revised Data 

With respect to the particular problem caused by a weak real estate 
market and an inflow of savings to SLA, Dr. Martin had this comment 
to make : 

Dr. Martin : . . . the decisions to save and the decisions to bor- 
row are made by two different groups. In the main, the savers are 
not always the borrowers, and so these two kinds of money flows 
do not always match. In the 1950 's, savings and loan associations 
in California, and to a large degree in the United States, domi- 
nated the savings market, and the principal need of the consumer 
sector of the regional economy and the national economy was in- 
deed mortgage debt. In this period, therefore, the financial re- 
sources and the financial credit needs of consumers of households 
matched most of the time. However, in some years the "fit" be- 
tween resources and needs was not ideal, and 1963 is certainly the 
most notable example. In 1963, savings went to savings and loans in 
unprecedented volumes, and savings and loans had no legal choice 
but to lend on mortgages if they were to maintain high rates of 
return and to maintain their position in the savings market by 
passing on these returns to savers. The result is rather generally 
conceded to be an overbuilding of housing in the State of Cali- 
fornia and, to some extent, in the whole United States. Further- 
more, it may be that coupled with this there was an underlending 
in the consumer sector. Consumer demand was certainly expand- 
ing rapidly in 1963 and 1964, both regionally and nationally. 

Aside from problems associated with the restricted nature of having 
one principal investment outlet and in having a liquidity profile change, 
another problem arises with respect to SLA statutory lending policy 
in that this policy tends to prevent associations from effectively com- 
peting for savings, i.e., change their liquidity profile through their 
own efforts. By offering a higher rate of deposit interest, SLA can 
remain competitive in the acquisition of savings and, therefore, work 
to maintain a somewhat stabile liquidity profile. Increasing the deposit 
rate of interest results in an association paying a higher rate on all 
savings accounts, and thus significantly increases such an association's 
cost of money. This cost is not so easily offset by increasing the associa- 
tion's return on its real estate loans. This point was brought out by 



50 COMMITTEE REPORT ON FINANCE AND INSURANCE 

Mr. Dean Cannon who testified at the hearing for the California Sav- 
ings and Loan League. 

Mr Cannon: It is important that you understand that, when 
our rate on savings is increased, the increase affects every dollar 
in the institution— not just the money that comes in after the effec- 
tive date of the increase. We must have some means of increasing 
our earning power in times such as we are experiencing today if 
we are to continue to be a viable industry and continue our con- 
tributions to the economy of California. Although it is true the 
money we are lending in the mortgage market today is bringing 
a higher rate of return, these loans are made on an amortized 
basis over a period of between 20 and 30 years and the result is 
that there is no significant increase in the total earnings for our 
institutions. It would take too many years to really have a measur- 
able effect and thereby increase the amount of earnings needed 
to pay the necessary rate for savings. We must, therefore, have 
the flexibility to make shorter-term loans, to which real property 
does not lend itself, so that the proper adjustments may be made 
in earning capacity in accord with whatever the monetary climate 
is at any given point in history. 

As Mr. Cannon pointed out, SLA have a turnover problem in the 
sense that they cannot quickly and effectively react to interest rate 
changes in the marketplace. This turnover problem arises because of 
the relatively long amortization period on the general real estate loan 
or for that matter the average period during which the loan has life, 
i.e., the period during which the encumbered property is not sold and 
a new loan financed. The SLA are not turning over enough money every 
year to reap benefits from the general up trend in interest rates. 

Testimony at the hearing also developed the point that SLA prin- 
cipal market, real estate lending, is undergoing a long-term structural 
change. The significance to SLA of this change is that expenditures on 
housing will increase but at a lesser rate than spending on other con- 
sumer items. On this subject, Dr. Martin had this to say : 

Dr. Martin : Consumer needs for financing not only changed 
between 1963 and 1966, but they're changing over the long run. 
This is in part because more and more households are of three 
types : the young marrieds ; the empty nesters, who are retired or 
who are about to retire; and the other individuals who are living 
by themselves. Another circumstance which the financial institu- 
tions of this country must cope with is the factor of changing fam- 
ily size, particularly among young households. The average size 
of a family is declining and has been declining since 1961. This is 
true in California. The increasing importance of these three kinds 
of households compared to the husband-wife-two-or-three-children 
household is evidenced very clearly by the booming markets for 
certain kinds of consumer goods and services . . . mobilehomes, 
campers, vacation homes, boats and other leisure-time goods. 

From the standpoint of present lending authority problems and the 
public interest, an argument was made that when families buy homes 
they frequently take out a loan at one institution for real estate and at 



BROADENED LENDING AUTHORITY 51 

another institution for furniture and appliances. Borrowing at different 
institutions involves a credit check at each one and it is a process that 
is economically inefficient and costly to the borrower. If the borrower 
were able to obtain funds at one institution for purchase of his home 
as well as the appurtenances, the one credit check and economies aris- 
ing therefrom would better serve the public. 

Dr. Martin : Our conclusion . . . indicates that on balance the 
public would be better served if savings and loans had broader 
lending powers, especially in the consumer field. The need for con- 
sumer financing, though it is growing, is less dollarwise than that 
for mortgage financing. Thus, mortgage lending is indicated to be 
the prime function of savings and loans, with consumer lending 
a residual one. However, the public is better served when finan- 
cial and real resources are allocated according to the public's 
changing needs. In the short run, wider lending power means 
flexibility in lending to match flexibility in spending by consum- 
ers. 

Less compartmentalization and more flexibility among lenders 
may lead to higher returns to savers over the business cycle and 
may lead to lower consumer financing charges. It would certainly 
enhance competition in the consumer financing industry, which 
result itself is in the public interest. 

A similar argument was made by Dean Cannon of the Savings and 
Loan League. 

Mr. Cannon: Years ago, the investment that was necessary for 
furnishing and equipping a house represented a relatively small 
part of the cost of moving into a new home. Today, our housing 
requirements have changed, and these costs for furnishings and 
equipment now represent from 10 percent to 20 percent of the pur- 
chase price of the home, or from $2,000 to $4,000 for a $20,000 
house. Normally, the family that buys this house will have used 
its cash resources for the down payment and will have little or 
no cash left to make these necessary purchases. They must then 
seek financing from other sources, since savings and loan associ- 
ations cannot now make loans on this type of security. Generally, 
the financing available to them is on a short-maturity basis with 
"add-on" interest rates, which makes the monthly payments high 
at a time when the family can least afford it. 

With package home financing, economies could be realized by 
utilizing information already on file, thereby reducing the costs of 
credit analysis, accounting, advertising, collections and other op- 
erational activities. The public interest will thus be served by pro- 
viding this type of package financing to the consumer, and it is 
in this area of finance that we strongly feel our business must be 
permitted to enter. 

Mr. Gareth Sadler testified as to the department's view on broad- 
ened lending power. He indicated that the department felt there was 
some merit in providing SLA with greater flexibility with respect to 
lending. Aside from this point, the department also recognized that 
general lending parity should be maintained between state chartered 



52 COMMITTEE REPORT ON FINANCE AND INSURANCE 

associations and federal chartered associations. He added that the pri- 
mary concern of his department was the orderly growth of the industry 
and with a view to the impact upon the SLA of broadened lending au- 
thority, the department was concerned with (1) what regulatory limi- 
tations should be considered with any new lending authority and (2) 
what the effect of broadened lending authority would be with respect 
to the operation of the department. 

Concerning limitations on broadening lending authority, Mr. Sadler 
noted that the department had not gone into this subject in any great 
detail primarily because the specific areas of additional authority had 
not as yet been determined. He did, however, submit that bank regula- 
tion provided an example of the approach SLA regulation might take. 
In bank regulation, commercial, savings and trust operations of a bank 
are distinct organizations established as such by the banking laws of the 
State of California. In this connection, the type of broadened lend- 
ing authority SLA are indicated to be interested in could be organized 
from a regulation standpoint as a special department of the association 
and separately licensed as such. Mr. Sadler was then questioned by 
Chairman Moretti on specific matters concerning regulation of the in- 
dustry. 

Chairman Moretti : . . . , do you see a need for a change in the 
reserve requirement for the savings and loans if their lending au- 
thority were to be expanded ? 

Mr. Sadler: Not necessarily. I think that the question probably 
would resolve itself into an individual case-by-case basis; and 
again, if I am correctly interpreting the procedures that are pres- 
ently followed by the Department of Banking, they do make this 
exact judgment in adjustments as between different departments 
of a given bank. I think there's no question that a great majority 
of our associations could properly undertake this and would have 
adequate reserves. I think that it would call for a careful review 
on an individual basis which would be a part of the review of the 
staff and other qualifications of the lending institution. 

Pursuing the question of direct lending as compared with the pur- 
chase of consumer paper, Committee Chairman Bob Moretti ques- 
tioned the Savings and Loan Commissioner, Mr. Gareth Sadler, as fol- 
lows : 

Assemblyman Moretti : How do you feel, Mr. Sadler, about the 
possibility of direct lending on the part of the savings and loans 
versus purchasing of consumer contracts where in one they do 
their own credit checking and background work and in the other 
case they are relying on someone else to do it and have not had 
direct contact with the person who is being loaned the money? 

Mr. Sadler : I think we may here be dealing with another ques- 
tion which I am sure has arisen before in other financial institu- 
tions and one of the normal safeguards which is used is to require 
recourse arrangements on the part of the seller. I think that should 
be an adequate answer; I'm not sure it is the only answer. I think 
the goal should be to provide reasonable flexibility. I think it would 
probably be better to approach the thing on a gradual basis but 



BROADENED LENDING AUTHORITY 53 

without restrictions outlawing a particular form of business ac- 
tivity. 

Dr. Martin was questioned as to whether SLA granted broader 
lending power would tend to channel most of their funds into short- 
term consumer loans as against the trust deed loan secured by real 
estate, owing to the relatively higher rate of interest available on con- 
sumer loans. 

Dr. Martin: . . . portfolio decisions are not just a matter of 
what yield do you get on various parts of the portfolio. For ex- 
ample, such savings and loan associations will hold treasury securi- 
ties in excess of that amount required of them in order to have 
higher liquidity. Now the treasury security, particularly in the 
short end of the scale, is usually the lowest yielding thing around. 
But the management decision is made to hold a certain volume of 
treasury securities. This is a mortgage lending institution, and it 
will not succumb to yield as the sole criteria. 

Concerning just what was meant by consumer loans, the following 
comments by Assemblyman Jack Casey and Mr. Rittermal are of in- 
terest : 

Assemblyman Casey: So, actually we're talking on a broader 
basis than merely just consumer financing of individual articles. 
You're thinking of the purchase of accounts receivable and that 
type of thing. You could move into department stores and purchase 
their consumer paper and to automobile firms and purchase their 
consumer paper. 

Mr. Rittermal: I personally believe that we are. I think your 
question relates to the originator of the loan, and I don't see that 
this topic we're discussing necessarily develops simply in the 
originator. 

Mr. Jerald Schutzbank, the Corporation Commissioner, as an observer 
at the hearing was called upon to answer certain questions. In the proc- 
ess of testifying in this manner, he commented on the need to keep reg- 
ulation of various industries on a uniform basis. 

Mr. Schutzbank: I might take this opportunity, though, to ex- 
press the one area in which I do have a point of view on that sub- 
ject, and this is one on which I feel rather strongly with respect to 
the industry as it exists today . . . Here, I 'm referring to the gen- 
eral structure of regulations in industries such as this, where I do 
believe there is imposed on the respective industries regulation 
which is unreasonable only in the sense that it is not necessarily 
uniform. The authority which is given to one agency over one in- 
dustry is not necessarily the same as that which is given to another 
agency with respect to another industry . . . consideration is 
going to have to be given at some point in the context of the com- 
mittee 's hearings here or elsewhere to the fact that there are many 
entities now engaged in the consumer credit business, some of 
which are regulated in that regard, some of which are regulated in 
other regards, and some of which are unrelated in one way and 
are not unrelated in another. The pattern is not as uniform as it 



54 COMMITTEE REPORT ON FINANCE AND INSURANCE 

should be in order to prevent unfair competition betweem the vari- 
ous business enterprises. I think that one of the legitimate com- 
plaints, if you can call it that, which the various industries have 
made and which I think they are entitled to make, is that they 
should, in any event, not suffer the difficulty of competing with 
another industry in the same market under different rules. 

... I think that it does go without saying that as you extend 
that flexibility [broadened lending power] the need for uniform- 
ity becomes all the greater. 

Mr. Alvin 0. Wise, Jr., representing the California Loan and Finance 
Association (composed of companies licensed to loan on the security 
of personal property under the authority of the Financial Code and 
supervised and regulated by the Division of Corporations) testified in 
opposition to proposals to allow SLA to enter the consumer loan 
field. He emphasized that SLA if they were to enter the consumer loan 
field would do so, at least under existing circumstances, with certain 
competitive advantages. 

Mr. Wise : In the origin of the savings and loan movement, they 
were afforded certain privileges as a class of lenders or as an or- 
ganization. These are privileges which are not afforded to banks, 
industrial loan companies, personal property brokers, or any other 
classification of lenders. Examples of these privileges include the 
fact that savings and loan associations are allowed to accumulate 
a reserve of 15 percent of outstanding liabilities. As this accumu- 
lation of money grows and the reserve account grows, they have a 
tax advantage from income tax in that no income tax is required 
to be paid upon the reserves. If this privilege were allowed, and 
savings and loan were to loan money for consumer finance pur- 
poses, the competitive disadvantage to personal property brokers, 
banks and other lending institutions would be obvious. Another 
privilege which we wish to call to the attention of this committee 
is that savings and loans can borrow from the Federal Home Loan 
Bank at a rate of interest lower than that which is available to com- 
petitive lending institutions of any other kind. To permit savings 
and loans to enter into the consumer loan market would be to 
permit one class of lender to borrow federal money for the purpose 
of lending on personal property where this privilege is denied to 
personal property brokers. The Commissioner of Corporations, Mr. 
Schutzbank, has already brought to your attention . . . the prob- 
lem of regulation of loans in the consumer finance field. It is our 
position that, if this committee should permit savings and loans 
to enter into the consumer finance field, the regulations required of 
our industry would have to be uniform and required of theirs. 
Last, and perhaps most important, we wish to call to the commit- 
tee's attention the question of whether or not permitting, under 
state law, savings and loans to enter into a consumer lending busi- 
ness would be constitutional. California is unique in that the in- 
terest rate is fixed by the Constitution of this state, the basic in- 
terest rate. Historically, in order to provide for certain types and 
classifications of lenders, by constitutional referendum, lenders as a 



BROADENED LENDING AUTHORITY 55 

class were excepted. We have the banks ; we have personal prop- 
erty brokers; [and] we have . . . industrial loan companies credit 
unions, [and] small loan licensees. In the constitutional referen- 
dum, each of these classifications of lenders was excepted from the 
mandate of the Constitution and the power delegated to the Leg- 
islature to fix their rates and regulate them. We seriously question 
that any legislation which would authorize savings and loans to 
enter into the special class of lender created by the constitutional 
referendum, namely, personal property brokers who are by defini- 
tion authorized to loan on the security of personal property, would 
be constitutional. 

SUBSEQUENT DEVELOPMENTS 

Under new rules announced by the Federal Reserve Board, the Fed- 
eral Deposit Insurance Corporation and the Federal Home Loan Bank 
Board, the SLA and commercial banks are limited in the maximum 
interest payments they can make on savings held at these institutions. 
The new rate regulation will be in effect through approximately Octo- 
ber 1, 1967. 

In California, all Federal Home Loan Bank member SLA may now 
pay up to 5.25 percent on depositor accounts with no maturity require- 
ment. Compounded daily, this is an effective annual rate of 5.39 per- 
cent. The maximum rate member banks of the Federal Deposit Insur- 
ance Corporation or Federal Reserve Board may now pay on any time 
or certificate of deposit of under $100,000 is 5 percent. This rate is -| 
percent below the previous ceiling on such consumer type deposit ac- 
counts. The net effect of this legislation and particularly that aspect 
of it here described, is to establish or enlarge upon a consumer deposit 
rate premium in favor of SLA as compared with banks. 



INSURANCE INSOLVENCY FUND 



INSURANCE INSOLVENCY FUND 

RECOMMENDATIONS 

The committee does not favor the alteration of the present order of 
priorities of paying claims against insolvent insurers. 
The committee would favor the granting of standby assessment pow- 
ers to the Insurance Commissioner to pay claims against insolvent 
workmen's compensation or casualty insurers. Such assessment pow- 
ers should be limited to the extent assets of the insolvent insurer 
are insufficient to pay claims arising out of insurance contracts. 



(58) 



INSURANCE INSOLVENCY FUND 

Two recurring issues that faced this committee during the 1965 Gen- 
eral Session concerned problems associated with the payment of claims 
against insolvent insurance carriers. It is indeed unfortunate that this 
state must concern itself with problems of insurance company insolven- 
cies since we have gone to great lengths to prevent the existence of 
such situations. We have in this state a regulatory scheme, including 
minimum capital requirements for insurance companies, periodic ex- 
aminations and audits of all insurance companies, and a rating law 
that will allow for an adequate premium charge on risks. However, 
we have not as yet developed a method of protecting a company from 
poor or dishonest management or overly aggressive and unsound un- 
derwriting. It is because of these latter reasons that most insolven- 
cies occur. 

During the 1965 General Session, this committee considered two bills 
affecting the payment of claims against insolvent carriers. Senate Bill 
545 proposed to alter the priority of paying such claims while AB 2410 
would have established an insurance insolvency fund to pay all claims 
against certain classes of insurance carriers. The former bill would re- 
distribute claimants' rights to an inadequate pool of assets still favor- 
ing some claims over others while the latter proposal would create a 
new and additional fund out of which all claims would be paid. 

The present priority system is set forth in Section 1033 of the In- 
surance Code. That order of priority in numerical sequence is as fol- 
lows : 

1. Expenses of administration. 

2. Unpaid charges due under the provisions of Section 736. 

3. Taxes due to the State of California. 

4. Claims having preference by the laws of the United States and 
by the laws of this state. 

5. All other claims. 

SB 545 would change the above priority schedule by substituting 
subdivision 5 above with subdivisions 5, 6, and 7, which are set forth 
below : 

5. All claims except those described in subdivision 7 hereof which 
are based upon workmen's compensation and employer's liabil- 
ity insurance contracts and any awards of the Industrial Acci- 
dent Commission against the person being liquidated. 

6. All other claims based upon insurance contracts allowed for 
sums in excess of one hundred dollars ($100), except those de- 
scribed in subdivision 7. 

7. Claims on account of return premiums and other claims based 
upon insurance contracts allowed for one hundred dollars 
($100) or less. 

8. All other claims. 



(59) 



60 COMMITTEE REPORT ON FINANCE AND INSURANCE 

As is well known in liquidation proceedings, there is rarely an in- 
stance when all creditors, i.e., claimants, are fully paid off. This is es- 
pecially true in the case of involuntary liquidation. In view of these 
facts, SB 545 appears to seek to move workmen's compensation claim- 
ants one more step up the payment ladder and thus provide such 
claimants a better change of full payment. This was one argument 
used by supporters of the bill during the 1965 session. On closer analy- 
sis, however, this is not the result. Current statutory provisions and 
case law give workmen's compensation claims priority over most other 
claims. One of these applicable code sections, Labor Code Section 4908, 
reads as follows : 

A claim for compensation for the injury or death of any em- 
ployee or any award or judgment entered thereon, has the same 
preference over the other debts of the employer, or his estate 
and of the insurer which is given by the law to claims for wages. 
Such preference is for the entire amount of the compensation to 
be paid. This section shall not impair the lien of any previous 
award. 

Section 1204 of the Code of Civil Procedure sets forth the preference 
for wages in any liquidation proceeding, and segments of this section 
are here presented : 

When any assignment ... is made for the benefit of creditors 
. . . wages and salaries . . . rendered . . . within 90 days prior to 
such assignment . . . and not exceeding nine hundred dollars ($900) 
each, constitute preferred claims and liens as between creditors 
of the debtor, and must be paid by the trustee, assignee, or re- 
ceiver before the claim of any other creditor of the assignor, in- 
solvent, or debtor . . . 

The statutory preference of workmen's compensation claims was re- 
affirmed in In Re Interstate Indemnity Co., 219 Cal. App. 2d 809, 815 
(1963), where the court cited Labor Code Section 4908 and CCP Sec- 
tion 1204: 

Section 4908 of the Labor Code gives workmen's compensation 
claims the same preference over the other debts of the employer, 
or his estate and of the insurer which is given by the law to 
claims for wages. The section extends such preference to the entire 
amount of the compensation to be paid, unlike the preference ac- 
corded claims for wages which extend only to wages earned in the 
90-day period of employment prior to insolvency. 

The preferential nature of a wage claim is established by the 
provisions of Section 1204 of the Code of Civil Procedure. The 
section applies to "any proceeding in insolvency or receivership." 

In applying the above statutes to the existing order of payment con- 
tained in Section 1033 of the California Insurance Code, it appears 
that workmen's compensation claims already have priority over all of 
the claims expressly set forth below such claims in SB 545. If the 
existing statutory priority of workmen's compensation claims has force, 
then the effect of SB 545 would be to move down rather than up such 
claims. Under the existing system such claims are coequal with wage 



INSURANCE INSOLVENCY FUND 61 

claims. Under SB 545 wage claims, covered in subdivision 4 — as they 
are under the present system of priorities, would be given a higher 
priority than workmen's compensation claims, which would be covered 
in subdivision 5, i.e., these claims are no longer coequal. Nevertheless, 
workmen's compensation claims under SB 545 would continue to carry 
the same priority over the same claims as is apparently set forth in 
the existing order of payment. The actual effect of SB 545 is two- 
fold: (1) to move workmen's compensation claims one step down the 
payment ladder and (2) to break out certain types of claims falling 
below workmen's compensation claims and affirmatively subordinating 
them to other claims. 

Thus, workmen's compensation claims would be subordinated to wage 
claims, loss claims of $100 and more would be subordinated to work- 
men's compensation claims, loss claims of less than $100 and return 
premium claims would be subordinated to claims of $100 or more, and 
finally, all other miscellaneous and trade creditors' claims would be 
paid last. Those subordinated would be all loss claimants except the 
workmen's compensation claimants, the return premium claimant, and 
the trade creditor. 

Who are the persons with claims against an insolvent carrier and to 
what extent have such claims been satisfied in past insolvency liquida- 
tions? Such claims represent many types of persons. They may be in- 
jured workers filing a workmen's compensation claim, a third party 
claimant filing a personal injury or property damage claim, the insured 
himself with a personal injury or property damage claim, or a medi- 
cal claim or a claim for the return of the unearned portion of the 
yearly prepaid insurance premium, filed either by the insured himself 
or by a premium finance company which has advanced the yearly pre- 
mium on the security of the borrower/insureds, promissory note and 
assignment of the return (unearned) premium. Such claims may be for 
a few dollars in the case of a small loss claim or return premium 
to many thousands of dollars for a large personal injury claim. 

If the premium has been paid by a premium financer, who has 
an assignment for the return premium, and he is able to collect the 
return premium from the insolvent insurer, the borrower/insured will 
not be liable under the promissory note. If, however, the premium 
finance company cannot collect the return premium or unearned pre- 
mium, it will move against the borrower on his promissory note. In 
effect then, the borrower owes the premium finance company money 
on the promissory note which was for insurance protection he will 
not receive since the insurance company is insolvent and, in addition, 
must come up with additional money to buy a new insurance policy. 
Although this cost may be relatively small in comparison to a large 
personal injury claim filed with the now insolvent insurer, it can, nev- 
ertheless, represent a severe hardship to the person with limited finan- 
cial resources. 

In some insolvency cases, however, the premium finance company 
which often is chartered as a state or national bank finds itself not 
in a subordinated position, but in a paramount position to other claim- 
ants against the insolvent carrier. This anomaly was pointed out by 



g2 COMMITTEE REPORT ON FINANCE AND INSURANCE 

the Insurance Commissioner, the Honorable Richard S. L. Roddis, 
in testimony before this committee on September 16, 1966. 

Commissioner Roddis : The bank has a form of off -record fluctuat- 
ing noncontractual security interest known as a bankers' lien. 
.Many banks engage in premium financing business, and I think 
probably any bank that knew what it was doing and engaged in 
that business and was dealing with one of these perhaps weaker 
[insurance] companies . . . will to the extent that it can do so, in- 
duce, if possible, the insurer with whom it has extensive financing 
arrangements, to maintain a deposit in the bank or maintain cer- 
tificates of deposit in the bank. If that company, that insurer, then 
becomes insolvent, the bank, to the extent to which it has deposited 
funds of the insurer in its possession, is not in the same situation 
as the average return premium claimant. The bank at this point 
. . . has a claim and, except as to workmen's compensation, the 
claim has considerable legal force. By virtue of the banker's lien 
it can offset against the loss so that they in effect come out with 
100 cents on the dollar even though other claimants may receive 
a lesser proportionate payment as a result of eventual liquidation. 
... It is of interest that two companies which became insolvent, 
Tower Indemnity Company, and a reciprocal interinsurance 
exchange, which was under common management or common con- 
trol with the people who controlled Tower . . . had premium fi- 
nancing relationships with [a bank. The bank] held substantial cer- 
tificates of deposit from both insurers. Initially, the bank took 
the position that it could offset the deposit against its assigned re- 
turned premium claims as to both companies. 1 

One method whereby all claimants of insolvent insurance company 
would be assured of reimbursement is through the operation of an 
insurance insolvency fund. Such a fund would obviate a priority sys- 
tem of pajmient, at least for those claimants covered by the fund. The 
rationale of insolvency fund would be consumer protection similar to 
that afforded depositors at most banks and savings and loan associa- 
tions through the Federal Deposit Insurance Corporation and the Fed- 
eral Savings and Loan Insurance Corporation. 

Several states have already created insurance insolvency funds cov- 
ering one or more classes of insurance. The State of New York has 
a Workmen's Compensation Surety Fund and a separate Motor Vehicle 
Liability Surety Fund. The workmen's compensation fund provides 
compensation and death benefits for persons with claims against an in- 
solvent workmen 's compensation carrier which was admitted to do busi- 
ness in that state. Each workmen's compensation insurer is required 
to pay into the fund 1 percent of its net written premium per year. 
However, payment into the fund is suspended when the fund equals 
5 percent of the New York workmen's compensation loss reserves of 
$2.3 million whichever is greater. Contributions are reinstated when 

1 Assembly Interim Committee on Finance and Insurance, Transcript of Hearings on 
Payment of Claims Against Insolvent Insurance Carriers, September 16, 1966, 
pp. 45-46. 



INSURANCE INSOLVENCY FUND 63 

the fund falls below this level. 2 The fund is administered by the Insur- 
ance Department and the State Workmen's Compensation Board. 

The New York Motor Vehicle Lability Surety Fund and Public Mo- 
tor Vehicle Liability Surety Fund provide insolvency protection to per- 
sons with claims arising out of motor vehicle accidents. These funds 
are also financed by contributions from admitted liability carriers based 
upon their written premiums. 

Wisconsin has also established a Workmen's Compensation Surety 
Fund. It is divided into threee separate funds ; a stock fund, a mutual 
fund and a reciprocal fund. Each is supported by contribution of 1 
percent of earned premiums of admitted workmen's compensation in- 
surers. Payments into the fund cease when it equals 5 percent of the 
loss reserves of the carriers. 

The New Jersey fund is a Motor Vehicle Liability Fund and applies 
only to motor vehicle liability carriers. The contribution rate is one- 
half of 1 percent of net direct written premium per year with con- 
tributions ending when the fund reaches 5 percent of net direct written 
premium of the covered insurers. No claim of less than $100 is payable 
from the fund which, of course, eliminates many return premium 
claims and smaller motor vehicle property damage claims. 

The State of Minnesota has a somewhat different system of insuring 
the payment of workmen's compensation claims against an insolvent 
insurer. Its statute provides for a prorata assessment of other ad- 
mitted workmen's compensation carriers to cover any unpaid work- 
men's compensation claims of an insolvent carrier. The total sum as- 
sessed cannot exceed 1 percent of the workmen's compensation pre- 
miums written in that state. 

In addition, the federal government is becoming interested in the 
problems created when an interstate insurer becomes insolvent. A sub- 
committee of the United States Senate headed by Senator Thomas Dodd 
of Connecticut conducted a two-year stud} 7 of insurance insolvencies 
among the so-called high risk automobile casualty companies. Near the 
close of the 1966 congressional session, Senator Dodd introduced S. 
3919 which would subject all interstate automobile insurers to manda- 
tory participation in and financing of a Federal Motor Vehicle In- 
surance Guaranty Corporation. 

The Dodd bill would subject all interstate automobile insurers to 
mandatory participation in and financing of the guaranty fund that 
would protect policyholder claimants against insurer insolvencies; the 
contractual performance of policies issued by intrastate insurers that 
are reinsured in any part in interstate commerce also would be guaran- 
teed on a mandatory participation basis; other intrastate insurers 
could elect to apply for guaranty status. 

The proposed corporation would be constructed and funded along 
the lines of the Federal Deposit Insurance Corporation and the Federal 
Savings and Loan Insurance Corporation, and would be modeled to re- 
flect several features of the auto insurance guaranty funds of New 
York and New Jersey. 

The proposed corporation, in addition to its guarantee functions, 
would be given sweeping examination powers to determine the 

2 This description applies to the Workmen's Compensation Stock Surety Fund. A 
separate Fund exists for mutual insurers. 



(j4 COMMITTEE REPORT ON FINANCE AND INSURANCE 

soundness of insurers seeking guaranty status, as well as the authority 
to terminate an insurer's guaranteed status if it can be established 
that the company has failed to make prescribed corrections of prac- 
tices in the issuance of policies found to be unsafe or unsound. 

The guaranty fund would be financed initially by the sale of $50 
million of capital stock to the Treasury, to be repaid later ; the corpo- 
ral ion also would be authorized to borrow up to $500 million from 
the Treasury in the event extraordinary demands jeopardize the fund's 

solvency. . 

But guaranty fees paid by the participating insurers would main- 
tain the fund on a self-supporting basis. The bill calls for a semi- 
annual charge of one-eighth of 1 percent of each insurer's net 
direct written premium ; this is estimated as sufficient to cover all 
claims costs, as well as all administrative expenses of the corporation, 
including those of examinations. 

The guaranty fee computed on an annual basis, according to these 
estimates, would amount to a charge of 37.5 cents to 75 cents on the 
average automobile insurance policy. 

The corporation, in the event a guaranteed insurer is declared in- 
solvent by a state court, would assume any pending claims against its 
guaranteed policies, and any other claims filed during the course of the 
liquidation or receivership proceedings. The corporation would adjust 
and settle any such claims only up to the policy limits, less mandatory 
deductibles that would be applied to each claim, ranging from $100 on 
third-party liability claims to $300 on policyholder claims. 

On the payment of any claim, the corporation would succeed to the 
rights of the policyholder or assured as against the insolvent insurer. 

No matter what level of tax or contribution may be required to 
create and maintain an insolvency fund, the cost of the fund will be 
borne by the consumer since the insurance premium charged the in- 
sured will reflect this additional cost. To this extent, the consumer 
is buying insurance against insolvency. In another context, the con- 
sumer can be thought of as paying for certainty when he pays the 
insolvency fund tax. Insurance is supposed to substitute certainty for 
uncertainty, but this definition of insurance is subject to qualification 
inasmuch as certainty can be washed out through insolvency. An in- 
solvency fund, therefore, provides a mechanism to effectuate the fore- 
going definition without qualification, i.e., certainty would mean just 
that — not certainty so long as solvency is maintained. As the consumer 
is paying for the insolvency fund, he can be said to be paying to wash 
out an infirmity in the economic system which causes certainty to fall 
short of being an absolute. 

Opinion is not uniform, however, on the advisability of establishing 
an insurance insolvency fund in California. Many objections to it 
were raised at this committee's hearings on the subject. The Insurance 
Commissioner of the State of California objected to the fund on several 
grounds. 

^ Commissioner Roddis : In the first place, I would fear ... the 
risk that the existence of such a fund would take the pressure 
off of some insurance commissioners to do an agressive and per- 



INSURANCE INSOLVENCY FUND 65 

haps ever better job, or seeking- an ever better level of solvency 
control and regulation. 3 

In rebuttal to this assertion, Mr. James Denebeim, Vice President 
of Vista National Bank, asserted that the federal experience with the 
Federal Deposit Insurance Corporation was exactly the opposite of 
that which the commissioner thought might result in California. 

Mr. Denebeim: . . . when the FDIC came in, the banks found 
that instead of the State Superintendent of Banks and the Comp- 
troller of the Currency being less regulatory they took now a more 
zealous view of their position because they now had a fund to 
protect as well as their normal duties. So, it worked just the 
opposite. Instead of going to the point of being lazy, they went to 
the point of increasing their ability. In addition, we got the 
FDIC who came in on top of it and with greater zeal and started 
to enforce the banking laws to protect — you might say — the fund. 4 

Secondly, the Insurance Commissioner felt that the existence of such 
a fund might weaken the Insurance Department's position in the 
courts when the department sought to obtain a court order placing a 
company in conservatorship. 

Commissioner Koddis : The parties before a court are usually, at 
least in the first instance, the commissioner and the equity owners 
who think the commissioner shouldn't have taken it over . . . 
There's a certain tendency on the part of some judges, not all but 
some, to feel that perhaps the commissioner acted too soon. My 
own feeling is that there are cases that the presumptive position 
should be the other way, but the company always has an explana- 
tion, for example, that they could have written their way out of 
the problem. You would have to know the record of some of 
the litigation we have had in some of these insolvency proceedings 
to really have the feel for the psychological problems, if you wish, 
in court. 

Now, with the fund in existence that psychology would be all 
the greater because the equity owner should be in a position to 
say "the Insurance Commissioner shouldn't have moved so ag- 
gressively, we had a chance of salvaging this thing and nobody 
would have gotten hurt if he had let us go on and run the string 
out some more before he moved on us because, after all, there 's al- 
ways that fund to back it up and policyholders would not have 
been hurt." 5 

The third objection was that good, healthy, well-run companies 
should not be required to subsidize or protect the weaker, not so well- 
run companies. Another objection concerned possible retaliatory taxes 
that could be levied against California insurers doing business in other 
states if California created an insolvency fund and required contribu- 
tions into it from all insurers admitted to do busines in this state. 

Commissioner Roddis: The addition of the assessment would 
probably be viewed and construed under the retaliation constitu- 

8 Transcript, page 51. 
♦Transcript, page 91. 
5 Transcript, pages 51-52. 



(j,j COMMITTEE REPORT ON FINANCE AND INSURANCE 

tional or statutory provisions of most other states as an additional 
sment or tax, and probably to the extent to which it was ap- 
plied to forms would be applied to California companies in every 
other state on a retaliatory basis. The only way, of course, to avoid 
retaliation would be to confine the assessment to California com- 
panies, domestics alone, in which case obviously then the rate has 
to be a great deal higher and you have the obvious problem of 
equity. . . . G 

The commissioner's position on the possibility of a retaliatory tax 
being imposed upon California companies by other states was supported 
by Mr. Perry Taft, Pacific coast manager and counsel of the American 
Insurance Association. 

Mr. Taft: ... in my experience in the western states, fortu- 
nately we've been able to successfully persuade the state au- 
thorities that they shouldn't apply it; but in Utah eight years ago 
the State Tax Commission did attempt to apply on our New York 
member companies, retaliation on both the automobile and work- 
men's compensation solvency fund, and we went around and 
around, almost to the point where we're going to court over it and 
they finally backed down. So, in Utah, very definitely we ran the 
risk of their attempting to apply this because the New York rate is 
2 percent, the Utah rate is 2 percent, so they were equal in that 
respect, so Utah figured that if a Utah company doing business 
in New York had to contribute to this (fund), the Utah ought to 
get the equivalent of that assessment for the State of Utah. 

Eight now we're involved in a protracted series of negotiations 
with the State Insurance Commissioner of Nevada in this very 
same area on our New York member companies as a result of 
Nevada having passed in 1963 for the first time a retaliatory law. 
And the ironic thing about this Nevada situation is that in Nevada 
they're trying to apply retaliation on a workmen's compensation 
solvency fund on our New York companies, although our New York 
companies can't even write workmen's compensation in Nevada 
because it 's a monopolistic state fund. 7 

A representative of the insurance industry, Mr. John P. McFarland, 
speaking on behalf of the Industrial Indemnity Company and the Fire- 
men's Fund of San Francisco, suggested that what w r as needed was not 
insolvency fund but an increase in the capital and surplus requirements 
an insurer would have to have in order to do business in this state. 

Mr. McFarland: You will note that the trouble that we have 
had has been with insurance companies that have been under 
capitalized. They have been, in many instances, on reserve. The 
commissioner cannot, as was testified to this morning, immedi- 
ately go out and detect and w T ave a red lantern the moment an 
insurance company becomes under reserved. But if there is suf- 
ficient capital back of the company, that is sufficient. Now, the 
insurance industry is a little bit hesitant about coming forward 
and suggesting increases in capital and surplus, because it looks 

6 Transcript, page 53. 

7 Transcript, pages 89-90. 



INSURANCE INSOLVENCY FUND 67 

as though we're trying to build up a competitive wall against 
other people coming into the business. This is simply not so. But 
our posture has to be guarded somewhat carefully lest we be ac- 
cused of this. The insurance has, of course, let 's face it, a selfish in- 
terest when we come to setting up state funds or other types of 
funds to pick up the check on insurance losses. We don't like the 
idea of furthering encroachment in private industry, quite 
frankly. 8 

The committee does not feel that an adequate solution to the insol- 
vency problem can be found in merely altering the present order of 
priority of paying claims against an insolvent insurer. SB 545 fails 
to improve the position of the workmen's compensation claimant. It 
does, however, affirmatively subordinate other classes of claimants. It 
is doubtful if any of these claimants would ever be made whole by the 
device of affirmative subordination. 

The concept of an insolvency fund has as its virtue the ability to 
make whole all claimants who are covered by the fund. However, with 
the exception of the standby assessment powers contained in the Minne- 
sota statute, other types of funds contain inherent weaknesses or dan- 
gers. The possibility of other states imposing retaliatory taxes on Cali- 
fornia companies operating in these states is a real threat. If California 
were to impose a tax or mandatory contribution on all insurers doing 
business here, in order to support the fund, other states might view 
this as sufficient to impose retaliatory taxes on California companies. 

Therefore, the committee would only favor at this time that the 
commissioner be granted standby assessment powers which would en- 
able him to assess admitted carriers pro rata to the extent that an in- 
solvent carrier 's assets were unable to satisfy claims based on insurance 
contracts. Such assessment powers should extend only to workmen's 
compensation carriers and casualty carriers. In addition, a sufficient 
period of time should be given to the assessed carriers to meet the assess- 
ment at the assessment dates so that no undue strain will be placed 
upon the solvent carrier's reserves. 

8 Transcript, page 72. 






HEALTH INSURANCE AND ANTIDUPLICATION 

PROVISIONS 



HEALTH INSURANCE AND ANTIDUPLICATION 

PROVISIONS 

CONCLUSIONS AND RECOMMENDATIONS 

The committee notes that the health insurance industry contracts 
with insureds to cover certain expenses, and that some insureds sub- 
mit claims and receive benefits in excess of covered expenses. How- 
ever, the information available to the committee at this time does 
not warrant a conclusion that any "insurance profit" is not used 
by the insured to cover medical expenses incurred but not covered 
by the policies. Since the insured has paid for both policies he should 
be entitled to the cash benefit of the policies. Since the committee has 
not been convinced that any potential savings through antiduplica- 
tion provisions will be passed on to the consumer in the form of lower 
premiums it cannot recommend such provisions at this time. If fur- 
ther investigation shows such a saving will result and an adequate 
system of informing insureds that their benefits will be limited by 
antiduplication provisions is developed we will reconsider our rec- 
ommendation. 



(70) 



HEALTH INSURANCE AND ANTIDUPLICATION 

PROVISIONS 

It appears that the health insurance industry is faced with a situa- 
tion wherein some insureds can and do collect on a given claim bene- 
fits which exceed related costs. This excess collected is termed an in- 
sured's insurance profit (hereafter referred to as overinsurance profit). 
When an insured is in a position where upon sickness or injury he 
might be able to collect an insurance profit, he is considered to be 
an overinsured. 

If there are problems caused by the existence of overinsurance, 
these problems can technically arise because of the fact that (1) both a 
husband and wife are employed and covered as a spouse under the 
other's group disability policy; (2) an individual, perhaps in recog- 
nizing that many insurance policies do not reimburse the full value of 
medical costs, holds, for instance, two policies — either both being indi- 
vidual policies or one being an individual policy and the other a group 
policy; and (3) an insured is covered under unemployment conten- 
tion disability insurance, which is required by statute for a good many 
employees in California, as well as being covered under a health insur- 
ance plan with no exclusion clause relating to hospital benefits payable 
under unemployment compensation disability insurance. Another over- 
insurance situation can arise when an insured has medical coverage 
under an automobile insurance policy as well as coverage under a health 
insurance plan. 

Assuming that an overinsurance problem exists, three basic forces 
appear to underlie that problem: (1) increasing awareness on the part 
of the public of the value of health insurance; (2) the growing utiliza- 
tion of group insurance plans; and (3) the increasing number of hus- 
bands and their wives who are both working. 

Limited data are available that can be used as a reference to the 
measuring of the dollar impact of overinsurance profit. A 1961 study 
of hospital insurance in California 1 found that 6.9 percent or 15,700 
hospital patients of a sample group received benefits which exceeded 
their respective hospital costs. This overinsurance profit averaged $201 
per person; aggregate overinsurance profit amounted to slightly over 
$3,155,700. These figures did not take into account disability hospital 
benefits which all of the sampled claimants were eligible to receive. 
When these disability hospital benefits were taken into account, it was 
found that 38.7 percent of all measured claimants benefited financially 
from their hospitalization. While extensive data are not available con- 
cerning the California overinsurance experience, and for that matter 
the national experience, it is indicated that overinsurance profit is 
being garnered by some insureds and that this profit is on an average 

1 Nathan Sinai et al., Disability Insurance in California, Bureau of Public Health 
Economic Research Series No. 11, University of Michigan (Ann Arbor, Michigan: 
Braun-Brumfield, Inc., 1965) p. 163. 



(71) 



72 COMMITTEE REPORT ON FINANCE AND INSURANCE 

and a per capita yearly basis amounting to a considerable sum of 
money. 

It has been argued that the overinsurance phenomenon gives rise to 
problems for the insured, the insurer and the public. For example, it is 
nerally held by those familiar with insurance economics that over- 
insurance profit has been a direct causative factor accounting for in- 
creasing health insurance premiums. The reasoning in support of this 
view runs like this: With the supply of hospital facilities relatively 
constant over a short period of time, a demand force based on getting 
the most out of several health insurance policies can impart an unnat- 
ural strain on hospital facilities and, therefore, contributes to or aggra- 
vates the inflation of medical costs. This, in turn, leads to a conclusion 
that a demand force of this type is inimical to the public interest. From 
the insured's standpoint, it can be argued that overinsurance profit 
engenders disrespect for insurance programs. It is indicated that this 
profit and, for example, concomitantly performed unnecessary medical 
service both work to distort rehabilitation programs and vitiate employ- 
ment incentive. 

To the extent that there exists an overinsurance problem, it is indi- 
cated that underwriting procedures alone are not effective to remedy 
such problem. Underwriting is ineffective because it must cope with 
too many variables affecting benefit and cost measurement. Group bene- 
fits are, for example, affected by collective bargaining processes ; medi- 
cal costs will vary geographically. Both of these variables present un- 
derwriting estimation problems for a mobile, unionized labor force. In 
light of these variables, it would be possible for an insured to be an 
underinsured at one point in time and an over-insured at another point 
in time. Furthermore, relatively low group premiums would of neces- 
sity increase if group underwriting were to be made more complex 
through measurement at a given point in time of the overinsurance ex- 
posure of each individual within the group. 

It has been argued that while an insured may collect benefits which 
exceed cost on a given claim, this so-called overinsurance profit cannot 
really be considered as a profit at all when a broad perspective is 
taken of an individual's health problems. This argument maintains 
that there are many medical expenses not covered by health insurance 
and that the covered medical expenses are not fully compensated for. 
Inereiore, there is no overinsurance situation but rather an underin- 
surance situation wherein the so-called overinsurance profit is used to 
defray what would otherwise be an out-of-the-pocket expense. This 
argument appears to hold that when once relatively more comprehen- 
sive and full benefit health insurance policies are available at a reason- 
able cost, then so-called overinsurance may present a real problem ; but 
at the present time, the so-called overinsurance problem is illusory in 
view of uncovered and uncompensated medical expenses that arise to 
place an economic burden on insureds. An argument of this nature ap- 
pears to maintain that what an insured pays for in the form of actual 
insurance coverage is not the standard of measuring whether or not an 
insured is overmsured but rather the standard should be that insurance 
coverage that would be purchased if it were economically available 



HEALTH INSURANCE AND ANTIDUPLICATION PROVISIONS 73 

An interim hearing was held on May 31, 1966, in San Francisco re- 
garding antiduplication provisions in health insurance policies. Such 
provisions have been proposed as the most effective mechanism for han- 
dling an overinsurance problem. The interest of the insurance industry 
in effecting a solution to this alleged problem has resulted in sponsored 
studies of such provisions and, in turn, these studies have led to the 
formation of a group model antiduplication provision, and that provi- 
sion is, in part, here set forth : 

The "model" provision is based on two guiding principles. 

1. Employees and employers will accept nonduplication provided 
it permits recovery by the insured of all covered medical ex- 
penses. 

2. In order to be effective claim settlement has to be simple and 
easily understandable to employers and claimants. 

It is also important to note that the "model" provision was drafted 
in a form which makes it adaptable to basic plans (i.e. hospital, sur- 
gical and medical expense) as well as major medical. 

Briefly the ' ' model ' ' industry provision works as follows : 

1. It is a firmly established principle that when a claimant is in- 
sured under two or more plans he should be permitted to re- 
cover, in total, the amount of the reasonable and customary 
charges for necessary items of medical expense that are covered 
in whole or in part under any one of the plans before either plan 
reduces its benefit payment. Such expenses are referred to as 
' ' allowable expenses. ' ' 

2. Whenever one plan does not contain a nonduplication provi- 
sion that plan must pay its benefits before the plan which does 
have a nonduplication clause. 

3. When two or more plans contain nonduplication clauses the fol- 
lowing "order of benefit determination" establishes the se- 
quence of payment : 

a. the plan covering the patient as an employee pays before the 
plan covering the patient as a dependent. 

b. the plan covering the patient as a dependent of a male person 
pays before the plan covering the patient as a dependent of 
a female person. 

c. where the order of payment cannot be determined in accord- 
ance with these rules, the first plan to make payment will 
be the one that has covered the insured for the longer period 
of time. 

4. The plan that pays first calculates benefits exactly as though 
duplicate coverage did not exist. 

5. The second plan to make payment will therefore reimburse the 
claimant for all allowable expenses not covered by the other car- 
rier provided this amount does not exceed the benefits payable 
under the plan in the absence of duplicate coverage. 

6. Benefit credit — that amount of money which is "saved" through 
application of a nonduplication provision on a given claim — 
accrues for a subsequent period, generally one year, as a credit 
to be applied against future claims. 



-\ COMMITTEE REPORT ON FINANCE AND INSURANCE 

The net effect of this arrangement is that the claimant is either 
reimbursed for 100 percent of his allowable expenses or receives the 
full benefits payable under both plans that would have been allowed 
if aeither plan contained nonduplication provisions. 

indicated in the above, "allowable expenses" and "order of 
benefit determination" are key features of the group model antidupli- 
cation provisions. The term "allowable expenses" gives the broadest, 
most absolute protection to the insured patient. In effect, it guarantees 
thai the insured patient will be protected up to 100 percent of any 
necessary, reasonable and customery item of expense, all or part of 
which is covered under at least one of the plans insuring the person 
for whom the claim is made. 

"Allowable expenses" is a concept consistent with the overall pur- 
pose of the nonduplication provision — that is, to conserve insurance 
dollars which otherwise would be wasted because of an overinsurance 
situation. 

"Order of benefit determination" — the second guiding principle — 
affords a reasonable, relatively simple criterion for determining the 
order of responsibility each insurance plan shall assume in paying 
benefits when a condition of overinsurance exists. This principle, of 
course, does not apply unless at least two plans involved in the same 
claim have a nonduplication provision. 

"Excess carrier." In a situation where two plans exist — and only 
one of the plans contains the nonduplication provision — the plan with 
the provision automatically assumes secondary responsibility for bene- 
fit payment. This would be true even though under the terms of "order 
of benefit determination" the plan normally would be the primary 
carrier for benefit payments. 

HOW THE GROUP Av\ODEL ANTIDUPLICATION PROVISION 
WORKS— A CASE STUDY 

The Coverage : Tom Jones is covered under a group health insurance 
plan provided by the ABC Corporation. His wife, Mary Jones, is 
under a group plan provided by the XYZ Corporation. Under the ABC 
plan, where Tom Jones works, his wife is included as a dependent 
spouse. Under the XYZ plan, where Mary Jones works, her husband 
is enrolled as a dependent spouse. 

Illustrative Claim : Tom Jones is the insured patient. Hospital and 
surgical expenses for an appendectomy performed on Mr. Jones total 
$600. As Example A illustrates, in the absence of a nonduplication 
provision combined benefits under two plans would amount to $850 
C$400 in total benefits under the ABC Plan for hospital and surgical 
expenses and $450 in total benefits under the XYZ Plan) — hence the 
Jones family would realize a profit of $250. 

In Example B, since only Tom Jones' plan contains the nonduplica- 
tion provision, it automatically becomes the "excess carrier." Accord- 
ingly, Mary Jones' plan assumes responsibility for paying first, and 
her husband's plan, as the "excess carrier," pays the lesser amount. 

In Example C, where both plans contain the provision, the situa- 
tion is reversed. Tom Jones' plan becomes the "primary carrier" and 



HEALTH INSURANCE AND ANTIDUPLICATION PROVISIONS 75 

his wife's plan the "secondary carrier." Therefore, Mary Jones' plan 
pays the lesser amount. 

Dependent Children : In all three illustrations, had the patient been 
a dependent child of Tom and Mary Jones, identical circumstances 
would have prevailed. In Example A, the same profit would be realized 
by the family. In Example B, the child would be covered first under 
the mother's plan, which contained no nonduplication provisions. In 
Example C, the father's plan would assume primary benefit responsi- 
bility, and the mother's plan, secondary, consistent with the "order 
of benefit determination" provision. The latter dictates that the plan 
covering the dependent of a male person pays before the plan covering 
the dependent of female person. 

EXAMPLE A 

WHEN NEITHER THE ABC PLAN NOR THE XYZ PLAN 

HAS THE ANTIDUPLICATION PROVISION 

Total allowable expenses for medical charges for appendectomy $600 

Employee benefits payable by ABC Corporation (Tom Jones' plan) $400 

Dependent benefits payable by XYZ Corporation (Mary Jones' plan)_ $450 

Total benefits payable by both plans $850 

Profit to Jones family $250 

EXAMPLE B 

WHEN ONLY ONE GROUP PLAN (i.e., ABC PLAN) HAS 

THE ANTIDUPLICATION PROVISION 

Total allowable expenses for medical charges for appendectomy $600 

Dependent benefits payable by XYZ Corporation (Mary Jones' plan) $450 

Employee benefits payable by ABC Corporation (Tom Jones' plan) $150 

Total benefits payable by both plans $600 

Out-of-pocket expenses $0 

EXAMPLE C 

WHEN BOTH PLANS HAVE THE ANTIDUPLICATION PROVISION 

Total allowable expenses for medical charges for appendectomy $600 

Employee benefits payable by ABC Corporation (Tom Jones' plan) $400 

Dependent benefits payable by XYZ Corporation (Mary Jones' plan)_ $200 

Total benefits payable by both plans $600 

Out-of-pocket expenses $0 

In both the 1963 and 1965 General Sessions of the Legislature, the 
insurance industry sponsored a bill that was designed to incorporate 
into the California Insurance Code an antiduplication provision pat- 
terned after the group model antiduplication provision. In both ses- 
sions, the bill was referred from committee to interim study. 

Mr. Joseph D. Thomas, Chief Assistant Commissioner of the Cali- 
fornia Department of Insurance, presented views on the subject of 
antiduplication provisions in general and also testified as to the de- 
partment 's position on this matter. 

Mr. Thomas: . . . the existence of these reports [status reports 
concerning overinsurance control and prepared by the insurance 
industry at the request of the National Association of Insurance 
Commissioners] indicates to the department certain things. 

One is that both the commissioners and the insurance industry 
believe that the lack of adequate contract provisions for eliminat- 
ing or restricting duplication of benefits in health insurance pol- 
icies is a serious and important problem. 

. . . two, that solution, fair and acceptable to all interests, is 
most difficult. 



76 COMMITTEE REPORT ON FINANCE AND INSURANCE 

The Chief Assistant Commissioner indicated that the department 
believes there is an overinsuranee problem in California. He pointed 
out that most other states permit some form of an overinsuranee pro- 
vision in group policies and in guaranteed renewable and noncaneel- 
lable individual policies. Since in his opinion the present provisions of 
the California Insurance Code do not allow antiduplication provisions 
to be written into health insurance policies, and in view of the factors 
commonly cited as undesirable consequences of overinsuranee profit, 
he presented certain department suggestions to alleviate problems as- 
sociated with such profit. 

Mr. Thomas: The California department does not believe the 
final form of AB 1301 [submitted in the 1965 General Session] 
is necessarily the one best solution. This proposed solution is com- 
monly referred to as the Pettengill provision. You will recog- 
nize that it was advanced as a solution only after the commissioners 
[National Association of Insurance Commissioners] adopted a 
somewhat similar but different provision ... in December, 1963 
. . . [applicable] to both individual and group [policies]. 

The California department makes these suggestions : 

One, that the law be changed to permit but not require the 
Pettengill solution. 

Two, that a law be enacted to: (1) state duplication is a prob- 
lem; (2) describe the evils the problem creates; (3) state the 
purpose of the law is to prevent these evils; and (4) authorize 
the Insurance Commissioner to approve for use in group policies 
one or more additional wordings which will reasonably and fairly 
prevent, or decrease, overinsuranee and its attendant evils. 
. . . three, serious thought be given to extending [the use of 
any new provisions] to individual policies, particularly guaranteed 
renewable and noncancellable health policies. 

Under current California law, the overinsuranee proration provisions 
permitted in individual policies are virtually ineffective. Proration is 
not applicable where policies are written on a noncancellable or a 
guaranteed renewable basis. Proration can be effectuated in a situation 
where an insured having insurance policies with such proration provi- 
sions issued by several insurers, has not given notice to an insurer of 
coverage by another insurer. Since most policies are indicated to be 
written on a guaranteed renewable basis, the insurer on notice appears 
to be in a position where it cannot modify coverage commensurate 
with other coverage. There are other problems with respect to proration 
and individual policies. For example, premium adjustment between 
several insurers for the purpose of determining an insured's return 
premium is rendered more difficult by the fact that the expense in- 
volved in determining such adjustment is considered by industry 
sources to be prohibitive. Also, the insured is likely to be confused 
by the proration process and return of premium. Furthermore, the 
computation of the return premium is not easily effected where several 
policies have different provisions. 

A question was raised concerning the effect of antiduplication on pre- 
mium rates. Mr. Thomas indicated that the effect of antiduplication 



HEALTH INSURANCE AND ANTIDUPLICATION PROVISIONS 77 

should be downward pressure on premium rates. This downward pres- 
sure on rates would be realized owing to the intense competitive en- 
vironment of the health insurance industry. He further indicated that, 
under the present overinsurance situation, the additional medical ex- 
pense attributable to that situation is passed on to consumers in the 
form of higher premium cost. Thus, those insureds who do not choose 
to collect an overinsurance profit still end up paying for some of the 
added medical service caused by those insureds collecting such profit. 
In response to a question concerning insurers taking into account 
duplication of benefits in the calculation of experience tables, Mr. 
Thomas pointed out that this is done with respect to hospital benefits 
under unemployment compensation disability insurance by companies 
writing other group health insurance. 

Mr. Thomas : ... it would be considered in the relatively minor 
areas where the California law now permits provisions which pre- 
vent overinsurance. There is a permission in the California law, 
for instance, in a group case, to exclude the benefits that you might 
get under the [unemployment compensation disability insurance] 
law and have the group policy be excess of anything that [this] 
law provides. That definitely would be taken into account in esti- 
mating the . . . premium for that type of a case as distinguised 
from one which would duplicate the . . . benefits [under that 
law]. 

Mr. Richard Edwards, Counsel of the Health Insurance Association 
of America, testified on the need for passage of a bill which would per- 
mit antiduplication provisions to be written into health insurance con- 
tracts. While Mr. Edwards did not explicitly characterize this need as 
an exigency, he did point out the passage of such a bill was needed 
to improve, among other things, the underwriting of policies covering 
employees under group contract in California together with employees 
in other states permitting antiduplication provisions in group contracts. 

Mr. Edwards: . . . my central purpose in being here is to try 
to bring you to the belief that I have that it is imperative, abso- 
lutely essential, that California enact legislation of the type de- 
scribed by Mr. Thomas . . . , because all other states have legisla- 
tion which now permits their Insurance Commissioner or director 
or superintendent, to have this type of policy provision in group 
basic contracts and in other types. California now has granted the 
authority, already existing authority, to your commissioner to per- 
mit this type of provision in major medical, group major medical 
and group comprehensive contracts, but not in group basic con- 
tracts. In that sense, California does not have this type of legisla- 
tion, and it is sorely needed so that the group contracts may be 
issued affecting employees in California where the status of the 
group contract is outside of California and vice versa. 

The other factor that has moved this from the area of desirable 
legislation to absolutely essential legislation is, of course, the enac- 
tion of Medicare. Medicare will create certain pressures on utiliza- 
tion of medical care facilities that will reduce, if not eliminate, 
any tolerance zone that existed before for excessive utilization by 
reason of overinsurance. 



78 COMMITTEE REPORT ON FINANCE AND INSURANCE 

Mr. Edwards concurred with the testimony of Mr. Thomas to the 
effect that the competition in the group health insurance market was 
of a nature that any savings brought about through antiduplication 
would tend to be passed on to the consumer in the form of lower pre- 
mium cost. Mr. Edwards also pointed out that the proration approach 
to overinsurance is impracticable in today's market owing to, for exam- 
ple, relatively excessive administration cost in calculating proration of 
benefits. While on the subject of proration problems, he was questioned 
about other approaches to the elimination of overinsurance profit and, 
in reply, indicated that proration and order of benefit determination 
(antiduplication) were as far as he knew the only effective alternative 
approaches to the problem of overinsurance. 

In response to questions by Assemblyman Newton Russell regarding 
antiduplication provisions in both group and individual health insur- 
ance policies, Mr. Edwards indicated that the more urgent need for 
such provisions was with group policies. This line of questioning also 
covered the complexities of a situation where an insured has an individ- 
ual policy and a group policy, with the latter containing an antidupli- 
cation provision. 

Assemblyman Russell: Is it practically impossible to put this 
nonduplication provision in individual policies ? 

Mr. Edwards: The situation on the individual policies differs 
in this respect. In 1950, the . . . National Association of Insur- 
ance Commissioners adopted a " model law," which all 50 states 
have adopted, called the Uniform Individual Accident and Sickness 
Policy Provisions Law. Now, it contains a series of overinsurance 
provisions [and] those provisions are in the California Insurance 
Code. It would require a separate amendment to achieve the same 
type of thing on the individual side that I am suggesting for 
the group side ... we would hope that both steps could be taken, 
but there is no question about it — the most urgent need of the two 
is for enabling legislation which will let your commissioner author- 
ize it on the group side. We support both forms of legislation. We 
would like to see the new overinsurance provisions on both individ- 
uals and groups. 

Assemblyman Russell: What if you have a situation where you 
have a group policy that has these provisions in it, and I have an 
individual policy [without such provisions]. Would [the insurer 
on my individual policy curtail benefit payments] ? 

Mr. Edwards: In the Pettengill provision, there is a section 
called ' ' definition of a plan ' ' and the definition of a plan recites the 
forms of coverage which you will take into account in determining 
whether benefits have exceeded the cost of an illness or a disability. 
Many insurers do not include individual policies in that definition 
of a plan, which means that in those circumstances they ignore 
individual policies. Our recommendation to you . . . would be 
that we would hope that that discretionary device . . . could be 
left to the Insurance Commissioner to administer as the pattern 
of financing medical care changes . . . [So], . . . if the definition 
of a plan in the group contract you describe includes individual 
policies, then, in effect, the individual policy would be primary and 
the group would be secondary. 



HEALTH INSURANCE AND ANTIDUPLICATION PROVISIONS 79 

Concerning the passage of antiduplieation legislation, Mr. Lewis Kel- 
ler, representing the Association of California Life Insurance Compa- 
nies which sponsored antiduplieation bills in.the 1963 and 1965 General 
Sessions, indicated that a two-step process, that is to say, separate in- 
troduction and enactment of a group antiduplieation bill and an indi- 
vidual antiduplieation bill, would be more desirable than a single in- 
clusive bill. The reason for this legislative bifurcation of related subject 
matter arises from the fact that interest groups of each class of insur- 
ance have separate views concerning antiduplieation. Apparently, anti- 
duplication in an individual policy appears to present more complex 
problems relative to those problems associated with group antidupliea- 
tion. As the process of ironing out problems of individual antidupliea- 
tion might slow up passage of group antiduplieation, the introduction 
of separate pieces of legislation was thought to be the better procedural 
approach. 

Assemblyman Jack Casey questioned Mr. Edwards on the mechanics 
of overinsurance collection and as to how such collection procedures 
would be affected by antiduplieation. Mr. Edwards indicated that if 
an insured failed to identify other coverage, and if, for instance, a hos- 
pital and a doctor were to submit bills to each insurer, the insured 
would receive payment from both insurers. Verification of doctor bills 
is for the most part a very informal process, but as a consequence of 
this informality, overinsurance can become a problem. At this point 
Assemblyman Jack Casey raised the following question : 

Assemblyman Casey: Isn't this more of a problem with admin- 
istration rather than legislation 1 

Mr. Edwards : It is a problem with administration, but in Cali- 
fornia, uniquely, the commissioner at this moment has no authority 
to authorize the insurers to solve the problem by administration 
and that is all we are asking for. 

A question was directed to Mr. Edwards by Assemblyman George 
Willson concerning possible administrative changes the insurance in- 
dustry would effect upon passage of legislation of the type that was 
under discussion. 

Mr. Edwards: I would hope that the enactment of the type of 
legislation that we are urging would be followed by a ruling from 
your Insurance Commissioner authorizing the Pettengill provision 
as one of the means for achieving this end and then the insurance 
companies would have, instead of a problem, [relief from] the prob- 
lem, because as it stands now, they already have the administrative 
machinery set up by reason of the fact that all other 49 states per- 
mit this provision. . . . All we are asking for is that your commis- 
sioner be given what the other 49 commissioners have so [that giv- 
ing your commissioner new power] will . . . remove an admin- 
istrative impediment instead of requiring creation of new admin- 
istrative machinery. 

Assemblyman Willson: . . . well, then, the simple solution you 
are seeking is that we change the state law to allow the commis- 
sioner to permit the companies to sue for the overage, is that is? 



gQ COMMITTEE REPORT ON FINANCE AND INSURANCE 

Mr. Edwards : Well, not to sue for the overage. ... to the best 
of my knowledge this provision has been operating in the other 49 
states . , and in California in respect to major medical compre- 
hensive . . . and I have yet to encounter a single lawsuit where 
the right to recovery provision is involved. What more often hap- 
pens on the right of recovery provision is that if discovery is made 
that the individual withheld the information as to other coverage, 
the insurer simply telephones or writes to the insured [and requests 
remittance]. ... in many instances where the request ... to be 
remitted is declined, insurers still very often do not litigate be- 
cause it is considered bad insurance relations. 

With respect to payment on covered expenses under the Pettengill 
provision, Mr. Edwards indicated that such expenses would be cov- 
ered 100 percent. On this subject of coverage of expenses, however, a 
previous question and answer exchange between Assemblyman Victor 
Veysey and Mr. Joseph Thomas was as follows : 

Assemblyman Veysey: . . . when you really look at it . . . 
most cases of duplicate coverage because [of] the deductions and 
the other costs that are involved, is it generally possible for an in- 
dividual to really make an overall profit by having duplicate cov- 
erage ? 

Mr. Thomas: Yes, it is possible. The Insurance Commissioner 
did consider the point that you are pointing up [and] that perhaps 
the man should be allowed to collect 110 percent or something like 
that. 

A question was raised by Assemblyman Jack Fenton with respect 
to the merchandising of insurance policies with antiduplication provi- 
sions contained therein. Specifically, Assemblyman Fenton was con- 
cerned about a lack of consumer counseling to the effect that such con- 
sumer might be purchasing unneeded insurance. 

Assemblyman Fenton: Is somebody going to counsel him and 
say, now you don 't need this — this is taken under the group policy 
and you don't need this? They are going to give him everything 
he asks for, aren't they? . . . they give him everything he wants 
and then [will] come the time when they are going to say, well, 
you can't get this because it is covered under group policy .... 

Mr. Edwards: I believe, sir, the very fact that 80 percent of 
the employers and unions accepting new major medical contracts 
have now included this provision in those contracts demonstrates 
their faith [in antiduplication]. . . . most agents will explain to 
the insured his needs and will take into account his group cover- 
age. ... I am sure there are exceptions that can be found, but I 
think this kind of legislation has to be directed to that overwhelm- 
ing majority, and, if you adjust it to the exception, you really 
leave the majority exposed to this risk that I have identified. 

^ On the subject of lower premium costs, Mr. Edwards was ques- 
tioned as to his views on the effect of antiduplication on premium 
cost. He indicated that the experience has been a lowering of group 
contract premium charges by the member companies of the Health 



HEALTH INSURANCE AND ANTIDUPLICATION PROVISIONS 81 

Insurance Association of America who instituted the Pettengill provi- 
sion. 

A considerably different viewpoint with respect to a so-called over- 
insurance problem and any need to remedy that problem was presented 
by representatives of the Kaiser Foundation Health Plan. Inherent 
in their argument, in fact, explicitly set forth, is that overinsurance is 
denned too narrowly. Taking a broader perspective, they argued that 
there is not overinsurance but rather underinsurance. On this matter 
Mr. Jerry Phelan of Kaiser had this to say : 

Mr. Phelan : . . . most policies have little or no coverage of such 
things ... as application for drugs. Take the . . . man who is in 
the hospital but he has overinsurance in the amount of $200 on 
hospitalization, but when he is released from the hospital he has 
to take drugs on an outpatient basis for a year and say those 
drugs at $20 a month are going to cost him around $250 for the 
coming year. Under AB 1301 no portion of the $200 excess on 
the hospital could be applied to pay for those drugs. However, the 
same man, even if he had an operation and suffered a deficit of 
$200, the overinsurance in the hospitalization could be applied to 
that. ... we think that the definition of "allowable expense " is 
too restrictive and that [this] definition should be expanded to 
cover any medical expense or any health care expense that the in- 
dividual might have in the coming year or whatever the claim de- 
termination period might be. 

Mr. Gibson Kingren, also testifying for Kaiser, had these comments 
to make : 

Mr. Kingren: There has been a great deal of discussion about 
overinsurance. I suggest that we raise the question [as to what 
overinsurance is]. If I have a heart attack and have to take anti- 
coagulants the rest of my life at an expense of $25 to $35 per 
month, plus periodic checkups, normally not included in health 
insurance programs, and my insurance policies pay me $100 or 
$200 over what my expenses are while I'm in the hospital, can 
anyone say that I am overinsured ? 

Mr. Phelan suggested that in determining overinsurance the expenses 
of a family unit should be the criterion of measurement. In this respect, 
it was pointed out that a situation can exist where a dependent, for 
example a child, will have less insurance coverage than the primary 
insured. 

Mr. Phelan: Take the case of the father and child in an auto- 
mobile accident. If the father, again, has a $200 excess on his hos- 
pital, but the child needed an operation but there is not sufficient 
surgical coverage under either policy for the child, then no por- 
tion of the father's $200 excess could be turned over to satisfy 
any deficit benefits for the child. ... we would suggest that since 
the family, for insurance purposes [is a] single consuming unit, 
that all expenses of all members of the family be put in the base 
to determine whether there is overinsurance. 



g2 COMMITTEE REPORT ON FINANCE AND INSURANCE 

Regarding the lack of incentive to recover brought about by overin- 
surance profit, Mr. Phelan submitted that an individual has in given 
situations a legitimate incentive to attempt to remain in the hospital 
for the full limit of his hospital benefits. For example, where he is 
hospitalized and overinsured for overhospitalization but facing conva- 
lescence in a nursing home where he has no insurance coverage, such 
a situation of incentive would arise. In this connection and with re- 
spect to the need to have effective utilization of medical facilities, the 
application of the hospital excess to the cost of residence at a nursing 
home would, in the foregoing example, effect better utilization of facili- 
ties. At any rate, it was argued that the incentive to remain in the 
hospital in such a situation is not an incentive founded merely upon 
a desire to make a few dollars. 

Mr. Phelan took a definite stand against antiduplication in individ- 
ual policies and against consideration of individual policies in deter- 
ming excess coverage. 

On the subject of malingering and overinsurance, Mr. Gibson King- 
ren suggested that it is not easy for a person to malinger. In this con- 
nection, he pointed out that a doctor admits a person to a hospital; 
the patient himself does not effect admittance. The inference to be 
drawn from this is that doctors will make use of some objective stand- 
ard in determining the need for admittance. Hence, it would be a 
rare case where one is admitted to a hospital without some reason 
for being there. Nevertheless, previous testimony by other individuals 
on this very point brought forth a view that some doctors tend to be 
biased in favor of their patient 's request. 

Turning to the subject of inflated costs and overinsurance, Mr. 
Kingren had this comment to make : 

Mr. Kingren: Inflates costs to whom? I don't know, because if 
you deny a patient the right to fully protect himself against medi- 
cal expenses, you have inflated the patient's cost [and] lowered 
the insurance company's costs. If the insurance companies want 
to lower premiums, there are some obvious approaches. Published 
data show that certain classes of individual policies pay out as 
little as 10 cents in claims [on] the premium dollar. This results 
in a high rate of profit which might be lowered by either a more 
liberal benefit schedule or lower premiums. 

In discussing the motive of insureds in obtaining several health in- 
surance policies, Mr. Kingren felt this reflected the desire of people 
to want more protection. The insured is trying to cope with uncertainty. 
He does not have a worthwhile premonition as to what his medical 
expenses will be, but he does have some notion of the fact that most 
insurance policies do not cover all medical expenses. If improvement 
is needed in the field of health insurance, Mr. Kingren indicated that 
the insurance industry should first work toward effecting more com- 
prehensive medical coverage before the industry concerns itself with 
the so-called problem of duplicated benefits. 

The California Labor Federation, represented by Mr. Clint Fair, did 
not take a firm position with respect to the adoption of antiduplication 
provisions in group health insurance policies. This organization, how- 



HEALTH INSURANCE AND ANTIDUPLICATION PROVISIONS 

ever, was very much interested in what would happen to insureds cov- 
ered under group policies were antiduplication to be effected. As 
group insurance is a negotiated fringe benefit, the federation, on be- 
half of its individual members, was indicated to have a vested interest 
in the disposition of benefits under such negotiated policies. Neverthe- 
less, while no opposition to such duplication was presented, the federa- 
tion submitted that it would find it difficult under present circum- 
stances to support legislation like that of AB 1301. The federation ex- 
pressed more of an interest in developing more comprehensive health 
insurance programs. On this point the federation's views appeared to 
coincide with the view presented by a Kaiser Foundation Health Plan 
representative concerning comprehensive coverage. On the matter of 
lower premium costs, Mr. Fair expressed a view to the effect that he 
was not convinced that antiduplication would in fact result in lower 
premium costs. Furthermore, if there did come about a savings owing 
to the implementation of antiduplication and these savings were not 
passed on to insureds in the form of relatively lower premiums, Mr. 
Fair felt that there was no certainty that such savings would be passed 
on in the form of greater policy benefits. While Mr. Fair did not di- 
rectly oppose antiduplication, the tenor of his comments reflected a 
skepticism as to certain alleged results of antiduplication. 

Mr. Paul Putnam of the Public Health League who, at the hearing, 
spoke for Blue Cross, indicated that the latter organization was in 
favor of antiduplication. With respect to California Physicians Serv- 
ice (a corporation under the authority of the Attorney General), this 
organization, whom Mr. Putnam also spoke for, was indicated to be 
actively working on proposals to eliminate benefit duplication. Aside 
from these brief comments, Mr. Putnam chose not to elaborate on the 
views already presented concerning inflated medical costs as a conse- 
quence of benefit duplication except to say that both of the aforesaid 
organizations believe that overinsurance profit does increase medical 
costs. 



printed in California office of state printing 
L-2517— 100 2-67 1M 



ASSEMBLY INTERIM COMMITTEE REPORTS 
1965-1967 

VOLUME 16 NUMBER 10 

FINAL REPORT OF THE 

ASSEMBLY INTERIM COMMITTEE ON PUBLIC 
UTILITIES AND CORPORATIONS 

TO THE CALIFORNIA LEGISLATURE 
(House Resolution No. 710(q), 1965) 



MEMBERS OF THE COMMITTEE 

JOSEPH M. KENNICK, Chairman 
F. DOUGLAS FERRELL, Vice Chairman 

DON A. ALLEN ALAN G. PATTEE 

WILLIAM T. BAGLEY JOHN P. QUIMBY 

CLAIR W. BURGENER PHILIP L. SOTO 

CHARLES E. CHAPEL WILLIAM F. STANTON 

CLAYTON A. DILLS JAMES E. WHETMORE 

LEROY F. GREENE JOHN C. WILLIAMSON 

LESTER A. McMILLAN 

EUGENE R. LEYVAL, Committee Consultant 
DON I. FOLTZ, Committee Consultant 

ARLENE JESPERSEN, Committee Secretary 



January 10, 1967 



Published by the 

ASSEMBLY 
OF THE STATE OF CALIFORNIA 

HON. JESSE M. UNRUH HON. CARLOS BEE 

Speaker Speaker pro Tempore 

HON. GEORGE N. ZENOVICH HON. ROBERT T. MONAGAN 

Majority Floor Leader Minority Floor Leader 

JAMES D. DRISCOLL 
Chief Clerk of the Assembly 



LETTER OF TRANSMITTAL 



Assembly Interim Committee on 
Public Utilities and Corporations 
Sacramento, January 10, 1967 



Hon. Jesse M. Unruh 
Speaker of the Assembly 

and Honorable Members 



Dear Speaker Unruh and Members 



Pursuant to House Resolution No. 710 section (q) of the 1965 Cali- 
fornia Legislature, your Assembly Interim Committee on Public Utili- 
ties and Corporations submits its report of functions and activities 
during the 1965-67 interim. 



Respectfully submitted, 



Joseph M. Kennick 
Chairman 



(8) 



TABLE OF CONTENTS 

Page 

Letter of Transmittal 3 

Report of the Study Group on Rock, Sand and Gravel Resources 
With Table of Contents 7 

Utility Regulation 

Regulation of Ambulance Rates 43 

Power Blackout 44 

Telephone Solicitation 45 



(5) 



HOUSE RESOLUTION NO. 531 
RELATING TO ROCK, SAND AND GRAVEL RESOURCES 

REPORT TO THE ASSEMBLY 

COMMITTEE ON PUBLIC UTILITIES 

AND CORPORATIONS 



MEMBERS OF THE STUDY GROUP 



Dr. Horace N. Gilbert, Chairman 
Professor of Business Economics 
California Institute of Technology 

Dr. Ian Campbell, Vice Chairman 

State Geologist, Division of Mines and 
Geology (Currently Director, California 
State Department of Conservation) 

Lyman Gillis 

Assistant State Highway Engineer 
Operations Department of Highway Trans- 
portation Agency and Public Works 

A. C. Keith 

County Surveyor and Road Commissioner 
Riverside County 



John E. Roberts, A.I.P. 

John Roberts & Associates, Inc. 
Planning Consultants 

R. G. Trevorrow 
President 
Pacific Cement & Aggregates, Inc. 

Jack D. Wickware 

Assistant Legal Counsel 
League of California Cities 

Laurence Wilson 
President, 1965-66 
American Institute of Planners 
California Chapter 



EX-OFFICIO 

Stanley M. Lourimore, Deputy Legislative 

Counsel 
California State Legislature 

SECRETARY 

Don Reining, Executive Secretary 

Southern Californa Rock Products Association 

CONSULTANT 
Sam Schauerman 
Dean of Physical Sciences 
El Camino College 



December 1, 1966 



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PUBLIC UTILITIES AND CORPORATIONS 9 

November 16, 1966 
Assemblyman Joseph M. Kennick 

Boom 3132, State Capitol Building 

Sacramento, California 

Dear Mr. Kennick : 

I am happy to transmit herewith the report of the Study Group on 
the Rock, Sand and Gravel Resources of the State of California, au- 
thorized by House Resolution No. 531. Our group whs asked to exam- 
ine disputes between the aggregate industry and local zoning authori- 
ties, and, if possible, to find a basis for resolving those disputes. 

The Study Group has completed its work. I am most pleased to re- 
port that our recommendation is a unanimous one : it preserves the es- 
sential features of the powers of local authorities with regard to land 
utilization, and it makes a significant move in the direction of recog- 
nizing the great interests of the larger community in securing access to 
much needed natural resources. 

The membership of the study group was well balanced: it included 
(a) representatives of the zoning authorities, particularly the city and 
county governments and a professional planner serving them, (b) the 
aggregate industry in both the northern and southern areas of the 
state, (c) the State Highway Commission, which uses approximately 
one-third of the annual output of the industry, and (d) the public in 
the persons of the Director of Conservation for the State of California, 
and the chairman of the Study Group, Professor of Business Econom- 
ics, California Institute of Technology. We were pleased to have the ad- 
vice of Stanley M. Lourimore, Deputy Legislative Counsel, State of 
California, throughout our deliberations. 

The testimony presented at our five meetings was by invited per- 
sons representing the points of view concerned with the problem. They 
were not public hearings in the usual sense. We had access to the re- 
ports of the four hearings held in 1963 on the same problem, under 
House Resolution 376, which were in the nature of public hearings. We 
did not think it necessary for our particular assignment to repeat them. 

I am sure that you will be pleased to know that there was 100 percent 
attendance by the eight members of the Study Group at our seven meet- 
ings, five of which were hearings and two closed for the purpose of de- 
bating our conclusions. The expenses of the members in attending these 
meetings were met entirely by themselves. We are proud of this demon- 
stration of interest, and of confidence in the assignment given us by 
your committee. 

On behalf of the Study Group, I wish to give recognition to the im- 
portant contributions of Don Reining who served as our secretary, and 
to Sam Schauerman who served as our consultant. Mr. Reining, Execu- 
tive Secretary of the Southern California Rock Products Association, 
scheduled our meetings, prepared the agenda, and arranged for the 
transcription of testimony presented. Mr. Schauerman, Dean of Physi- 
cal Sciences, El Camino College, drafted our report. As you can read- 
ily imagine, this involved tedious review of voluminous testimony, ex- 
tensive research, and thorough field work. The good spirit that char- 

2— L-1767 






JO ASSEMBLY INTERIM COMMITTEE 

acterized the work of the Study Group extended to our relationship 
with Mr. Reining and Mr. Schauerman. 

The problems of conservation and of urbanization loom large in 
our great state. Our Study Group believes that it has made an initial 
contribution toward the resolution of the particular problem of the 
rock, sand and gravel industry in its relation to local zoning authorities. 
We hope that our report will prove useful to you and your committee. 

Respectfully yours, 

Horace N. Gilbert 

Professor of Business Economics 
Chairman of the Rock, Sand and 
Gravel Study Group 



CALIFORNIA LEGISLATURE 
1965 Regular (General) Session 

HOUSE RESOLUTION NO. 531 

Relative to the Rock, Sand, and Gravel Resources of the State 

Whereas, During the 1963-65 interim period the Legislature received 
considerable testimony on the subject of the orderly development of the 
state 's sand, gravel and rock resources and found within that testimony 
a sound basis for concern ; and 

Whereas, The Assembly Committee on Public Utilities and Corpo- 
rations, in its report of January 11, 1965, to the Legislature, declared 
that there is a need to resolve disputes between the aggregate indus- 
try and local planning authorities and thereby acknowledged that con- 
sideration of further testimony by the committee "is not likely to pro- 
duce meaningful results until the interested parties have resolved their 
differences ' ' ; and 

Whereas, The Assembly Interim Committee on Public Utilities and 
Corporations, in its report, recommended that the Legislature establish 
a specialized group of technically qualified persons to attempt to formu- 
late a workable solution to the sand, gravel and rock development is- 
sue ; now, therefore, be it 

Resolved by the Assembly of the State of California, That the Rules 
Committee be directed to authorize the creation of a "study group" to 
inquire into the problems presented by the depletion, or loss of availa- 
bility through other causes, of the rock, sand, and gravel resources in 
this state. The "study group" shall report its findings not later than 
December 1, 1966, together with recommendations for action, including 
specific legislative proposals necessary to adequately protect and pre- 
serve the rock, sand and gravel resources of this state ; and be it further 

Resolved, That the members of such "study group" shall be ap- 
pointed by and shall conduct its affairs under the direction of and 
shall be responsible to the Chairman of the Assembly Interim Commit- 
tee on Public Utilities and Corporations, and that the study group 
shall remain in existence only until December 1, 1966, at which time 
it shall report to the Assembly Interim Committee on Public Utilities 
and Corporations. 



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TABLE OF CONTENTS 

Page 

SUMMARY OBSERVATIONS AND RECOMMENDATIONS 15 

Recommendations ] 5 

Possible Next Steps 16 

INTRODUCTION 18 

BACKGROUND 

The Geology 19 

The Economics 20 

Land Use Regulation 21 

Summary 23 

A DISCUSSION OF THE PROBLEMS 

Depleting Resources and Conservation 24 

Extractive Operation and Reclamation 26 

The State's Role 28 

PROPOSED SOLUTIONS 
State Control 

1. Mineral Aggregates Bill 30 

2. State Land Bank 31 

3. State Appeals Board 31 

Regional Control 

4. Los Angeles Basin Rock, Sand, and Gravel District 32 

Local Control 

5. Continuous, Cooperative and Comprehensive Planning 33 

6. Local Conservation Commissions 34 

Inventory 

7. A Pilot Program 34 

8. A Systematic Approach 35 

APPENDIX A. Draft of Legislation 36 

APPENDIX B. List of LLR. No. 531 Hearing Witnesses 40 

MAP 

A. Transport Costs per Ton of Rock and Sand 42 

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SUMMARY OBSERVATIONS AND RECOMMENDATIONS 

The summary observations and recommendations that were agreed 
upon by the Study Group in a meeting held on October 12, 1966, are 
the result of much discussion and compromise. They represent the 
most acceptable solution found for the problems of conserving rock, 
sand and gravel to which unanimous support could be given. Final 
agreement was reached on the following points : 

1. Rock, sand and gravel resources are vital to the private and public 
construction industry which, in turn, is a necessary adjunct to 
the rapid population growth in the state. 

2. The problems of conserving natural resources are by their very 
nature broad in scope and thus suggest a regional approach to 
study and planning. 

3. Land use regulation should remain an important function of city 
and county governments. 

4. The state's role should be one of establishing a public policy on 
conserving rock, sand and gravel as well as other natural resources, 
and assisting local and regional agencies in their efforts toward 
implementing the policy. 

5. Recent interest in federal legislation to control open pit mining 
and reclamation was noted by the Study Group. 

RECOMMENDATIONS 

The following recommendations requesting action by the California 
State Legislature are respectfully submitted to the Assembly Committee 
on Public Utilities and Corporations: 

1. It is recommended a pilot study involved with the inventory of 
rock, sand and gravel reserves in an area of critical shortage as 
determined by the State Geologist be inititated by the State Legis- 
lature at public expense. The study should be conducted by the 
State Geologist with assistance from other public agencies and 
qualified consultants approved by him. The performance and 
phases of a consultant's study should be subject to the general 
supervision and direction of the State Geologist. 

The "inventory study" should provide sufficiently comprehen- 
sive data relating to reserves to permit its use by industry, public 
and quasi-public planning agencies in determining needs for the 
future. This implies a regional concept to the study and to the 
use of this information in planning. Every encouragement should 
be given to the regional cooperative planning agencies, Southern 
California Association of Governments and the Association of Bay 
Area Governments, to become involved in making the study and 
to the data and conclusions in planning. 

In addition, legislation would provide for a continuing interest 
in regional studies on a systematic basis so that all areas of the 
state could have the benefit of adequate information for regional 

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16 ASSEMBLY INTERIM COMMITTEE 

planning and local decisions. The pilot study area would be one of 
the more critical areas, but it is assumed other regions will eventu- 
ally face a similar need. 

2. To provide for continuing study in a systematic manner, it is rec- 
ommended financial assistance be provided to the local and re- 
gional agencies. The funding of Senate Bill 703, Section 2205 
of the Public Resources Code is suggested for this purpose. 

3. The State Planning Law requires that certain basic elements be 
included in every master or general plan formulated by planning 
bodies. The Study Group recommends the necessary amendments 
to said planning law to provide for the identification of rock, sand 
and gravel deposits to serve the planning area, as well as other 
natural resources, be a required element in every master or general 
plan. 

4. The adoption of a resolution by the state to encourage cities, 
counties and regional associations to cooperate with the Division 
of Mines and Geology is recommended. A draft of this proposed 
r {solution as well as the recommended legislation is found in Ap- 
pendix A. 

POSSIBLE NEXT STEPS 

It is apparent from the report that the Study Group considered 
seriously the possibility and wisdom of transferring traditional 
authority over land use from local to regional and even state jurisdic- 
tions, to a greater degree than has been recommended. Such points 
of view were expressed by individual members who entertained a 
haunting concern that a sufficiently bold position had not been taken. 
Might it not be better to accept the fact that intensive urbanization 
and the proliferation of zoning authorities creates new problems that 
demand new methods for their solution? These members of the Study 
Group believed that the real challenge, in view of the inexorable trend 
of the times, is to adapt our institutions so that they will help, not 
hinder, the well-being and development of our larger communities. All 
members were aware of the oft-repeated claim that the winds of change 
may be blowing with respect to the traditional authority of local juris- 
dictions over some aspects of land use. 

The rising tide of interest in conservation with regard to many 
natural resources in addition to rock, sand and gravel, may be becom- 
ing irresistible, and the acute problems associated with urbanization 
are exhibiting explosive characteristics. Significant evolutionary steps 
have already been taken in the direction of increasing the role of 
regional organizations and authorities, in efforts to solve both groups 
of problems. The federal government has initiated action through 
tlic Appalachian Regional Development Act that relates to the ways in 
which state and local authorities take steps to meet such problems. 

In the interest of unanimity and in the belief that a first, even if 
modest, step holds promise of resolving at least some of the disputes 
between the aggregate industry and local zoning authorities, the Study 
Group did not put alternative recommendations to a vote. Experience 
will indicate the need, if any, of further, more aggressive, legislative 
action. 



PUBLIC UTILITIES AND CORPORATIONS 17 

The positions of the aggregate industry and of the zoning authori- 
ties, are set forth clearly in our report. The fact that they could 
agree on a recommendation is pleasing, and it may lead to construc- 
tive developments. But the question can still be asked "Are the best 
interests of the larger community, in this case the people of the State 
of California, being served by indication of ability to work out local 
and even regional solutions to the problems of land use?" Some of the 
members of the Study Group, possibly a majority, were not convii; 
that those broader interests would be best served. 

The aggregate industry is young; it has made progress in the direc- 
tion of operating efficiency and pro-social orientation. Competition is 
keen. Zoning authorities have only recently been confronted with the 
special problems of wasting natural resources and of dynamic urban- 
ization. The Study Group has observed that progress has already been 
made, sometimes with the aid of informal and advisory organizations, 
in resolving problems of land use. Constructive developments of this 
kind are promising, but they might well be aided and accelerated by 
the proposals set forth in our recommendations. 



INTRODUCTION 

Under House Resolution No. 376, four separate hearings were con- 
ducted on the subject of "zoning of rock, sand and gravel deposits and 
the establishment of reasonable and uniform limitations, safeguards 
and controls over future production." 1 The resolution was assigned to 
the Assembly Interim Committee on Public Utilities and Corporations. 

The testimony to the committee revealed certain basic conflicts 
which have occurred around excavation operations. The economic im- 
portance of excavating the aggregate near the point of consumption 
can lead to conflicting concepts of land use, objections by some home- 
owners, and increasing demands for control or even banishment of op- 
erations. As a result, sand and gravel deposits are being lost to other 
uses and primary sources of this important resource are being rapidly 
depleted. Since no single workable solution was presented to the com- 
mittee, a recommendation was made for the adoption and assignment to 
the Assembly Committee on Public Utilities and Corporations, a house 
resolution that enables the Assembly to create a "study group" to 
recommend specific legislative action. 2 It was felt a meaningful solu- 
tion could only result from the meeting of the minds of various par- 
ties in a concerted effort to resolve their differences. 

House Resolution No. 531 was adopted as recommended in 1965. 
Members of the Study Group were carefully chosen to represent var- 
ious capabilities in the field of government and the sand and gravel 
industry. The guidance of a practical economist with a considerable 
interest in the subject as chairman of the group was acquired. 

1 Assembly Interim Committee Reports, 1963-65, Assembly Interim Committee on 

Public Utilities and Corporations, Vol. 16, No. 9, p. 9. 
-Ibid., p. 10 



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BACKGROUND 

THE GEOLOGY 3 

Sand and gravel is a non-renewable resource that is formed and de- 
posited by nature. Man cannot manipulate the patterns in which the 
deposits are located. The location of any extractive site is restricted 
by the facts of geology to the boundaries of the sand and gravel bear- 
ing lands. However, the presence of quality deposits does not insure 
their accessibility for development. In addition to the natural limita- 
tions, supply and demand, transportation, land ownership and land 
use considerations can impose significant plant location restrictions. 4 

The bulk of California's sand and gravel is obtained from stream 
deposits, both past and present. The rugged mountains are drained 
by streams which transported and deposited huge volumes of materials 
in channels, floodplains, and alluvial fans. The natural abrasive ac- 
tion of stream transport grinds up and removes most of the soft weak 
rocks and concentrates the harder, firmer particles. The maximum size 
of gravel gradually decreases downstream and commercial, production 
centers in the deposit where the proper blend of sand and gravel can 
be obtained. Fortunately, many favorable portions of the streams oc- 
cur in the flat-lying areas near population centers, as for example, 
the San Joaquin River near Fresno, the American River near Sacra- 
mento and the Santa Clara River in Ventura County. 

Alluvial fan deposits also are widely exploited for aggregate. Fan 
deposits ordinarily contain lenticular beds of poorly sorted sand and 
gravel, interbedded, because of the frequent shifting of the stream, 
with varying proportions of silt and clay. One of the major sources 
of aggregate for the San Francisco Bay area is the alluvial fan of 
Alameda Creek near Niles in Alameda County. The principal sources 
of aggregate for the Los Angeles County area are the alluvial fans of 
Big Tujunga and San Gabriel Rivers. 

In spite of their advantages, some stream deposits are not exploited 
because of such economic factors as poor quality, inaccessibility, exces- 
sive distance to market, insufficient tonnage of material available and 
restrictive local legislation. Certain deposits are unsuitable because 
they contain physically unsound or chemically reactive rocks. Some 
thick deposits may contain severely decomposed material at shallow 
depths beneath seemingly fresh and durable materials. Thus, although 
superficially it may appear that sand and gravel deposits are located 
throughout the state, not everywhere are they equally suitable. 

Crushed stone from quarries in bedrock or "ledge rock" is used for 
many of the same purposes as sand and gravel particularly where 
stream deposits are not adequate or of sufficient quality to be economi- 
cally mined. If the demand is sufficient to warrant the expense in- 
volved, material from deposits containing harmful proportions of det- 
rimental substances may be beneficiated or processed to reduce the 
detrimental components to an acceptable level. 

3 See Transcript Vol. 2, Harold Goldman, pp. 39-42. 

* Bauer, Anthony M., Simultaneous Excavation and Rehabilitation of Sand and Gravel 
Sites, University of Illinois, p. 10. 

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20 ASSEMBLY INTERIM COMMITTEE 

THE ECONOMICS 

Sand and gravel production in California rose from 4.7 million tons 
in 1920 to 113 million tons valued at 129 million dollars in 1964. Cali- 
fornia is the leading producer of sand and gravel in the nation, produc- 
ing one-seventh of the nation's total. About one-third of the total 
California production is from the Los Angeles area. There are ap- 
proximately 800 producers in the state, half of which are commercial 
operations; the other half are contractors for government agencies. 5 

The continued influx of population with resulting demands for 
homes, multiple dwellings, commercial and industrial buildings, high- 
ways, and public works projects accounted for an increase in produc- 
tion of 100 percent between 1954 and 1964. Sand and gravel are used 
primarily as aggregate in mixtures with portland cement or asphalt 
by the construction industry. The construction industries represent 
annual expenditures in the 7 billion dollar range which should reach 
the 10 billion dollar mark by 1970. 6 

The largest single user of aggregate products is the state. It has 
been estimated 35 percent of the sand and gravel produced is used by 
the various state agencies. 7 The Division of Highways estimates in 
building freeways that each $100 of construction uses approximately 
1\ tons of sand and gravel materials of all categories. An eight-year 
planning program approved by the division June 6, 1966, calls for 
construction costs totaling approximately 3.87 billion dollars by 1975. 
This program will require 290.6 million tons of sand and gravel by 
using the above conversion figures. In addition, the Department of 
Water Resources estimates indicate a need for approximately 1\ million 
tons of concrete and asphaltic concrete aggregates for the State Water 
Project by 1972. 8 

Sand and gravel for aggregate is by nature a large tonnage com- 
modity of low unit cost. The price of sand and gravel has not risen 
proportionately with other construction materials. For example, 10 
years ago in the bay area, one ton of sand sold for $1.21, f .o.b. plant ; 
today, a ton of sand sells for about $1.30, f.o.b. plant. Prices have 
remained remarkably stable in spite of rising operational costs because 
operators have absorbed some of these increased costs themselves and 
offset others by means of automation. Expensive machines are needed 
for the modern operations and a modest plant at today's prices would 
cost -J of a million dollars. 9 Total production costs per ton of aggregate 
are low enough that even slight differences in operating cost of com- 
petitive plants may determine their commercial success or failure. 10 

The single factor which most escalates the delivery price of sand and 
gravel is the distance of haul under present practices and regulations. 
The figure 5^ a ton mile is commonly used to estimate transportation 

5 See transcripts, Vol. 2, Harold Goldman, p. 39. 
8 Ibid., p. 39. 

7 Assembly Interim Committee Reports, 1963-65, Vol. 16, No. 9, p. 9. 

8 From interviews in Sacramento, June 21, 1966. 
See transcript, Vol. II, Harold Goldman, p. 42. 

10 Division of Mines and Geology, Mineral Commodities of California, Bulletin 176, 
1957, p. 513. 



PUBLIC UTILITIES AND CORPORATIONS 21 

charges. 11 Should the hauling distance be increased by 20 miles, the 
price of aggregate would increase $1 per ton. This could easily repre- 
sent an increase of 50 to 100 percent on the delivered cost of sand and 
gravel to the consumer. Some idea of the effect distance has on the price 
of aggregate delivered to the consumer is indicated on Map A, which 
was prepared by H. Zinder and Associates, Incorporated. 

LAND USE REGULATION 

In California, city and county governments find their source of power 
to enact land use regulations in the Constitution, Article XI, Section 
11 which provides : 

"Any county, city, town or township may make and enforce within 
its limits all such local, police, sanitary and other regulations as are 
not in conflict with the general laws. ' ' 

The limitations on those police powers are: (1) The regulation must be 
local. (2) Such regulations must not conflct with the general laws of 
the state. (3) Certain constitutional limitations which result from court 
interpretations. In general, the latter limits are imposed by courts when 
they find the local governments are "arbitrary, unreasonable or con- 
fiscatory. ' ' 12 

Land use regulation is an important function of city and county 
governments. Zoning ordinances for whatever purpose ususally define 
standards aimed at fostering public health, safety or general welfare. 
The Study Group reviewed a representative sample of zoning ordi- 
nances regulating quarry operations, the results of which are reported 
here. 

Zoning regulations determine land use and development and are 
considered as tools for expression of public policy. Metzenbaum 
cautions, ' ' Unless a zoning ordinance can successfully meet the require- 
ment of being reasonable in its application, and unless it is enacted 
for the purpose of protecting the public safety, health or welfare, it 
cannot be expected to meet with the approval of the courts. And this 
is as it should be. . . . Unfortunately, some have become so strongly 
inclined toward the benefits of zoning as to look upon it as a cure-all 
for every civic evil, and they vigorously resent any suggestion to the 
contrary. A careful survey, however, discloses that zoning is not a 
panacea. It is a step in the right direction, and if appropriately — 
reasonably — applied and sensibly practiced, it will have ever-broad- 
ening beneficial effects. ' ' 13 

Sand and gravel extractions in most areas of California are permitted 
in zones allowing such multiple uses as agricultural or industrial uses. 
A few cities or counties have adopted exclusive natural resources or 
gravel zones while others are considering such legislation. 14 

Permits or outright zone changes for the extraction of rock, sand and 
gravel in districts not automatically permitting such use are obtained, 

11 See transcript, Vol. I, M. C. Lorenz, p. 118. 

12 Herring, Frances "W., Editor, Open Space and the Law, Institute of Governmental 

Studies, University of California, Berkeley, 1965, p. 7. 

13 Metzenbaum, James, The Law of Zoning, Vol. 1, 2nd Ed., p. 10. 

14 See Transcript, Vol. 1, Milton Breivogel, p. 68 ; Vol. 1, Forrest S. Dickason, p. 42 ; 

Vol. 1, M. C. Lorenz, p. 117 ; Vol. 3, James Fairman, p. 51 ; Vol. 4, Bill Living- 
stone, p. 2. 



22 ASSEMBLY INTERIM COMMITTEE 

nerally, through application to the local agency having jurisdiction 
over the deposit. Public hearings may be required to be held in conjunc- 
tion with these applications at which time arguments for and some- 
times against the issuance of such permits are heard. Quarry zones, con- 
ditional uses or variance permits so approved are generally accompa- 
nied by standards or conditions which are designed to effect compati- 
bility with the use of affected properties. 

There is little uniformity in the zoning or use permit regulations 
established by local jurisdictions. Indeed, there may be differences in 
the conditions imposed on the various use permits within a particular 
area depending on what the local government believes is desirable and 
necessary to make an operation at that location compatible with adja- 
cent land uses. Where ordinances are established to regulate the sand 
and gravel operations, however, there are some common elements. 

The ordinances generally outline conditions to be met by the indus- 
try in maintaining and operating a quarry or they require the opera- 
tor to specify these conditions as part of the application for a use or 
zone permit. It is common to require the property lines to be speci- 
fied and limit excavation to within 25 or 50 feet of the boundaries. This 
is particularly true when the boundary borders another person's prop- 
erty, public highway or street, and certain types of easements. To avoid 
erosion problems, the excavation is required to slope within specified 
limits or to have terraced sides. 

In an effort to provide for public safety and to screen the exterior 
appearance of excavations, the ordinances often require perimeter 
fences and landscaping wherever adequate water supplies are found. 
Dust is required to be controlled particularly on roads leading in and 
out of the sites, and noise and vibration is required to be held to a 
minimum. Often the access and hauling route to be taken by truck 
traffic is part of the conditions of the permit. Mention is made also of 
spillage from the trucks on public roads. Operating hours are fre- 
quently regulated particularly when the operation is near residential 
areas. 

The regulations may require certain procedures to protect streams 
and water bearing strata. Drainage of water accumulated in pits may 
be required also. Compliance with requirements of the Air Pollution 
Control Board is mentioned in some ordinances. 

Permit or application fees are charged by some authorities as well 
as inspection fees. Liability insurance is often required of the operator. 
Bonding may be part of the ordinances especially where provisions are 
made for reclamation of the site. There is a trend to require reclama- 
tion plans at the time of application or within a brief time period fol- 
lowing the granting of a permit. 

Time limits are sometimes made a part of the conditions of a use 
permit. Whether such limits are one year, five years or more, a reap- 
plication or review may be required and may involve an additional 
public hearing. Whether such a time limit is part of the ordinance or 
not, provisions may be made to revoke or suspend a permit on sufficient 
cause and with due process. 

Perhaps no single ordinance will contain all of the above elements. 
The contents of the ordinances viewed by the Study Group varied from 



PUBLIC UTILITIES AND CORPORATIONS 23 

very general and brief regulations to legislation which was quite speci- 
fic on almost all the topics mentioned. 15 More stringent conditions 
seem to be found where the quarry operations border urban develop- 
ment and where homeowners are most likely to object to extraction 
operations. 

In some jurisdictions the conditions are allowed to vary. The ordi- 
nances in these instances often treat the conditions as guidelines which 
might be applied in toto, in part, or not at all. 

SUMMARY 

Though the rock, sand and gravel industry lacks the glamour of other 
mining ventures, its products are used in huge quantities as basic mate- 
rials for concrete and asphaltic concrete. Production of these materials 
in California make this the state's second largest mining industry in 
terms of volume and dollar value. 16 

"To be suitable for use as concrete aggregates, the sand and gravel 
deposits must have the following characteristics : 

1. The cost of extraction and processing must be low. 

2. The deposits must have acceptable physical and chemical prop- 
erties. 

3. The deposits must be located close to the market. (A hauling dis- 
tance of only 20 miles can double the costs.) 

4. The producer must have the legal right to extract the deposits, 
process them, and transport the materials to the population cen- 
ters." 17 

Land use controls which affect the location of a sand and gravel oper- 
ation and control the excavation, processing and transporting of these 
products are presently the responsibility of the city or county in which 
the deposit is located. The regulations include standards which vary 
from one jurisdiction to another and which are designed to control 
quarry operations for public health, safety and welfare. There is a 
trend to include planning for reclamation of mined lands as a condi- 
tion of use. 



15 See Transcripts, Vol. II, Jack Wickware, Appendix. 

18 Moore, William W., Editor, Engineering- Bulletin No. 29, Dames and Moore, p. 1. 

" Ibid., p. 1. 



A DISCUSSION OF THE PROBLEMS 

DEPLETING RESOURCES AND CONSERVATION 

People are both a blessing and a problem to the sand and gravel 
industry. As a community begins to grow, a demand or market for the 

gregate products is created. The high-bulk, low-cost product is ex- 
tracted as close to the consumer as possible (the population centers). 
Continuing growth means more and more residential, commercial and 
industrial sites are located in the rural areas. The urban developments 
approach and then surround established gravel pits and cover potential 
deposits while demands for the products continue to increase because 
of the needs of an expanding population for the material, for its 
structural growth. 

These new neighbors of the industry register complaints which in- 
clude excessive noise and dust, depreciated land values, safety hazards 
and depleted unsightly pits. Testimony to the Study Group provided 
no evidence to substantiate or refute these claims. Several examples 
were cited, however, where reasonable and effective zoning ordinances 
combined with conscientious and responsible producers have successfully 
operated without complaint. 18 In spite of this, continued pressure par- 
ticularly at public hearings conducted for zone changes, new permits 
or renewed permits result in some denials to the industry and in stricter 
restrictions on operations. 

At one time, the producer could move to more remote locations re- 
ducing the available supply of aggregate (albeit, requiring increased 
transportation costs), but today the sand and gravel deposts are limited. 
The reserves in the San Gabriel Valley are estimated to reach deple- 
tion in ten years and the Tujunga Cone in seven years. These are major 
sources for the Los Angeles metropolitan area. 19 New deposits in remote 
locations are removed far enough from the consumer that increased 
costs are a real economic factor. 

Industry representatives warn that available deposits of sand and 
gravel are rapidly dwindling. Their concern is for the lack of adequate 
planning for the utilization of natural resources in many areas 
where the deposits are located, the opportunity for emotional rather 
than objective decisions provided by present procedures in local use 
permit and zoning change hearings and the lack of regional planning 
to conserve this resource which may deny consumers of neighboring 
communities low-cost aggregate. 20 

The testimony presented to the Study Group revealed few instances 
where the city or county General or Master Plan provided specifically 
for sand and gravel resource areas. In the more usual case, therefore, 
the plans have failed to identify valuable and necessary aggregate 
reserves, and this despite the fact that projected population increases, 

18 See transcripts, Vol. I, Forrest Dickason, p. 12; Vol. 5, Paul Foxworthy, p. 2; Vol. 

5, Crawford Williamson, p. 30-31 
10 See transcripts, Vol. I, John Kerfoot, p. 15, 16. 
20 See Transcripts, Vol. 1, E. O. Rodeffer, p. 2; Vol. I, John Kerfoot, p. 23 and 25; 

Vo L n ', Bruce Bravo, p. 64 ; Vol. Ill, Glenn Rick, p. 16 ; Vol. IV, Stewart Adler, 

?• 39 ; Vol. V, Crawford Williamson, p. 29 ; Vol. II, Bruce Woolpert, p. 62 ; Vol. 

II, William Downing, p. 29. 

(24) 



PUBLIC UTILITIES AND CORPORATIONS 25 

and urban expansion, imply an immediate planning need to identify 
and conserve a vital natural resource. The deposits are often not iden- 
tified until encroached upon by residences. Each decade, urban settle- 
ment in the United States extends over an additional 15,000 square 
miles in and around the metropolitan complexes. It is the smaller urban 
places that take up most of the land used or withdrawn from other uses 
by new urban growth, and yet their land use problems have had little 
or no planning or policy attention. 21 

Although local agencies are becoming more active in cooperative 
planning with regard to many problems of regional character, planning 
in relation to natural resources and the aggregate industry has received 
insufficient attention. A notable exception is the inter-governmental 
body, Amador-Livermore Valley Rock, Sand and Gravel Study 
Committee. 22 This committee is made up of representatives of the indus- 
try and several local governments for the express purpose of recom- 
mending solutions to problems of conservation, zone regulations and 
site rehabilitation. 

The need to conserve sand and gravel resources is recognized by 
some local officials. The Los Angeles City Council and Planning Com- 
mission authorized a study, completed in 1954, which strongly indicated 
the need to conserve and utilize reserves. 23 Ventura County recently 
hired a private consulting firm to survey the available resources and 
predict the future needs. 24 The City of San Diego entered into a coop- 
eratively financed study with the California State Department of Con- 
servation, Division of Mines and Geology, which includes a survey of 
the rock, sand and gravel resources in the city and which is to be 
utilized by the city planning department to develop a report recom- 
mending actions to conserve deposits, control operations and provide 
for rehabilitation. 25 Orange County also conducted a study in 1965 on 
sand and gravel resources of the county. 26 

The most consistently mentioned deterrent to effective planning and 
ultimate conservation is the lack of information. 27 Most of the studies 
conducted by local jurisdictions and the Division of Mines and Geology 
lack an inventory approach which would estimate the quantity and 
quality of each deposit. The studies are said to be further limited by 
the fact that the majority of resource areas identified are lands owned 
or leased by the industry neglecting other possible deposits. The best 
and sometimes only source of information is from the industry. Re- 
sourceful and responsible producers have not only furnished the most 
detailed information on deposits but have served as an effective 
force in the conservation of aggregate resources. It has been largely 
through their efforts and long-range investments that sand and gravel 
deposits are preserved. 

21 See Transcript, Vol. I, B. O. Rodeffer, p. 2. 

22 See Transcript, Vol. II, Warren Harding - , William Parness, William Downing, 

pp. 1-29. 

23 See Transcript, Vol. I, Calvin Hamilton, p. 102. 
2i See Transcript, Vol. I, M. C. Lorenz, p. 115-116. 

25 See Transcript, Vol. Ill, Glenn Rick, p. 8 ; James Fairman, p. 31. 

26 See Transcript, Vol. I, John T. McGinnis, p. 37. 

27 See Transcript, Vol. I, Frank G. Bonelli, p. 61 (many others). 



26 ASSEMBLY INTERIM COMMITTEE 

It is difficult to ascertain what data and what form the information 
should take to be most helpful to those who would make use of reports. 
"We are launching urban development and environmental geology 
studies that relate to the problems of environmental health, transporta- 
tion, land use, and urban and regional planning. The problem of urban 
expansion into areas of potential quarry sites and the realization that 
construction materials may be denied for the very development pro- 
grams that require them has become but one facet of this kind of study. 
Water supply and production, foundation problems, drainage prob- 
lems, and a variety of land use problems all require geological informa- 
tion. Unfortunately, we have not known how to secure this informa- 
tion in minimum time for maximum return, nor have we known how 
to prepare reports that could and would be used by the city planner 
or engineer. We are concerned with project evaluation and review 
techniques for urban and regional studies." 28 

Conservation of sand and gravel implies setting land aside for agri- 
cultural or some other nonconflicting use until circumstances require 
extracting its resources. Much of this land may be suitable for subdivi- 
sions, commercial or other conflicting use. The land then may need to be 
preserved for many years with a less profitable interim use leading pos- 
sibly to a type of inverse condemnation. 29 Industry representatives ex- 
pressed a willingness to purchase or lease such land provided there was 
some assurance the aggregate could be mined. 30 

In addition to the long-range planning, conservation suggests zon- 
ing regulations that will avoid conflicting land uses. An exclusive nat- 
ural resource or sand and gravel zone could require posting of the prop- 
erty to inform land owners in the vicinity that a quarry operation is or 
will be in this area. Urban encroachment in these areas, however, may 
bring pressure upon local officials to consider zoning changes that will 
prohibit sand and gravel extraction. 

EXTRACTIVE OPERATIONS AND RECLAMATION 

In spite of increased efforts by responsible producers to conduct oper- 
ations in a compatible manner and to comply with all land use and 
other regulations, there is continued opposition to quarry sites in many 
locations. The opposition may be based on misconceptions resulting from 
a picture of the operations of years past or the few producers who, as 
may be found in any field, perpetuate a bad image. Responsible pro- 
ducers take advantage of the opportunities for improved public accept- 
ance and for the dissemination of factual information to correct these 
misconceptions. Production of rock, sand and gravel is limited to loca- 
tions selected by nature, and when such locations are virtually sur- 
rounded by urban development, it is appreciated that production ac- 
tivities are subject to operating conditions sufficient to assure reason- 
able compatibility with other uses. 

Industry representatives have pointed out that judicious and ob- 
jective determination of land uses may be difficult under the pressure of 
objecting homeowners. They express concern that local decisions can 

a* Hambleton, Dr. W. W M "Education of Geologists for Geological Surveys," Journal 

of Geological Education, June 1966. 
» See Transcript, Vol. I, M. C. Lorenz, p. 118 : Vol. V, Paul Foxworthy, p. 5. 
3° See Transcript, Vol. TV, Stewart Adler, p. 42 ; Vol. I, John Kerfoot, p. 30. 



PUBLIC UTILITIES AND CORPORATIONS 27 

vacillate. 31 Cooperation between the industry and zoning authority to 
avoid this kind of pressure and to improve mining operations is pos- 
sible. 32 

Some zoning decisions have placed a time limit on conditional use per- 
mits. The objections to having such restrictions include : 

1. Insufficient time to amortize the original investment. 

2. Serves as a deterrent to long-range planning and expensive im- 
provements. 

3. Sets the tone for relations between the industry, government, and 
community through expensive and time-consuming public hear- 
ings. 33 

Arguments in favor of a time limit for review generally include : 

1. To determine the producer's compliance with conditions of the 
permit. 

2. To provide an opportunity to review land use problems and any 
changes in conditions which may have occurred within the time 
period. 34 

Reclamation of depleted sand and gravel deposits is becoming com- 
mon practice in the industry. Examples of such projects can be found 
in the National Sand and Gravel Association's publication "Case His- 
tories" and in California through testimony presented to the Study 
Group. 35 As population expands and land use becomes more intense, 
three criteria for a reclamation program emerge — public pressure, regu- 
lations, and land value. 

People see examples of a scarred countryside brought about by de- 
serted mining operations and use this as one basis for opposing sand 
and gravel operations in some areas. One of the basic objectives of rec- 
lamation, then, is to improve the industry's image to the public. Local 
authorities are also becoming more concerned about an ultimate use of 
the land. This is reflected in the trend to include in zoning regulations 
some provisions for planned reclamation and land development. The 
Study Group also learned of legislation at the federal level which is 
under consideration and which has as one major objective the reclama- 
tion of open pit mines. The third criterion for land reclamation is the 
incentive offered by increasing the land value. 36 

The types of reclamation projects completed or proposed include 
residential, commercial, industrial, recreational (Vasona Reservoir in 
Santa Clara County), agricultural and flood control developments. In 
some instances, the pits would be filled and brought back to their origi- 

31 See Transcript, Vol. I, E. O. Rodeffer, p. 2 ; Vol. I, John Kerfoot, p. 25 ; Vol. II, 

Bruce Bravo, p. 64. 

32 See Transcript, Vol. I, Forrest S. Dickason, pp. 43-44; Vol. I, Milton Breivogel, 

p. 65. 

33 See Transcript, Vol. II, William Downing, p. 18; Vol. Ill, Glenn Ricks, p. 10; 

Vol. V, Crawford Williamson, p. 33. 
3 * See Transcript, Vol. II, William Fraley, p. 31 ; Vol. Ill, James Fairman, pp. 40-41. 
35 See Transcript, Vol. I, E. O. Rodeffer, p. 9 ; Vol. I, John Kerfcot, pp. 31-32 ; Vol. II, 

William Downing-, p. 22 ; Vol. II, Karl J. Belser, p. 69 ; Vol. IV, Dan Mikesell, 

p. 17 ; Vol. V, Crawford Williamson, p. 30. 
3<5 Bauer, Anthony M., Simultaneous Excavation and Rehabilitation of Sand and 

Gravel Sites, A Report of a Research Project, University of Illinois, p. 28. 



9£ ASSEMBLY INTERIM COMMITTEE 

nal level and in other cases, the development takes advantage of the new 
land contour. A use of depleted pits that is receiving a great deal of 
attention, particularly in the Los Angeles area, is sanitary land fill. 
The annual refuse disposal in Los Angeles County is estimated at 9 
million tons. Through a joint power agreement with the City of Los 
Angeles, Hie county has set up a trust fund to acquire disposal sites 
for future use. Proposed sites include quarry zones in the San Fernando 
Valley and San Gabriel Valley. These areas can be obtained through 
condemnation proceedings should such action be required. 37 

Sanitary fills frequently are looked upon with much disfavor by 
homeowners in the vicinity of the disposal site. Some officials are con- 
cerned, too, about underground water pollution. 38 Experiments with 
plastic lined pits and jute with plastic mixed lining are being conducted 
to allow sanitary fill below the water table level. In other cases, the use 
of Kt clean" or inorganic fill through and above the underground water 
table has permitted the upper reaches of a depleted pit to be used for 
rubbish disposal. 

If possible, the most opportune time to plan reclamation of quarries 
is prior to the start of excavation. This allows the producer to divert 
part of his capital towards reclamation and provides the community 
planners an opportunity to project future land use patterns. 39 It is un- 
realistic, however, to expect such a plan to remain inflexible in the face 
of changing land use, to place a time limit on reclamation, or to re- 
claim the land while extraction is proceeding in the same immediate 
area. 40 

THE STATE'S ROLE 

The Study Group devoted a major share of its attention to deter- 
mining the role that the state should assume to resolve some of the 
problems concerning sand and gravel extraction and, in particular, 
preservation of deposits. An extreme viewpoint would suggest the state 
should pre-empt the zoning and regulation of sand and gravel quarries, 
removing such authority from the local jurisdictions. The opposite end 
of the spectrum would require no action by the state, and assumes the 
cities and counties along with the industry will cooperatively solve 
their problems in the best interests of all concerned. Neither view was 
considered practical by the Study Group, but rather a solution was 
thought to lie somewhere between these extremes. 

Removing the police power of local governments in relation to this 
resource is opposed by local agencies and some industry represent- 
atives on several grounds. This power has been traditionally exercised 
locally as granted by the State Constitution. 41 Special consideration for 
one industry by pre-empting control in this field will open the door 
to many other equally concerned interest groups. 42 State control will 
remove the determination of land use and standards of operation from 
the peo ple most affected by the location of quarry sites. 43 In addition, 

"Reining Don, Our Natural Resources, A Speech delivered to the National Sand and 



s^PSSZl 1 -^??? ^ 1 . 01 !' February 8, 1966. 



™ i ee transcript, Vol. I, E. O. Rodeffer, p. 10 ; Vol. I, John Kerfoot, Pp. 31-35. 
<no ee Transcript, Vol. II, William Downing, p. 19 ; Vol. II, Harold Goldman, p. 46. 
4i q £ ranscr }Pt, Vol. I, John Kerfoot, p. 34 ; Vol. II, Harold Goldman, p. 46. 
i* o transcript, Vol. I, Louis Nowell, p. 84 ; Vol. II, William Parness, p. 15. 
! I ee transcript, Vol. V, Paul Foxworthy, p. 4. 
« See Transcript, Vol. I, Milton Breivogel, p 79 



PUBLIC UTILITIES AND CORPORATIONS 29 

uniform regulations which would be applied throughout the state could 
not take into account the variety of situations presented by the geog- 
raphy and geology of the various areas. 44 Only the local jurisdictions 
can accurately evaluate the maximum benefit to be gained from a 
property and how best this property fits the concept of a balanced 
community. 45 Finally, there is no assurance that by pre-empting this 
field the problems as they exist today will be solved. 46 

To maintain the status quo on the other hand, is unrealistic ac- 
cording to industry representatives who warn that unless there is in- 
creased concern and action to conserve aggregate near population cen- 
ters, there will be significant economic consequences for the citizens 
in the form of increased construction costs. 47 The best chance for ac- 
complishing this, it is argued, is by providing an appeals board or 
broader controlling body. 48 One industry representative stated local 
officials cannot always make objective decisions when a crowd of home- 
owners oppose a zoning change or the granting of a use permit, par- 
ticularly when the opposition is based on emotion rather than reason. 49 
Help is needed, too, where zoning authorities do not realize adequate 
controls can be utilized in a quarry operation to protect the public. 50 
A common fault found with local planning and zoning is the lack of 
regional considerations which will become more critical as populations 
increase and sources of sand and gravel decrease. 51 

Several problems were identified in relation to a lack of regional 
planning. First there is the question of whether local planning and 
zoning officials will take as broad a view of regional needs as is required 
for the best use of deposits within a local jurisdiction. Indeed, the pro- 
duction and use of aggregate products are very often not in the same 
jurisdiction. 52 Conserving and extracting sand and gravel deposits 
may depend on avoiding extreme variations of control, particularly, 
where these controls affect the producers ability to be competitive 
within the region. Finally, a deposit or quarry operation which is an- 
nexed to a new jurisdiction may be more easily protected when it is 
part of a regional plan. 

Considerable agreement was found in proposing the state should as- 
sume a greater responsibility for assisting local governments with 
more detailed information on the location, quantity and quality of 
deposits. An inventory that would provide decision making bodies 
with essential data not now available making it possible to develop 
more comprehensive plans to conserve sand and gravel requires study 
in depth. Many cities and counties lack the finances and technical 
personnel to conduct an inventory study. 53 

44 See Transcript, Vol. I, Calvin Hamilton, p. 104; Vol. II, William Downing, p. 19; 

Vol. II, Bruce Woolpert, p. 59. 

45 See Transcript, Vol. II, William Downing - , p. 17 ; Vol. Ill, James Fairman, p. 36. 

46 See Transcript, Vol. Ill, Charles Porter, p. 44. 

47 See Transcript, Vol. V, Crawford Williamson, p. 29. 

4S See Transcripts, Vol. II, Bruce Bravo, p. 64 ; Vol. I, John Kerfoot, p. 24. 
4f ' See Transcript, Vol. I, E. O. Rodeffer, p. 2. 
50 Ibid., p. 6. 

31 See Transcripts, Vol. I, John Kerfoot, p. 23 ; Vol. I, Forrest Dickason, p. 48 ; Vol. I, 
Milton Breivogel, p. 66 ; Vol. I, M. C. Lorenz, p. 121 ; Vol. Ill, Ray Kepner, p. 30. 

52 See Transcript, Vol. IV, Stewart Adler, p. 46. 

53 See Transcript, Vol. I, John T. McGinnis, p. 41 ; Vol. I, Forrest S. Dickason, p. 47 ; 

Vol. I, Frank Bonelli, p. 61 ; Vol. I, Calvin Hamilton, p. 106 ; Vol. Ill, James 
Fairman, p. 37. 



PROPOSED SOLUTIONS 

The preceding sections of this report have pointed out that rock, 
sand and gravel are essential to the economy of the state and vitally 
important to the entire construction industry. As is readily apparent, 
aggregates must be extracted where suitable deposits are found and, 
to be economically useful, they should be produced near the consumer. 
The deposits must be of sufficient quality to meet the specifications of 
various private and public construction projects and of sufficient 
quantity to justify a large investment in plant. 

The report also points out the importance of local land use regula- 
tions. The many factors which are necessarily considered in planning 
and zoning can best be evaluated by the local officials. The require- 
ments for complete and accurate information would apply equally to 
any public agency who is faced with the determination of land use. 

The authors of the Ventura County study reached the following con- 
clusions : 

1. Land uses such as housing can be designated in many areas while 
sand and gravel resources are found in only limited quantity and 
consequently should be protected from less vital land uses. 

2. City, county, and state agencies should evaluate the future supply 
and demand of industrial minerals to avoid the almost impossible task 
of protecting these minerals after the deposits are surrounded by ur- 
ban housing. 

3. The government agencies in cooperation with producers should 
develop satisfactory ordinances for operating and reclaiming open-pit 
mines. 54 

Much of the testimony heard by the Study Group would support 
these conclusions. The action that may be required to implement them, 
however, becomes a point of contention among the various groups repre- 
sented. The following proposals calling for specific legislation at the 
state level have been suggested by various individuals and discussed 
by the Study Group. 

STATE CONTROL 

1. Mineral Aggregates Bill. This legislation would put zoning, per- 
mits and quarry operation regulations under a state agency. The bill 
would delegate to this agency the power to license the excavation and 
production of mineral aggregates, adopt and enforce rules and regula- 
tions controlling such operations and approve and supervise the execu- 
tion of reclamation plans for areas from which the aggregates have 
been extracted. The powers so delegated to the state are preempted by 
the state to the exclusion of cities and counties. 

The purpose of the bill would be to secure the public interest in con- 
tinued availability of rock, sand and gravel, and their production 
under uniform regulations operative throughout the state. The regula- 
tions would afford protection against injury or serious annoyance to 
person or property and provide for the reclamation of the lands. 

"Moore, _ William W., Editor, "The Urban Threat to the Sand and Gravel Industry," 
Engineering Bulletin, No. 29, Dames & Moore, pp. 8-9. 

(30) 



PUBLIC UTILITIES AND CORPORATIONS 31 

Opposition to legislation of this type would be vigorous and wide- 
spread. The objections to land use decisions at the state level include re- 
moval of those decisions from the public most affected, variety of alter- 
natives are known best by local authorities, and the impossible task of 
designing uniform regulations with the variety of situations. There is 
insufficient evidence to justify the removal of police powers of the local 
governments over a specific type of land use and placing such pwoers 
at the state level. 

2. State Land Bank. A proposal for conserving sand and gravel 
deposits on the urban fringe would give power to the state to acquire 
land in advance of need, plan its use, and then lease it to private in- 
dustry to develop according to the plan. The legislation would require 
determination of projected needs, appropriation of funds to acquire the 
land, and some procedure for choosing the private company who would 
be willing to excavate the aggregate. 

The objective would be to remove control of sand and gravel deposits 
from local jurisdictions and place responsibility for development with 
the state. Local pressure in opposition to quarries would then be less 
effective. 

The cost to the state, thus the taxpayer, would be significant. In addi- 
tion, Article I, Section 14 of the California Constitution states that 
private property can be taken under eminent domain power only for a 
public use. To interpret sand and gravel extraction as a public use is 
not acceptable. To require that all the lands so acquired be developed 
for public use following depletion of the aggregate is unrealistic. Little 
support was found for this suggestion, though, in a specific situation 
it might be acceptable and advisable. A program in Phoenix, Arizona, 
for example, is designed for multiple-use projects where land is ac- 
quired for park purposes, with interim uses for excavation of sand 
and gravel, followed by sanitary fill. 

3. State Appeals Board. This suggestion was for an act to be added 
to the Public Resources Code. It provides for a State Resources Appeals 
Board consisting of the Director of Conservation and 10 additional 
members appointed by the Governor, with the advice and consent of 
the Senate. Representatives would be chosen from the cities, counties, 
industry and the public. Producers or citizens could appeal to the 
board any local decision relating to a zoning ordinance or action on a 
conditional use permit or variance or other permit affecting aggregate 
production. The appeals board would have the power to overrule the 
local decision. A review would only be made when an appeal is regis- 
tered with the State Resources Appeals Board by affected parties. 

The purpose of such an act would be to prevent unreasonable deci- 
sions or conditions and limitations affecting natural resources. Equal 
protection would need to be provided for the general public. Such an 
agency would be expected to be concerned with the regional implica- 
tions of the city and county decisions. 

Some producers looked upon this proposal as the best possible solu- 
tion. It would provide a body between the city or county and the courts 
that the producers expect would be concerned about the regional needs 
and would not be influenced by objecting property owners. The police 
power of local zoning authorities would be preempted to the extent that 
local decisions could be reversed. 



32 ASSEMBLY INTERIM COMMITTEE 

City and county representatives and some producers do not see this 
as a solution. They argue that there is nothing omnipotent about a 
state body and that the local needs are in fact better met at that level. 
Cities and counties question legislation which will benefit special interest 
groups and are concerned about opening the door to other groups who 
might desire the same treatment. They believe regional planning can 
be brought about through cooperative organizations such as the Asso- 
ciation of Bay Area Governments and the Southern California Associa- 
tion of Governments. 

Seine members of the committee believe the importance of sand and 
-ravel to the economy of the state and the inadequate protection cur- 
rently being given to future reserves at the local level make this pro- 
posal worthy of consideration. The relatively brief time that coopera- 
tive government planning organizations have functioned, particularly 
in southern California, may have prevented their official concern over 
depletion of the resource. Such concern would be welcomed by produc- 
ers and public alike. No one of the Study Group advocated wholesale 
removal of zoning powers from the local governments. 

REGIONAL CONTROL 

Each of the above proposals could be assigned to a regional agency 
which would bring the control closer to the people and provide the 
same advantages attributed to state control. The need for regional con- 
siderations is emphasized by the fact that the Amador Valley is a pri- 
mary source of aggregate for the bay area, and San Bernardino will 
eventually be a primary source for Los Angeles city. 

4. Los Angeles Basin Rock, Sand, and Gravel District. This pro- 
posal would result in an act to be added to the Public Resources 
Code. A sand and gravel district would be established in the Los 
Angeles area where the depletion of aggregates is most critical. The 
board of directors of the district would be empowered to (a) inventory 
the sand, gravel and rock resources of the area; (b) prepare a master 
plan for conservation and development of the resources; (c) provide 
information and recommendations to the local jurisdiction in line with 
the above actions; and (d) hear and determine appeals from local 
decisions in zoning or permit proceedings which affect production and 
distribution of rock, sand and gravel in the district. 

The board membership would include representatives of the cities, 
counties, industry and public. The district board would be empowered 
to tax the production of rock, sand and gravel for the purpose of 
defraying the costs of conducting district business. 

Proponents for legislation state it could be desirable for several rea- 
sons: The advantages of regional study and planning would be real- 
ized ; action would be taken in one of the more critical regions of the 
state and could serve as a test program for possible adoption else- 
where as the need arises ; a designated body as an agency of the state 
but with only regional jurisdiction would be able to improve the rela- 
tions between the public, government and industry through education 
and study. 

Opposition could be expected on the same basis as any other legisla- 
tion w r hich would threaten local zoning authority. In addition, exist- 
ing state laws would allow for similar regional actions on a voluntary 



PUBLIC UTILITIES AND CORPORATIONS 

basis. Evidence of such voluntary activity, however, in relation to con- 
serving our natural resources is sketchy and needs encouragement. 

A question arises with regard to the tax on producers to meet the 
district expenses. If the natural resources are important to the econ- 
omy of the region and state, then taxing should perhaps be distributed 
on that basis. 

LOCAL CONTROL 

Some opponents of state or regional control legislation insist that 
the problem can be handled at the local level if certain enabling leg- 
islation is enacted. The need generally identified is for more informa- 
tion and education. Several proposals were investigated by the Study 
Group and are included here. 

5. Continuous. Cooperative and Comprehensive Planning. This 
proposal assumes the effective tools for preserving sand and gravel de- 
posits and controlling quarry operations are based on area-wide and 
long-range planning. Restrictions such as inadequate information tend 
to keep the potential benefits of local planning from being fully real- 
ized. In addition, the scope of planning and action may embrace prob- 
lems far beyond the limited concern of local jurisdictions. A compre- 
hensive regional general plan which identifies sand and gravel deposits, 
then, should provide necessary information for local policy determina- 
tion. 

The multiplicity of agencies and factors which must be considered 
in local determination of lands to be used for sand and gravel pro- 
duction suggest a need for a regional approach to planning. The im- 
portance of regional study of mineral resources is advanced by Dr. W. 
W. Hambleton, ,; We have been active in the field of regional economic 
studies and applied product research and development. For the past 
several years we have involved people from geophysics, statistics, pe- 
troleum engineering, mining engineering, geology and econometrics in 
studies to develop methodologies for regional economic analysis. Re- 
gional economic growth is not simply a consequence of a discrete set 
of local decisions, and every sizable injection of new investment brings 
with it a train of related economic events characterized by a multi- 
plier effect. . . . \Ye are dealing increasingly with the whole field of 
a system analysis and operati ::s research in the economics of the 
mineral industries. " 7i ' J 

Powerful inducement to engage in area-wide planning could be pro- 
vided by the state in the same way as the Federal Housing Act. 
Funds for planning and study would be provided to a metropolitan 
area when there is continuing, comprehensive and cooperative plan- 
ning by counties and cities. The legislation should require that the 
general plan for a region identify the location of natural resources. 
Area study commissions on mineral resources might be formed volun- 
tarily with adequate incentive. 

The legal requirements for local zoning decisions would be unaf- 
fected, though recommendations from the regional planning' agencies 
would be sought or required. Frances AY. Herring says. -'The re- 
quired review of local zoning decisions by a higher jurisdiction, when 

rs Hambleton, W. W.. '-Education of Geologists for Geological Surveys." Journal of 
Geological Education, June, 1966. 



34 ASSEMBLY INTERIM COMMITTEE 

such decisions bid fair to affect neighboring communities or the region 
as a whole, is a desirable new tool of zoning administration." 56 The 
conservation of natural resource districts designated on a master plan 
would possibly require an exclusive zone for that use before planning 
might have much effect. Multiple use should at least be restricted to 
nonconflicting uses such as agriculture, forestry, and recreation. 

6. Local Conservation Commissions. The state might enact legisla- 
tion enabling local conservation commissions to receive some funds for 
the purpose of studying the problems, inventorying the deposits and 
recommending legislation within a local jurisdiction. The commission 
would not have powers beyond those already granted local governments, 
but rather would serve a purpose in placing emphasis on problems 
not now receiving sufficient consideration. Hopefully, a coordinated 
and vigorous local program in cooperation with industry could develop 
a conservation program; more thought would be given to alternative 
land uses, and influence on the public might be realized through a 
concentrated information program. 

Adequate legislation exists now for cities and counties to move in 
this direction. The Division of Mines and Geology is authorized to 
enter into agreements with local governments to investigate resources 
in order to prevent their loss to urbanization through Senate Bill 
703, Section 2205 of the Public Kesources Code. Lack of funding has 
curtailed activity in this area, but the possibility does exist. A serious 
question arises, then, whether there would be a need for and use of this 
type of legislation. 

INVENTORY 

A special consideration was given to the need for an inventory 
because this was the most frequent suggestion for legislative action. 
The need for assistance stems from the high cost and lack of technical 
personnel to accomplish a detailed study at the local level. Without 
additional information, though, local officials may be unable to deter- 
mine the value of any particular deposit and the justification for con- 
servation of that deposit. 

The advantages in having the state, through the Division of Mines 
and Geology, coordinate inventory investigations are as follows : The 
information would be uniform which has advantages for both Cali- 
fornia and its cities and counties ; the investigations are more readily 
controlled assuring accuracy and usability; and the studies could be 
conducted only where the need exists. To consider a detailed statewide 
inventory of deposits is unwarranted and financially prohibitive. 
Several concepts have been advanced to suggest the role the state could 
play in providing funds and other assistance for an inventory. 

7. A pilot program could be launched utilizing state and local re- 
sources by choosing a metropolitan area for detailed inventory. It 
possibly should be an area where the problem of depleting resources 
is most critical such as Los Angeles or San Francisco. The legislation 
would provide for funding and the basis for local and state cooperation. 
The coordination of such a program could be placed with the State 
Division of Mines and Geology with latitude to involve public agencies 

» Herring, Frances W., Open Space and the Law, Institute of Governmental Studies. 
University of California, Berkeley, 1965, p. 102. 



PUBLIC UTILITIES AND CORPORATIO .>.-, 

or private consulting services where such assistance might be advan- 
tageous. 

8. A systematic approach could be taken whereby state assistance in 
inventory studies would be controlled under predetermined conditions. 
A systematic accumulation of pertinent data such as the life of existing 
deposits, population growth, changing economic conditions, trends in 
urban development, etc., could be fed to a central state or regional 
agency. The data could be arranged or processed in such a way that 
it becomes most useful in determining where the critical problems will 
exist with regard to depletion of sand aud gravel deposits. The in- 
formation would have to be filed in an easily retrievable way. 

AYhen a certain region approaches a predetermined situation where 
the future conservation will be made difficult by problems known to 
exist, an inventory of additional deposits will be encouraged. Coopera- 
tive involvement of the state, industry, and local governing bodies 
could provide incentive to make a thorough study of the region, share 
the cost among the various interests, and assure some uniformity of in- 
formation. It is conceivable that an approach such as this could lead 
to greater understanding by the industry and governments of each 
other 's problems. 

Under either of the above proposals, the role the State Geologist 
would assume should be clearly defined. A suggestion that he be made 
available in zoning change or permit proceedings as an expert witness 
did not receive adequate support. It would be difficult for him to be 
an expert in the many considerations of land use. In addition, testify- 
ing at local hearings has been against tradition and reserved primarily 
for the private consultant. 

The use of private consultants or consulting firms as well as other 
public agencies in special phases and special situations in developing 
the inventory would perhaps be advisable inasmuch as the Division 
of Mines and Geology does not now have all the necessary equipment 
and is presently understaffed for such an exhaustive survey. The 
coordination and direction could be handled by the present staff 
working in close cooperation with the area representatives. The distribu- 
tion of information might also be centralized with this agency. 



APPENDIX A 

An act to add Chapter 2.5 (commencing with Section 2220) 
to Division 2 of the Public Resources Code, relating to rock, 
sand, and gravel, and making an appropriation therefor. 

The people of the State of California do enact as follows: 

1 Section 1. Chapter 2.5 (commencing with Section 2220) 

2 is added to Division 2 of the Public Resources Code, to read : 
3 

4 Chapter 2.5. Rock, Sand, and Gravel 

5 

6 2220. The Legislature hereby finds and declares that ; 

7 (a) Rock, sand, and gravel are essential to the economy 

8 of California and vitally important to public and private con- 

9 struction in this state. 

10 (b) These materials must be extracted where suitable de- 
ll posits are found, and, to be economically useful, they must be 

1 2 produced near the point of consumption. 

13 (c) In many regions of the state, the rock, sand, and gravel 

14 supply situation is extremely critical since the deposits of 
If) these materials which are presently available for production in 

16 that area will be exhausted within a few years. 

17 (d) Other potential sources of rock, sand, and gravel to 

18 meet the continually increasing demands of the state and other 

19 public and private users of rock, sand, and gravel cannot now 

20 be used due to the policies and practices of the public agencies 

21 which have jurisdiction over the areas in which these potential 

22 sources are located. 

23 (e) In order to protect the future economic growth and de- 

24 velopment of the state and to insure that an adequate supply 

25 of rock, sand, and gravel will continue to be available at a rea- 

26 sonable cost in any region of the state where the rock, sand, 

27 and gravel supply situation is now, or hereafter becomes, ex- 

28 tremely critical, it is imperative that the State Geologist be 

29 required to (1) cause an inventory to be made of the rock, 

30 sand, and gravel resources of any region of the state in which 

31 the State .Geologist determines that there is a serious threat 

32 that an adequate supply of rock, sand, and gravel will not con- 

33 tinue to be available at a reasonable cost; (2) prepare recom- 

34 mendations for the conservation and development of the rock, 

35 sand, and gravel resources of the region; and (3) provide in- 

36 formation derived from the inventory and the recommenda- 

37 tions to the public agencies, and organizations of public agen- 

38 cies, within the region. 

39 2221. Whenever the State Geologist determines that there 

40 is a serious threat in any region of the state that an adequate 

41 supply of rock, sand, and gravel will not continue to be avail- 

42 able at a reasonable cost, he shall cause an inventory to be 

43 made of the rock, sand, and gravel resources of the region. 

(36) 



PUBLIC UTILITIES AND CORPORATIONS 37 

1 2222. The inventory shall be made by the Division of Mines 

2 and Geology or, if the State Geologist determines that the divi- 

3 sion is unable to make the inventory, shall be made by any 

4 other person or organization selected by the State Geologisl 

5 pursuant to a contract which is approved by the Director of 

6 Conservation. 

7 2223. The inventory shall determine, among other things, 

8 both of the following : 

9 (a) The location, quantity, and quality of the rock, sand, 

10 and gravel resources within the region which are presently 

11 available for production. 

12 (b) The location, quantity, and quality of the rock, sand, 

13 and gravel resources within the region which could be de- 

14 veloped for commercial or public use. 

15 2224. Based upon the information derived from the inven- 

16 tory, the State Geologist shall prepare recommendations re- 

17 garding the conservation and development of the rock, sand, 

18 and gravel resources of the region. 

19 2225. The State Geologist shall furnish to public agencies, 

20 organizations of public agencies, and producers of rock, sand, 

21 or gravel, within the region, and to any other persons, agen- 

22 ci es > or organizations which request such information and rec- 

23 ommendations, the following information and recommenda- 

24 tions : 

25 (a) Information regarding the location, quantity, and qual- 

26 ity of the rock, sand, or gravel resources within the region 

27 which are presently available for production or which could 

28 be developed for commercial or public use. 

29 (b) The recommendations of the State Geologist regarding 

30 whether any rock, sand, or gravel resources should be cur- 

31 rently developed and used or should be conserved for future 

32 nse - 

33 (c) Information and recommendations regarding the man- 

34. ner in which any rock, sand, or gravel resources may be de- 

35 veloped for commercial or public use. 

36 (d) Any other information or recommendations which the 

37 State Geologist determines may be necessary to insure that an 

38 adequate supply of rock, sand, and gravel will continue to be 

39 available at a reasonable cost within the region. 

40 2226. The State Geologist may request any person, public 

41 agency, or private agency or organization to aid or assist him 

42 in carrying out the duties which are imposed upon him by 

43 this chapter. 

44 2227. The State Geologist may receive, on behalf of the 

45 state, for use in carrying out the provisions of this chapter, 

46 any gifts or grants of funds from any person, public agency, 

47 or private agency or organization. 

48 Sec. 2. The sum of ($ ) is hereby ap- 

49 propriated from the General Fund to the Division of Mines 

50 and Geology of the Department of Conservation for expendi- 

51 ture in carrying out the provisions of Chapter 2.5 (commenc- 



38 ASSEMBLY INTERIM COMMITTEE 

1 ing with Section 2220) of Division 2 of the Public Resources 

2 Code with respect to one region of the state selected by the 

3 State Geologist pursuant to the provision of such chapter. 

TENTATIVE DRAFT 
BUDGET BILL ITEM 

1 ______ For expenditure by the State Geologist, 

2 pursuant to Section 2205 of the Public Re- 

3 sources Code, in providing financial assist- 

4 ance to local and regional agencies for spe- 

5 cial studies and investigations relating to 

6 rock, sand, and gravel resources 



TENTATIVE DRAFT 

An act to amend Section 65302 of the Government Code, 
relating to planning. 

The people of the State of California do enact as follows: 

1 Section 1. Section 65302 of the Government Code is 

2 amended to read : 

3 65302. The general plan shall consist of a statement of de- 

4 velopment policies and shall include a diagram or diagrams 

5 and text setting forth objectives, principles, standards, and 

6 plan proposals. The plan shall include the following elements : 

7 (a) A land use element which designates the proposed gen- 

8 eral distribution and general location and extent of the uses 

9 of the land for housing, business, industry, agriculture, rec- 

10 reation, education, public buildings and grounds, and other 

11 categories of public and private uses of land. The land use 

12 element shall include a statement of the standards of popula- 

13 lion density and building intensity recommended for the var- 

14 ious districts and other territory covered by the plan. 

15 (b) A circulation element consisting of the general location 

16 and extent of existing and proposed major thoroughfares, 

17 transportation routes, terminals, and other local public utili- 

18 ties and facilities, all correlated with the land use element of 

19 the plan. 

20 (c) A natural resources element which designates the gen- 

21 eral distribution and general location and extent of natural 

22 resources. The natural resources element shall include, among 

23 other things, the location, quantity and quality of the rock, 

24 sand, and gravel resources within the area covered by the 

25 plan. 



TENTATIVE DRAFT 
ASSEMBLY CONCURRENT RESOLUTION NO. 



Relative to encouraging cities, counties, and regional associations to 
cooperate with the Division of Mines and Geology. 

"Whereas, Rock, sand, and gravel resources are essential to the econ- 
omy of the State of California and vitally important to public and 
private construction in this state ; and 

Whereas, The problems of development and conservation of these 
natural resources are by their very nature broad in scope and thus 
suggest a cooperative approach to study and planning ; and 

Whereas, The cooperation of cities, counties, and regional associa- 
tions with the Division of Mines and Geology of the Department of 
Conservation is a vital element in the development and conservation 
of the rock, sand, and gravel resources of the state ; now, therefore, be it 

Resolved by the Assembly of the State of California, the Senate 
thereof concurring, That the Members of the Legislature respectfully 
urge cities, counties, and regional associations to cooperate with the 
Division of Mines and Geology of the Department of Conservation in 
the development and conservation of the rock, sand, and gravel re- 
sources of the state. 



(39) 



APPENDIX B 

HOUSE RESOLUTION NO. 531 

A List of Hearing Witnesses 
(In order of testimony) 

Volume 1 — Los Angeles — September 28, 1965 

E. I). Rodeffer : Director, Southern California Rock Products Association ; Presi- 
dent, Rodeffer Industries. 

John Kerfoot: President, Southern California Rock Products Association; Presi- 
dent. Owl Rock Products Company. 

John T. McGinnis: Vice Chairman, Orange County Planning Commission. 

Forest S. Dickason : County Planning Director, County of Orange. 

Dale Heinly : Attorney at Law, Santa Ana. 

Frank G. BonelU: Supervisor, First District, Los Angeles County. 

Milton Breivogel: Director of Planning, Los Angeles Regional County Commis- 
sion. 

I - n is Nowell : Councilman, First District, City of Los Angeles. 

Calvin Hamilton : Director of Planning, City of Los Angeles. 

M. C. Lorenz: Director, Department of Public Works, Ventura. 

Volume 2 — San Francisco — December 7, 1965 

James Fales, Jr.: City Manager, Pleasanton. 

Warren R. Harding : City Councilman, Pleasanton ; Chairman, Amador-Liver- 
more Valley Rock, Sand and Gravel Study Committee. 

W. H. Parness : City Manager, Livermore. 

William Downing : President, Kaiser Sand and Gravel Company ; Member, Ama- 
dor-Livermore Valley Rock, Sand and Gravel Study Committee. 

William Fraley : Director of Planning, Alameda County. Mr. Fraley read a state- 
ment from John D. Murphy (Chairman, Alameda County Board of Super- 
visors) . 

Harold B. Goldman: Geologist, Division of Mines and Geology, California 
Department of Conservation. 

Bruce Woolpert : Planning Commissioner, Santa Cruz County; President, 
Granite Rock Company. 

Jack Cedarblade : Executive Secretary, Northern California Rock, Sand and 
Gravel Producers Association. Mr. Cedarblade read statements from E. F. 
Brovelli (Member of the State Mining Board) and Karl J. Belser (Director 
of Planning, Santa Clara County). 

Jack Bravo: California Rock and Gravel Company. 

Howard L. Reese : City Manager, Fremont. 

Volume 3 — San Diego — January 18, 1966 

Michael C. Fletcher: President, Ed Fletcher Company. 

Glenn A. Rick : President, Rick Engineering Company. Mr. Rick represented San 

Diego County Rock Producers Association. 
James Fairman : Director of Planning, City of San Diego. 
Charles E. Porter: Assistant to the City Manager, City of San Diego. 
William A. Craven : Executive Assistant, San Diego County Board of Supervisors ; 

Planning Commission, Oceanside. 
Roy M. Kepner : Natural Resources Specialist, San Diego County Department 

of Agriculture. 

Volume 4 — Riverside— April 12, 1966 

William R. Livingston : Assistant Planning Director, Riverside. 

Paul Anderson : Supervisor, Riverside County ; President, California Super- 
visors' Association. 

Daniel D. Mikesell: Vice-Chairman, Board of Supervisors, San Bernardino 
County. 

Stuart L. Adler : President, San Bernardino and Riverside Counties Rock Pro- 
ducers Association. 

Dick Bowman : Chief, Division of Resource Management, Bureau of Land Man- 
agement District Land Office, Riverside. 

(40) 



PUBLIC UTILITIES AND CORPORATIONS 41 

Volume 5 — Sacramento — May 17, 1966 
Paul Foxworthy : City Manager, Azusa. 

Jack M. Merelman : Legal Counsel, County Supervisors Association of California. 
Crawford Williamson : Teichert & Son. 
Richard Rathfon : Assistant City Manager, Sacramento. 



12 



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UTILITY REGULATION 

In accordance with the ongoing interest of the Public Utilities and 
Corporations Committee in matters involving regulation of public utili- 
ties, the following subject areas were studied. 

REGULATION OF AMBULANCE RATES 

One hearing was conducted on September 13 and 14, 1966, in San 
Diego. 

Scope 

As a result of a federal regulatory agency decision that ambulance 
firms are in interstate commerce, employees of such firms are now cov- 
ered by the provisions of the Fair Labor Standards Act, In order to 
meet increased labor costs private ambulance firms are finding it nec- 
essary to raise rates and, in some cases, seek subsidies from govern- 
mental bodies to continue operation. 

The Public Utilities Code does not name ambulance rates as being 
under the jurisdiction of the California Public Utilities Commission. 
Regulatory jurisdiction at the state level currently rests with the De- 
partment of Motor Vehicles and the California Highway Patrol. The 
regulatory jurisdiction of these departments appropriately relates to 
vehicles and safety equipment. At the present time, regulation of ambu- 
lance rates exists at the city and county levels of government. 

In the larger urban areas, the administrative and economic capacities 
of local government generally make it possible to provide for ambulance 
service at rates which have been adequately reviewed and approved 
by local authorities. In many of the smaller cities and rural areas of the 
state, limited budgetary and administrative capacities may preclude 
local authorities from exercising such regulatory functions. The result 
in these areas is often inadequate ambulance service at expensive rates. 

In view of these factors, it was the intent of the committee to inquire 
into the feasibility and wisdom of granting the California Public Utili- 
ties Commission jurisdiction over ambulance rates. 

Positions 

Representatives of cities testified that regulation of ambulance serv- 
ices and rates beyond the local level is not desirable. Factors such as 
population density, street patterns and geography vary considerably 
throughout the state and have a direct influence on the organization 
and economics of ambulance services. Local authorities are best quali- 
fied to determine and react to these variables. 

Spokesmen for the ambulance industry agreed with the concept of 
local control of ambulance services. There was general agreement, how- 
ever, that many rural areas need financial assistance in order to provide 
adequate ambulance service at reasonable rates. 

Analysis and Recommendation 

The committee concluded that ambulance services are primarily a 
para-medical facility. The arguments for local jurisdiction are com- 

(43) 



44 ASSEMBLY INTERIM COMMITTEE 

pelling. Since there is general agreement that economic problems are 
responsible for high rates, the matter of financial assistance should be 
pursued with a view to administration at the local level in accordance 
with state standards. The committee recommends that this subject be 
approached as a public health matter. The committee concluded that 
ambulance rates should not be regulated by the Public Utilities Com- 
mission of the State of California. 

POWER BLACKOUT 

One hearing was conducted on December 15, 1965, in Sacramento. 

Scope 

As a result of the power failure in the northeastern states in Novem- 
ber, 1965, there had been widespread speculation as to the possibilities 
of a similar occurrence in California. The committee was interested 
in learning about California 's posture with respect to power blackouts. 

Positions 

The committee heard testimony from representatives of electric utili- 
ties in California, cities, and state officials. 

California electric utilities were pioneers in long distance, high 
voltage transmission. Methods were developed in California to protect 
long transmission lines and to guard against losing power loads. Elec- 
tric utilities in California employ equipment which will automatically 
unload part of the system in the event of frequency irregularities. This 
type of equipment was generally not in use in the northeastern part of 
the United States at the time of the power failure in 1965. There are 
a great number of ties connecting the northeastern utilities together and 
a serious power failure on one system pulled other systems down. 

In California, each electric utility system carries enough genera- 
tion in reserve to protect its own system. Its ties will open automati- 
cally before any failure on one system pulls another system down. Since 
this action takes place over a wide area, it is dependent on a great many 
relays. The chances of any malfunction are extremely remote. Should a 
malfunction occur there would not be an overall effect such as was ex- 
perienced in the northeast. 

On the state level the California Disaster Office is part of the Gov- 
ernor 's office and is basically a planning and coordinating agency. 

Whenever an emergency or natural disaster occurs, the Disaster Of- 
fice is charged with coordination of mutual aid and disaster relief ac- 
tivities provided by state and federal agencies and local jurisdictions 
throughout the disaster area, The State Electrical Operating Engineer 
of the California Disaster Office is charged with coordinating individ- 
ual electric utilities in the event of a complete electric breakdown in 
California. 

The State Fire Marshal is empowered to establish minimum regula- 
tions for fire safety, which includes emergency power, especially for 
lighting, in schools, public gathering places, emergency facilities such 
as hospitals and state-owned buildings. Enforcement of these regula- 
tions is delegated almost completely to local authorities. 

A representative of the League of California Cities testified that vir- 
tually all cities have equipped themselves with independently oper- 



PUBLIC UTILITIES AND CORPORATIONS 4.") 

ated standby power equipment for the essential emergency services in 
case of limited power failures. 

Analysis and Recommendation 

Power failures of a limited nature due to such causes as traffic acci- 
dents, storms and equipment failure cannot be completely eliminated 
in California. However, emergency procedures and standby power 
sources have been provided for by state agencies, California electric 
utilities, virtually every city and important facilities such as hospitals. 
Such measures are designed to minimize the extent and duration of 
any possible power failure in California. 

Testimony at this hearing did not disclose the need for legislation to 
avoid a power blackout such as occurred in the northeast. 

TELEPHONE SOLICITATION 

One hearing was held on October 4 and 5, 1966, in Compton. 

Scope 

The committee 's interest was in the area of uninvited telephone solici- 
tation calls to private residences. The term uninvited is used to de- 
scribe telephone calls made from a list of names, addresses or telephone 
numbers without regard to whether or not the party being called has 
indicated any prior interest in receiving such a call. Telephone solici- 
tation is generally used for charitable fund raising, political cam- 
paigning and for commercial purposes. 

While telephone solicitation is not prohibited under present law, the 
committee was aware of widespread concern and annoyance on the part 
of private telephone subscribers over uninvited telephone solicitation 
for commercial purposes. 

Positions 

Testimony was heard from housewives, senior citizens, witnesses rep- 
resenting consumers, charities, law enforcement, telephone companies 
and the California Public Utilities Commission. Hearing notices were 
mailed to numerous firms known to be involved in telephone solicita- 
tion. None of these firms sent representatives to testify before the 
committee. 

Witnesses representing telephone companies and the California Pub- 
lic Utilities Commission testified that, under present law, telephone 
service must be provided without regard to the fact that telephone 
equipment may be used for uninvited calls to private residences for 
commercial purposes. 

Testimony before the committee was overwhelmingly opposed to this 
type of telephone usage. At issue is the individual's right to privacy 
in his own home as opposed to the rights of legitimate businesses and 
organizations to advertise and sell their products, services or special 
cause. 

Telephone solicitation for charitable purposes and for political cam- 
paigning were distinguished as generally nonobjectionable in view of 
the high public purpose served by such causes. 

Representatives of law enforcement agencies testified to the high in- 
cidence of fraud involved in commercial telephone solicitation. A pub- 



4(J ASSEMBLY INTERIM COMMITTEE 

lie agency in one metropolitan area processed approximately three hun- 
dred cases of fraud in one year. A high percentage of these cases 
were traced to telephone solicitation. 

The committee received recommendations ranging from outright pro- 
hibition of commercial telephone solicitation to various restrictions on 
this type of telephone usage. Representatives of law enforcement agen- 
cies testified that enforcement of outright prohibition or restrictions 
on commercial telephone solicitation per se would involve difficult 
problems of identification and proof. 

Analysis and Recommendations 

The committee found strong opposition to uninvited commercial tel- 
ephone solicitation on the part of private telephone ratepayers. Testi- 
mony from law enforcement officials revealed an alarming incidence 
of fraud related to uninvited calls to private residences for commer- 
cial purposes. In view of the fact that difficulties of proof and identi- 
fication would frustrate effective enforcement of outright prohibition 
or restrictions on uninvited commercial telephone calls to private resi- 
dences, the committee does not recommend such an approach at this 
time. 

The committee concluded that, as a first step, legislation should be 
enacted providing that where a sale or contract results from an initial 
contact by an uninvited telephone solicitation call to a private resi- 
dence, the party who had received the uninvited telephone solicitation 
call shall have the power to rescind the contract for a period of fifteen 
days after the contract is formed. This will provide private residence 
telephone ratepayers the opportunity to reconsider the matter free from 
any sales pressure on their telephone or in their homes. The commit- 
tee believes that public awareness of such legislation would limit the 
possibility of fraud and discourage this type of telephone usage. The 
committee recommends that such legislation should not apply to rate- 
payers whose telephones are installed for business purposes. A review 
of the effectiveness of such legislation should be undertaken by the 
Legislature, allowing for a reasonable period of operation. 

An act to add Article 2.5 (commencing with Section 17550) to Chapter 
1 of Part 3 of Division 7 of the Business and Professions Code, re- 
lating to ousiness solicitation. 

The people of the State of California do enact as follows: 

Section 1. Article 2.5 (commencing with Section 17550) is added 
to Chapter 1 of Part 3 of Division 7 of the Business and Professions 
Code, to read : 

Article 2.5. Solicitation by Telephone 

17550. A contract resulting from an unsolicited telephone commu- 
nication to a private residence by a solicitor for commercial purposes 
may be rescinded by the solicited contracting party. The power to 
rescind must be exercised within fifteen days after the making of such 
contract. 

o 

_ ._ printed in California office of state printing 

L.- 17(5 7— 100 12-68 1,800 



Volume 19 



ASSEMBLY INTERIM COMMITTEE REPORTS 
1965-1967 

REPORT OF THE 

ASSEMBLY INTERIM COMMITTEE 
ON SOCIAL WELFARE 

MEMBERS OF THE COMMITTEE 

JACK T. CASEY, Chairman 
WILLIAM F. STANTON, Vice Chairman 



Number 14 



ROBERT E. BADHAM 
CLAIR W. BURGENER 
JOHN L. BURTON 
EUGENE A. CHAPPIE 



EDWARD E. ELLIOTT 
WINFIELD SHOEMAKER 
JOHN G. VENEMAN 



JANUARY 1967 

THOMAS JOE, Consultant 
MARY VIRGINIA KALES, Secretary 



A REVIEW OF REHABILITATION 
POLICIES AND PROGRAMS 




Published by the 

ASSEMBLY 
OF THE STATE OF CALIFORNIA 



JESSE M. UNRUH 
Speaker 

GEORGE ZENOVICH 
Majority Floor Leader 



JAMES DRISCOLL 
Chief Clerk 



CARLOS BEE 
Speaker pro Tempore 

ROBERT T. MONAGAN 
Minority Floor Leader 



LETTER OF TRANSMITTAL 



California State Legislature 
Assembly Committee on Social Welfare 

January 5, 1967 

Honorable Jesse M. Unruh 
Speaker of the Assembly, and 

Honorable Members of the Assembly 
State Capitol 
Sacramento, California 

Gentlemen : 

The Assembly Interim Committee on Social Welfare submits herewith 
its report to the Legislature on 1965-67 Interim studies. This report is 
devoted to the following subject : 

A Review of Rehabilitation Policies and Programs 

The attached report presents a brief review of each problem and sets 
forth the general conclusions and recommendations of the Committee 
for the legislation which seems indicated. These conclusions and recom- 
mendations are the result of a series of public hearings and additional 
research conducted during the interim period. 

Respectfully submitted, 

Jack T. Casey, Chairman 

William F. Stanton, Vice Chairman 

Robert E. Badham (with reservations)* Edward E. Elliott 

Clair W. Burgener Winfield Shoemaker 

John L. Burton John G. Veneman 
Eugene A. Chappie 

* To Recommendations 2, 4, 11, 12, and 16. 



(3) 



PREFACE 

This report has to do with the total subject matter of rehabilitation. 
Five public hearings were held which dealt with various programs of 
the Department of Rehabilitation, but there is no attempt here to dupli- 
cate the hearing transcripts. Committee hearings held on this subject 
were as follows : 

Nov. 22-23, 1965 — Review of existing vocational 
LOS ANGELES rehabilitation policies in 

California 

Dec. 3, 1965 — California Industries for the 

SAN FRANCISCO Blind 

Dec. 7, 1965 —Contracts 

SACRAMENTO 

Dec. 21, 1965 — Business enterprise program 

SAN DIEGO 

March 2, 1966 — Interagency transfers 

SACRAMENTO 

Anyone interested in reading the complete transcripts should contact 
the Committee office. 

In this report, an attempt is made to consolidate and synthesize many 
of the questions and ideas brought out in the hearings, particularly 
those which are significant for legislative action. The recommendations 
made are in the nature of broad policy proposals rather than of legisla- 
tive bills. These proposals must be viewed in the context of the present 
relationships between the Department of Rehabilitation and other 
agencies, and are, therefore, not narrowly confined to that administra- 
tive jurisdiction. 

The report begins with a statement of the Committee's legislative 
recommendations, followed by three supporting sections. These are : 
1) a summary and description of the existing programs of the Depart- 
ment of Rehabilitation, 2) a discussion of financing, and 3) an analysis 
of issues brought out by the hearings. 



(4) 



TABLE OF CONTENTS 

Title Page 1 

Letter of Transmittal 3 

Preface 4 

Recommendations 7 

Section I : Summary and Description 9 

Section II: Financing 14 

Section III : Policy Review, Findings and Recommendations 16 

Section IV: Conclusion 29 

Appendixes 33 



(5 

-L-1682 



RECOMMENDATIONS 

1. It is the Committee's judgment that the present scope of activities 
of the Department of Rehabilitation is too broad. The Committee 
recommends that the Department's proper role be the direct voca- 
tional training and placement in competitive employment of the 
physically and mentally disabled. 

2. In order to permit the Department of Rehabilitation to concentrate 
on its primary task, within its limited ceiling of Federal reim- 
bursement, the Committee recommends that such prevocational 
programs as the Orientation Center for the Blind and the Field 
Service Counselors for the Blind be transferred to the Department 
of Social Welfare, which has no ceiling on Federal reimbursement 
and which is the chief social service agency. It is further recom- 
mended that the State Department of Social Welfare be renamed 
the Department of Social Services. 

3. The Committee recommends that a study be made of the feasibility 
of applying orientation and field service counseling programs 
to other disability groups. 

4. Because of the proven value of the present Orientation Center 
for the Blind, the Committee recommends that all necessary budg- 
etary support be provided for the hiring of sufficient staff to per- 
mit full utilization of the facility. It has been estimated by the 
Department that an additional $60,000, of which $15,000 would 
be State money, would be required to fully staff the Orientation 
Center. 

5. The Committee also recommends that the Department of Social 
Welfare recognize the Department of Rehabilitation as the employ- 
ment training agency for public assistance recipients who qualify 
for rehabilitation services. 

6. In order to encourage disabled public assistance recipients to par- 
ticipate in on-the-job training, the Committee recommends that 
provision be made in the law for the exemption of a portion of 
earnings in determining the welfare aid grant. 

7. The Committee views the present cooperative agreements between 
the Department of Rehabilitation and other agencies as pilot proj- 
ects which shoidd be reviewed by the Legislature before they 
are reauthorized or expanded. 

8. The Committee takes the position that the Department of Reha- 
bilitation should not provide purely medical rehabilitation where 
this is available under the State Medi-Cal Program. 



(7) 



8 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

!>. In regard to the Business Enterprise Program, the Committee rec- 
ommends that the Legislature limit the percentage of the oper- 
ators' trust fund which can be used for new expansion purposes. 

TO. The Committee also recommends that an intensive study be made 
of the feasibility of establishing a system of financial incentives 
to encourage business enterprise operators to begin independent 
ventures in the food service field. 

11. The Committee recommends that a distinction be made between 
workshops which provide temporary work training in marketable 
skills and workshops which offer work adjustment or permanent 
employment. It is further recommended that public and private 
work adjustment and long-term workshops be transferred to the 
jurisdiction of the State Department of Social Welfare. 

12. The Committee recognizes the special value of the present work 
activity centers serving 200 mentally retarded Aid to Totally Dis- 
abled recipients through the Social Service Amendments to the 
Social Security Act. The Committee, therefore, recommends ex- 
pansion of such services to a greater number of mentally retarded 
recipients through increased Budget support. 

13. The Committee urges the Department of Rehabilitation to give 
even greater emphasis than it already has to the inclusion of its 
clients in training programs for the general population, such as 
MDTA, apprenticeship programs, public and private trade 
schools, colleges and universities, and on-the-job training. The 
Committee recommends engaging more of the private sector in the 
rehabilitation of disabled persons through some type of incentive, 
instead of establishing separate rehabilitative training facilities. 

14. The Committee recommends the establishment of a Board to re- 
view and adopt regulations of the Department of Rehabilitation in 
public hearings which are clidy publicized. The Committee also 
recommends that the Board of Rehabilitation hear complaints and 
settle grievances for clients or applicants for service. On the basis 
of testimony and other information coming to the Committee, it 
lias been found that the Department's necessarily broad policy- 
making discretion requires that concerned individuals, organiza- 
tions, and other departments be apprised of regulation changes 
in advance of their adoption and that a fair hearing procedure 
be available for clients. 

15. The Committee recommends that the Board of Rehabilitation and 
the Legislature cooperatively establish priorities for rehabilitation 
services and that every effort be made to provide rehabilitative 
services and training for employment to the culturally disadvan- 
taged, without retarding the growth of programs for other physi- 
cal J \j and mentally disabled persons. 

16. Finally, the Committee urges the Legislature to memorialize Con- 
gress to remove the ceiling on Federal Rehabilitation matching 
funds. 



SECTION I 

SUMMARY AND DESCRIPTION 

GENERAL INFORMATION 

Through action of the State Legislature, the Department of Reha- 
bilitation was established on October 1, 1963, but all of its units had 
existed before that time. It has three major programs : Vocational Re- 
habilitation Service, Disability Certification, and Rehabilitation of the 
Blind. The Department of Rehabilitation is one of four Departments 
within the Health and Welfare Agency. The Department provides em- 
ployment services to the physically and mentally handicapped in the 
State and attempts to reduce dependency through a wide variety of 
restorative and retraining services. 

The Department is headed by a Director and a Chief Deputy Di- 
rector, and is organized into four sections, an Administrative Services 
Section, a Division of Vocational Rehabilitation, a Division of Disa- 
bility Determination, and a Division of Rehabilitation of the Blind. 
The Division of Vocational Rehabilitation has approximately 500 total 
positions, the Division of Rehabilitation of the Blind has approximately 
200, and the Disability Certification Program has 225, for a total of 
1,000 positions in 42 offices and 2 districts. 

The Department of Rehabilitation had 40,024 cases referred to it 
during 1964, of which 9,025 were accepted for service. Of an active 
caseload of 20,171 during 1964, 3,044 were closed as rehabilitated. An 
additional 3503 cases were closed before rehabilitation could be un- 
dertaken due to factors such as loss of contact, the indifference of the 
client, or an increase in degree of disability. An additional 1,246 cases 
were closed although the person never achieved employment after re- 
ceiving the rehabilitation services. 

The Federal law broadly defines who is eligible for service. States 
have the discretion of selecting for rehabilitation any individual with 
a mental or physical defect affecting his employability, as long as the 
rehabilitation plan is realistic and "feasible." California's Department 
of Rehabilitation has the stated policy of giving priority to persons 
with major handicaps requiring long-term and intensive effort rather 
than those with relatively minor disabilities remedied by eye glasses, 
hearing aids, braces, or trusses. The Department has the expressed 
policy of not helping those who might find employment on their own 
or who would be likely to be assisted elsewhere. Selection of clients 
is not based necessarily on the need to show quick results ; on the other 
hand, individuals whose potential is judged to be extremely limited, 
and who are considered unlikely to benefit from the program, are not 
accepted either. An applicant's disability may not be considered suffi- 
ciently serious to warrant rehabilitation training or, on the other end 
of the scale, his disability may be so severe that he does not meet the 
"feasibility" criterion. Even within this selective framework, the De- 
partment is financially capable of serving only a small percentage of 

(9) 



10 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

those needing rehabilitation services. The 1965 Amendments to the 
Federal Rehabilitation Act have allowed the inclusion of sociocultural 
factors in the determination of disability, which further broadens the 
clientele, but makes selection sometimes even more difficult. 

For the numbers, earnings, and occupations of successful rehabili- 
tants for the fiscal year ending June 30, 1965, see Appendixes 1 
and 2. Types of services provided are shown in Appendix 3. Ap- 
pendixes 4-6 show the types of disabilities of the clients. Appendixes 
7-12 cites their income and its sources. Appendix 13 gives the age, 
race, and sex of the clients. Appendixes 14 and 15 give a comparison 
by states of the number of referrals, cases accepted, and per capita 
expenditures, while Appendixes 16-18 show the number of rehabili- 
tants nationwide since 1920, and the disabilities and occupations of 
rehabilitants on a national basis. 

VOCATIONAL REHABILITATION 

Vocational rehabilitation has been a function of State Government 
since 1921. In fact, it is one of the oldest of California's social pro- 
grams. The current Vocational Rehabilitation Division in the Depart- 
ment of Rehabilitation offers diagnosis and evaluation, vocational guid- 
ance, and other services aimed at bringing disabled individuals to the 
point of employment. These other services include, but are not limited 
to, maintenance, transportation, prosthetic devices, medical or psychia- 
tric treatment, on-the-job training, personal tutoring, supplies, and 
placement of selected individuals in small business enterprises. Work 
evaluation, training, and employment may be provided in privately 
operated sheltered workshops. Individuals may be supported through 
high school, junior college, or university as part of their rehabilitation 
training. 

The central administrative unit of the Division is in Sacramento, 
with regional supervisory offices in Oakland and Los Angeles, and 11 
district and 23 branch offices. Rehabilitation counselors, located in the 
district and branch offices, have the primary responsibility for re- 
habilitation. They maintain continued personal contact with their 
clients and perform the necessary tasks of testing, counseling, referral, 
and employer public relations. The rehabilitation plan is the result 
of the joint efforts of the counselor and the client. 

1. Caseload 

The Vocational Rehabilitation caseload has been increasing; the 
total of active cases has grown from 16,000 in 1960-61 to approximately 
_!(U)00 in 1963-64. The number of cases carried from year to year 
has risen from 9,000 to 11,000 in the three-year period from 1960-61 
to 1963-64, while new cases accepted have increased from 6,000 to 
9,000 in the same period. 

Total cases closed yearly have increased from 6,330 to 7,750 in the 
aforementioned combined three-year period. Cases closed as rehabili- 
tated have slowly, but gradually, increased from 2,487 in 1960-61 to 
3,045 in 1963-64; cases closed, unemployed after plan developed, 
have increased from 1,050 in 1960-61 to 1,245 in 1963-64. Cases closed 
for other reasons still make up a plurality of the cases, going from 



REHABILITATION POLICIES AND PROGRAMS 11 

2,841 in 1960-61 to 3,502 in 1963-64. These other reasons are not speci- 
fied by the Department. 

Within the Division of Vocational Rehabilitation, there are speci- 
fic programs, including' rehabilitation services to recipients of Old 
Age Survivors and Disability Insurance (OASDI), the industrially 
injured, and some patients in mental hospitals. 

2. Cooperative Agreements 

In addition to its direct functions, for the past year, the Depart- 
ment of Rehabilitation has been authorized to engage in interdepart- 
mental contract agreements which are rehabilitative in nature. The 
Department of Rehabilitation provides funding and staff to opera- 
tions within the facilities of other departments. The essential pur- 
pose of these cooperative agreements is to provide a necessary rehabili- 
tation element in programs of the Departments of Corrections, Public 
Health, Mental Hygiene, and Education. Over $8 million of Federal 
money has been authorized to the Department of Rehabilitation to 
augment and initiate rehabilitation services in the programs of these 
other agencies. 

As an example of a cooperative interdepartmental agreement, the 
Legislature authorized the Department of Rehabilitation to utilize 
$750,000 of Federal funds in 1965-66 to develop programs in local 
school districts. The purpose of these programs is to provide voca- 
tionally oriented experiences to mentally retarded and physically hand- 
icapped young people while they are still in school. Programs of this 
type were established in approximately 25 school districts. 

Another cooperative program between the Department of Rehabil- 
itation and Youth and Adult Correctional agencies, assigns rehabilita- 
tion counselors to both inmates and parolees. Agreements with the 
Department of Public Health focus on the strengthening of counsel- 
ing and referral services to Crippled Children's Services and to 
the regional diagnostic centers for the mentally retarded. In addi- 
tion, cooperative programs are being developed with the Department 
of Public Health to provide vocational rehabilitation for alcoholics. 
Another joint program, this time with the Department of Mental 
Hygiene, authorizes the placement of rehabilitation counselors in State 
Hospitals for the mentally ill and retarded and establishes a special 
program for the mentally retarded at Agnews State Hospital. 

The major theme dominating these cooperative agreements is that 
of strengthening existing social programs by the infusion of a voca- 
tional rehabilitation element, while achieving maximum utilization of 
Federal funds. 

There is also a special project that is being carried on by the Division 
of Rehabilitation Services for recipients of public assistance. This pro- 
gram places vocational rehabilitation counselors in count}?- welfare of- 
fices to determine whether disability is a factor in a recipient's unem- 
ployability and whether rehabilitation services would be useful. Al- 
though the Aid to the Blind and Aid to the Totally Disabled categories 
provide some rehabilitation clients, there is also a major potential for 
rehabilitation services in the Aid to Families with Dependent Children 
(AFDC) category. It has been estimated that at least one-third of 



12 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

AFDC parents have a disability or health problem, which may make 
them eligible for rehabilitation services. 

The results so far of the efforts to rehabilitate recipients have been 
minimal. Only 850 Public Assistance recipients were rehabilitated 
through the Department of Rehabilitation in 1964-65. Of these, only 
90 wore Aid to Totally Disabled recipients, out of a total caseload of 
75,000 in this category. 

DISABILITY DETERMINATIONS 

There are two offices within the Department of Rehabilitation which 
deal exclusively with disability determinations for OASDI benefits. 
More than 100,000 disabled Californians and their families receive 
Social Security Disability Benefits amounting to between $100 and $150 
million annually. Although this is a Federal program, the benefit 
claims by disabled persons are adjudicated by the Division of Dis- 
ability Determination of the Department of Rehabilitation. 

Social Security Benefits for disabled workers under age 65 were 
first authorized by Congress in 1956. The eligibility requirements have 
been extended since then and the numbers of persons included grows 
larger every year. The typical beneficiary is a married man under 
age 60, disabled by a cardiovascular or nervous system disease. He 
has a wife and two dependent children and his monthly benefits range 
between $254 and $300 per month. 

In addition to determining the extent of disability for purposes of 
OASDI, the Division staff studies the case folder of each benefit appli- 
cant. If the information submitted for OASDI purposes indicates a 
potential for rehabilitation, the case is referred to the Division of 
Rehabilitation. Six thousand cases w 7 ere referred in 1965-66 on this 
basis, out of 59,600 determinations made during this time. The client 
is not actually seen until he is contacted by the Division of Rehabili- 
tation. 

REHABILITATION OF THE BLIND 

The third major program is the Division of Rehabilitation of the 
Blind. Like the Division of Vocational Rehabilitation, this division 
provides counseling, physical restoration, vocational training, and job 
placement, in this case for clients who are blind or severely visually 
handicapped. Blind clients are served by counselors specializing in 
rehabilitation of the blind, unlike other counselors whose caseloads usu- 
ally represent a variety of disabilities. During the fiscal year 1964-65, 
155 legally blind and another 290 visually handicapped clients were 
rehabilitated by the division. 

In addition to the general vocational rehabilitation program for the 
blind, the division has several special programs. These programs are 
pioneering in nature and have been of special interest to the Legis- 
lature because of their possible applicability to other disability groups. 
These programs are described briefly. 

Orientation Center for the Blind: 

This is a short-term residential rehabilitation center for the blind 
with new quarters opened in Albany in 1964. It has a capacity of 40 
clients and a projected workload of 100 clients per year. All residents 
receive instruction in mobility, communication skills (braille and 



REHABILITATION POLICIES AND PROGRAMS 13 

typing), techniques of daily living, and the development and reorien- 
tation of hand skills through shop work, sewing, and cooking. 

At present, the Orientation Center has only 23 clients. The Depart- 
ment has limited the Center to this number because of lack of financing 
for sufficient staff to serve the total capacity. 

Field Rehabilitation Services: 

This program provides prevocational rehabilitation services (typ- 
ing, braille, mobility, self -care) to the blind and severely visually 
handicapped at home, in hospitals, and in institutions. The program also 
offers counseling and orientation for families of the newly blind. 

Industrial Rehabilitation Services: 

The Department of Rehabilitation operates two types of rehabili- 
tation workshops: the California Industries for the Blind and the 
Opportunity Work Centers. 

The Opportunity Work Centers consist of three rehabilitation work- 
shops which provide training and employment to over 100 blind and 
otherwise disabled workers. These are subcontract shops primarily en- 
gaged in assembly and packaging. 

California Industries for the Blind is composed of three manufac- 
turing rehabilitation workshops producing government contract items 
and commercial products and offering employment to up to 230 blind 
and otherwise disabled workers. 

Business Enterprise Program: 

This is a training and placement program for operators of vending 
stands, snack bars, and cafeterias. The program provides employment 
opportunities to more than 250 blind operators and, in addition, they 
employ over 200 other disabled workers. Also included is a training 
program in food service occupations for the nonblind disabled for 
placement in competitive employment. Installations are located in pub- 
lic buildings and industrial establishments. 

There are 11 State Civil Service administrators working with the 
blind operators. The operators earnings are shown in the following ta- 
ble: 

BUSINESS ENTERPRISE PROGRAM 
OPERATORS EARNINGS 



Number of 


Vending 


Food Service 


Monthly 


Percentage 


Operators 


Stands 


Operations 


Earnings 


of the Total 


34 


24 


10 


Under $200 


13.9 


70 


39 


31 


$201-$400 


28.7 


61 


26 


35 


$401-$600 


25 


37 


15 


22 


$601-$80O 


15.2 


21 


7 


14 


$801-$1000 


8.6 


6 


2 


4 


$1001-$1200 


2.4 


5 


3 


2 


$1201-$1400 


2.1 


3 


2 


1 


$1400-$1600 


.5 


5 


3 


2 


$1601-$1800 


2.1 


2 


1 


1 


$1801-$2200 


.8 



3— L-1682 



SECTION II 

FINANCING 

The State Department of Rehabilitation is the smallest and newest 
department under the Health and Welfare Agency. Since the Depart- 
ment of Rehabilitation's establishment as a separate department in 
1963, the Federal Government has played a leading role in the ex- 
pansion of its fiscal base. During this period, the State's financial 
contribution has not changed. The State Legislature has merely au- 
thorized the expenditure of the additional Federal funds without pro- 
posing specific new programs. 

During the year 1964r-65, the Department received $1.04 of Federal 
matching for every $1.00 of State money used to carry out the rehabili- 
tation function. The total budget for that year was $13.5 million. 
The Federal Rehabilitation Act was amended to change reimburse- 
ments for the fiscal year 1965-66. California benefitted more than any 
other state. The ratio of Federal funds previously allocated to the 
states was influenced heavily by per capita income factors, which 
had worked to the detriment of California as a high income state. 
Now all states receive reimbursement at a 75-25 ratio, which doubles 
the amount of rehabilitation money available to California at no in- 
crease in State costs. Even prior to this new development, the De- 
partment showed rapid financial growth, as is shown below. 

Total Expenditures: 

Total State-Federal expenditures by the Department of Rehabilita- 
tion have risen from approximately $9.5 million in 1962-63, to $13.5 
million in 1964-65. Projective estimates by the Department of Finance 
show that the Department of Rehabilitation will have expended some 
$22.2 million in this past fiscal year, 1965-66. It is estimated that 
the Department of Rehabilitation's budget will total $31.5 million 
for the present fiscal period, 1966-67, more than a tripling of ex- 
penditures over a four-year period. 

General Fund Expenditures: 

Actual expenditures from the State General Fund by the Depart- 
ment of Rehabilitation have risen from $3.8 million in 1962-63 to $5.3 
million in 1964-65. The State General Fund authorization for Rehabili- 
tation for 1965-66 was $5.7 million. The appropriations request for 
the 1966-67 period was reduced to the amount expended from the 
General Fund by the Department of Rehabilitation in 1964-65, an 
amount of $5.3 million. 

Federal Fund Expenditures: 

The difference between the total expenditure by the Department of 
Rehabilitation and monies from the State General Fund is made up 
by Federal funds. Such Federal funds amounted to $3.6 million in 
1962-63 and $5.2 million in 1964-65 

(14) 



REHABILITATION POLICIES AND PROGRAMS 15 

Expenditures for Cooperative Rehabilitation Services: 

The Legislature authorized the Department of Rehabilitation to ex- 
pend some $8.7 million in Federal funds for the Cooperative Rehabili- 
tation Services Program for fiscal 1965-66, which would provide a total 
statewide program of $17.4 million. The Department of Finance esti- 
mated, however, that only $3.7 million would actually be utilized for 
the program during the 1965-66 fiscal period, since program growth 
has not kept pace with available financing. 

In the 1965-66 review of Budget requests, the Legislative Ana- 
lyst suggested that some criteria be established to evaluate the Cooper- 
ative Rehabilitation Services Program and its massive infusion of ad- 
ditional Federal monies into the programs of the cooperating State 
Departments and Agencies. 

Summary 1965—66 Fiscal Year Expenditures for the 

Department of Rehabilitation: 

State General Fund $5,467,000 

Federal Matching Funds 9,477,000 * 

Cooperative Rehabilitation Services (Federal funds) — out of a 

total authorized of $8.7 million 3,734,000 

Disability Certification Program (OASDI) 3,504,000 

TOTAL FUNDS EXPENDED BY THE DEPARTMENT OF 

REHABILITATION $22,182,000 

* Due to the passage of HR 8310 by the last Congress, the percentage of Federal 
matching funds was increased from a sharing of 51.19% to 62.5% in the 1965-66 
fiscal year to 75% in the current fiscal year. Thus, the State General Fund monies 
of $5.7 million appropriated, matched by approximately the same amount in 
Federal grants, engendered an additional $3.6 million in Federal funds for this 
past fiscal year, for a total Federal matching of $9.4 million. 

In the 1966-67 fiscal year, with a General Fund expenditure of 
$5.3 million, at a Federal matching ratio of 75%, there will be an 
increase in Federal funds of $8 to $10 million. 

DEPARTMENT OF REHABILITATION 
TOTAL FEDERAL-STATE EXPENDITURES 

62-63 $9.5 Million 

63-64 $11.1 Million 

64-65 $13.5 Million 

65-66 $22.5 Million 

66-67 $31.5 Million (Estimated) 



SECTION III 

POLICY REVIEW, FINDINGS AND 
RECOMMENDATIONS 

A review and in-depth analysis of State rehabilitation policies and 
practices is especially timely, in view of the fact (pointed out in the 
previous section) that the Department's budget has more than tripled 
in the last four years. The increase in Federal funds available for 
the employment rehabilitation of disabled persons is the result of 
growing nationwide concern in this field. California's program is de- 
veloping rapidly under the stimulus of Federal dollars, but the State 
Legislature has provided scant direction and has played a relatively 
passive role. The Legislature has not initiated major rehabilitation 
policy during the last 12 years and has authorized little in the way 
of additional State financing. The 1959 Report of the Joint Interim 
Committee on the Education and Rehabilitation of Handicapped Chil- 
dren and Adults, Senator James J. McBride, Chairman, represents 
the last comprehensive review of the rehabilitation field by the Legis- 
lature. 

Although the Department of Rehabilitation is the smallest social 
agency in California, its task is given high priority by the public and 
by government officials. The Department does not undertake this task 
alone, but works in a broad field along with the other social agencies. 
''Rehabilitation" is a goal of virtually every social agency in the State. 
The functions of the various agencies in relation to this goal must be 
differentiated. It is the duty of the Legislature to pinpoint the re- 
sponsibility of each department in the achievement of the aims of 
rehabilitation. The major task of the Committee at this point is to de- 
fine the function of the Department of Rehabilitation vis-a-vis the 
other departments, so that the Legislature may consider the financing 
and legislation necessary to fulfill this function. 

A UNIFORM LEGISLATIVE VIEW 

The Legislature has consistently expressed and proven its concern 
for the rehabilitation of the disabled. However, the many legislative 
proposals which have been enacted all too often represent a piecemeal 
approach. The rehabilitation program has been augmented at va- 
rious times, according to the urgings of special interest groups and 
the availability of favorable Federal matching. These factors, along 
with the failure of the Legislature to reevaluate rehabilitation policy, 
have resulted in a patchwork program, with pieces scattered among 
various departments. 

As previously indicated, any comprehensive analysis cannot be ar- 
bitrarily limited by departmental jurisdictions. The Committee would 
be failing in its duty if it merely recommended adjustments and modi- 
fications within the established programs of the Department of Reha- 
bilitation. In order to go beyond existing departmental lines, a func- 

(16) 



REHABILITATION POLICIES AND PROGRAMS 17 

tional orientation to the problems of rehabilitation is offered here. This 
functional viewpoint provides the necessary means of dividing the 
broad responsibility among various agencies on a systematic basis. 

A functional perspective emphasizes type of service, as opposed to 
a clientele orientation, which looks at services in terms of a particular 
class of persons. Occasionally, a functional and a clientele orientation 
may coincide : Objective characteristics of a class of persons, such as 
physical disability, blindness, or retardation, may define service needs 
peculiar to a particular class. While this may occur in some cases, it 
is contended here that most service needs cut across categorical lines 
and that a functional method of organization best meets these needs. 
A strictly client-centered orientation has a number of disadvantages ; 
first, there is a great likelihood that several departments or divisions 
would be duplicating a whole gamut of services — each for the group 
it serves. (We see this happening currently in many State programs.) 
In addition, responsibility is difficult to pinpoint in cases where a 
group does not fit into any existing client category. Furthermore, there 
is inequality of service, with some persons receiving greater benefits 
based on group membership rather than on need for service. A 
clientele-centered bureacracy leads to fragmented and piecemeal pro- 
gram development and repetition of programs which cut across group 
lines. 

It is recognized that special interest groups will continue to argue 
for a clientele-centered department for themselves, a department which 
may include services ranging from the granting of assistance, to help 
with self -care, to placement in gainful employment. But the conten- 
tion of the Committee is that any group of persons, whether blind, 
disabled, retarded, or otherwise disadvantaged, vary among themselves 
as to characteristics and needs, and that many characteristics and needs 
are shared with other groups and with the general population. It is 
further contended that there should be a distinction between welfare 
programs which maintain the individual economically and in his 
•capacity for self-care and self-improvement, and vocational rehabili- 
tation programs which propel him to economic independence. These 
functions should not be mixed in a single administrative structure, 
whether organized on the basis of a clientele-orientation or some other 
basis. The more varied a department's responsibility, the less primary 
is the concern with vocational counseling and placement. 

As the Director of the Department of Rehabilitation stated in a hear- 
ing held on December 7, 1965, "I think the chief function of the 
Department of Social Welfare is income maintenance, and in the proc- 
ess of keeping family income up to a reasonable level, they are also 
charged with the responsibility of doing what they can to get them 
back to work. Our responsibility is strictly rehabilitation, whether 
they come from welfare, from an institution or . . . right out of school 
or whether they are just not in any of these situations, but because 
of an automobile accident or injury or something like that, they lose 
their job and they need to have somebody come in and help them get 
going again, even though they aren't (economically) dependent." 



18 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

CONCEPTS OF REHABILITATION 

The Committee sees the Department of Rehabilitation's task as that 
of training the physically and mentally disabled in marketable skills 
Leading to competitive employment. Self-care, self-improvement, and 
social adjustment are certainly prerequisites to successful economic re- 
habilitation, but they are secondary to the Department of Rehabilita- 
t ion's goals. 

The Committee feels that legislative and budgetary augmentations, 
which have expanded and added to the Department's functions, should 
bring a direct measurable return in terms of client employment, rather 
than in terms of maintaining or improving personal adjustment. Job 
success for the disabled is important not only for economic reasons, but 
because of the by-product of social and psychological benefits to the 
individual. Many personal adjustment problems can be improved 
through gainful employment. This is not to deny that many disabled 
persons must be trained to accept and live with their disability, but 
such training is not primarily vocational in character and should be 
the function of a more appropriate agency. 

In order to concentrate the efforts of the Department of Rehabilita- 
tion in the proper channels of vocational training, the existing programs 
must be scrutinized. Some present functions of the Department need 
to be redefined or transferred as a precondition to a proper focus on 
strictly rehabilitation functions which are the major means of breaking 
the cycle of dependency. Not only is it more logical for the Department 
of Rehabilitation to concentrate its efforts on employment preparation 
and placement for practical and accountability reasons, but this speciali- 
zation should result in better utilization of Federal matching funds. 

The Federal Government does allow rehabilitation matching for pre- 
vocational adjustment training, as well as vocational training itself. 
However, there is a ceiling on Federal rehabilitation funds. Therefore, 
priorities must be set, as the establishment of too many goals will 
dilute the use of the funds. 

It is not always easy to draw the dividing line between vocational 
and prevocational activities. Probably no one could fail to see the dis- 
tinction between prevocational instruction in personal grooming and 
communication skills (braille or lipreading) and vocational activities 
such as on-the-job training in private employment. Many activities in 
the rehabilitation sphere are not so easily differentiated. But some guid- 
ing distinction between the two must be formulated by the Legislature 
in order to make the Department of Rehabilitation primarily account- 
able for vocational training. Otherwise, the Department may continue 
to develop nonvocational programs in a cradle-to-grave approach to 
clients. 

The functions of other departments would also be clarified if the 
Department of Rehabilitation's function were delimited in terms of 
vocational training for disabled and socially handicapped persons. The 
Departments of Education, Social Welfare, Mental Hygiene, and 
Employment could then gear their own activities to coordinate with, 
but not duplicate, the Department of Rehabilitation's primary efforts. 
The Department of Rehabilitation is, therefore, protected from assum- 
ing the burdens of other departments in such areas as compensatory 



REHABILITATION POLICIES AND PROGRAMS 19 

education, vocational training for the nondisabled, and the provision of 
social services of a nonvocational nature. In addition, in no case should 
the Department provide purely medical rehabilitation when it is avail- 
able under the State Medi-Cal Program. 

The problem of setting limits to the scope of the Department of 
Rehabilitation has been further challenged by the 1965 Amendments 
to the Vocational Rehabilitation Act. These amendments have extended 
the definition of disability by giving greater weight than ever before 
to sociocultural factors. A person with educational and cultural disad- 
vantages may find that a minor defect prevents him from obtaining 
gainful employment and, therefore, makes him eligible for rehabilitation 
services. A person without these disadvantages of background presum- 
ably would be able to overcome a minor disability on his own and 
would not be eligible for rehabilitation services. Under the broadened 
definition, the client will still have a verifiable mental or physical defect, 
but an emphasis on the sociocultural factors contributing to his un- 
employability is also permitted. 

While any attempts to better the situation of the disadvantaged is 
commendable, this new emphasis raises major issues in regard to financ- 
ing and setting priorities. In 1964-65, the Department of Rehabilita- 
tion turned away over 25,000 of 40,000 persons referred for service. 
The Department itself acknowledges that even the total 40,000 referrals 
constitute only a fraction of the disabled persons in need of vocational 
rehabilitation. However, because of financial limitations, the Depart- 
ment admits that it is unable to serve three-fourths of those coming to 
it for service, much less to seek out those who have never been referred. 
Therefore, even with the new Federal funds coming to the Department, 
it is doubtful that adequate attention can be given to this large clien- 
tele which now includes the disadvantaged. 

The Department of Rehabilitation, in testimony presented in the 
hearings before this Committee, declared the policy of serving the "hard 
core" disabled, rather than those with minor disabilities who could be 
more easily placed. Is the serving of the less disabled, even though 
culturally disadvantaged, a retreat from this position? It is already 
difficult to steer a middle course between those who are "unfeasible" 
for rehabilitation and those who are not sufficiently disabled, without 
injecting this new element. The primary reason the Department gives 
for serving only a selected group of the disabled is lack of financing. 
Should the additional Federal financing now available be used to extend 
rehabilitation services to a larger proportion of the traditional clientele, 
or should it be used to offer services to a new class of disabled persons ; 
the socioculturally disadvantaged who may have only minor discernable 
mental or physical defects ? 

The Committee recommends the establishment of a Board to review 
and adopt regulations, hear client complaints, and, in cooperation with 
the Legislature, set priorities for rehabilitation services. This Board 
shall make every effort to fulfill the needs of the culturally disadvan- 
taged, without retarding the growth of programs for other physically 
and mentally disabled persons. This may require the use of the funds 
and programs of other departments in the service of the disadvantaged. 
It may also mean an additional State appropriation for rehabilitation 
purposes. 



20 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

There follows a discussion of the specific issues raised in the Com- 
mittee hearings on rehabilitation. 

POLICY IMPLICATIONS OF COOPERATIVE AGREEMENTS 

During the past fiscal year, as has been briefly mentioned, the De- 
partment of Rehabilitation initiated and completed several contract 
agreements with other State agencies and local school districts. At 
the completion of the current fiscal year (1966-67), in excess of $8 
million of Federal rehabilitation money will have been infused into 
programs of other departments. A brief discussion of the policy im- 
plications of such agreements is merited. 

The Legislature has always urged that the maximum resources be 
brought to bear on any given problem, whether in the field of reha- 
bilitation, education, or medical care. At the same time, however, the 
Legislature has also insisted upon holding agencies fully responsible 
for specific areas of financial investment. The determination of respon- 
sibility requires particular clarification in regard to interdepartmental 
agreements. 

The issue can be discussed by using a few examples. The Department 
of Corrections is charged with the responsibility and is given financial 
support for the broad purpose of rehabilitating law violators and re- 
turning them to society. This is rehabilitation not only in vocational 
terms, but certainly economic rehabilitation is a major part of the 
goal. Likewise, special education programs for handicapped children 
are the responsibility of local school districts and the State gives spe- 
cial reimbursement to enable the particular needs of the handicapped 
to be met. One of the major considerations of special education pro- 
grams for the handicapped is preparing the children for adult life 
and work. 

During the past year, these programs and other broadly rehabilita- 
tive programs in departments other than the Department of Rehabili- 
tation have been enriched through Federal rehabilitation money. The 
existing State and local expenditures in these programs have served 
as the base for Federal rehabilitation matching money. If this trend 
continues, other agencies will be competing for a larger share of re- 
habilitation funds. This in turn will decrease the availability of funds 
for clients not in the programs of these other agencies. 

Approximately half of the total Rehabilitation budget for 1966-67 
will be used in multi-service centers and cooperative agreements, nei- 
ther of which are directly administered by the Department of Re- 
habilitation. As laudable as these programs are, the important ques- 
tion is, should they be financed at the expense of basic programs? 

Because of this question, the Committee views the present coopera- 
tive agreements as only pilot projects which must be reviewed by the 
Legislature before they are reauthorized or expanded, so that measure- 
ment or performance tests may be applied. The Legislature must 
weigh the degree of success and financial effects that these programs 
will have on the unmet needs of all the potentially employable disabled 
in the State. The effect of rehabilitation funds on the total budget of 
the agencies involved in contracts with the Department of Rehabili- 
tation must also be evaluated. Recognizing the convenience of applying 
Federal financing to existing programs, the Committee warns against 



REHABILITATION POLICIES AND PROGRAMS 21 

the possible danger of confining rehabilitation innovations to persons 
in institutional settings, without expanding services to persons outside 
these institutions. The emphasis of rehabilitation should be commu- 
nity-based and should reduce, rather than provide an incentive to, 
institutionalization in regard to the availability of services. 

BUSINESS ENTERPRISE PROGRAM 

The Business Enterprise Program, referred to in Section I, is con- 
cerned with the training and placement of blind persons as operators 
of vending stands, cafeterias, and snack bars. These facilities are lo- 
cated in public buildings, Federal, State, or local. The program was 
initiated by Congress in 1936 through the Randolph-Shepard Act. 

In California, business enterprises are semi-independent operations. 
The Division of Rehabilitation of the Blind offers training, selects lo- 
cations, buys equipment, and installs the operators. After the oper- 
ator has a location, he is essentially a private businessman, in that he 
does his own planning, hiring, buying, and bookkeeping. However, he 
is subject to the periodic supervision of the Division and to its rules 
and regulations. He is encouraged to train other blind and handi- 
capped workers in food service and to give them priority in hiring. In 
addition, he must pay a fixed percentage of his gross receipts, not to 
exceed 6%, into an operators' trust fund. 

There are about 250 blind operators, with net earnings ranging 
from less than $200 up to $2200 per month. (See previous description of 
Business Enterprise Program in Section I.) The earnings depend upon 
the size and character of the location, the type of food service 
(cafeteria, snack bar or dry vending stand), and the initiative and 
imagination of the individual. The Committee has been generally im- 
pressed with the Business Enterprise Program in terms of its eco- 
nomic success and the quality of the food service offered to custo- 
mers. 

The problems connected with the program arise primarily out of its 
semi-independent character. The operators are not direct employees 
of a sheltered program and do not have constant supervision or fixed 
wages. Still, they remain at their locations on the Division's approval. 
They have limited influence over the rules which may affect their live- 
lihood. No provision is made for placing the successful operators in 
competitive employment. The Business Enterprise Program offers eco- 
nomic opportunities to selected individuals, but does not fall into the 
classification of competitive employment. 

The Committee recommends that specific steps be taken by the Divi- 
sion to provide economic incentives to individuals to move out of the 
program and into independent food service occupations. If turnover 
were encouraged in this way, the Business Enterprise Program could 
become a training ground for a larger number of blind persons, rather 
than a protected place of permanent employment for a few. The Com- 
mittee recognizes that there are certain risks involved in this approach, 
since competitive businesses may fail. Risks may be involved, but 
successes are more genuine. In addition, training followed by place- 
ment in competitive employment is more consistent with the goals 
of rehabilitation. 



22 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

Another issue of special concern to the Committee is the amount 
of discretion the Division has in the use of the operators' trust fund. 
The fixed percentage of each month's gross income which goes into the 
operators' trust fund is to be used for improvements to existing loca- 
tions, such as the addition, maintenance, and replacement of equip- 
ment. 

In 1963, the Legislature authorized the Department to spend a por- 
tion of these funds to establish new locations. Setting up entire new 
locations is extremely expensive and use of the operators' trust fund 
for expansion purposes necessarily limits the amount available for im- 
provement to existing locations. Many marginal locations are in need 
of substantial remodeling, which is often very costly. It is important 
to keep a reserve in the trust fund and to prevent excessive expansion 
to new locations at the expense of existing locations. 

The Department already has a General Fund allocation as its major 
source of money for expansion purposes. The operators should have 
some legal guarantee that their trust fund will not be completely 
depleted by new expansion activities. To this end, the Committee recom- 
mends that a fixed percentage of the operators' trust fund be allocated 
for expansion purposes and that the remainder be retained exclusively 
for maintenance and improvements to existing operations. 

ORIENTATION CENTER FOR THE BUND 

The program of the Orientation Center for the Blind, presently 
under the Department of Rehabilitation, is not primarily vocational 
in character. Employment is not its essential goal and it does not 
provide vocational training in marketable skills. Rather, the Orienta- 
tion Center assists newly blinded persons to adjust to blindness. 

If he is to function at all, every individual who becomes blind must 
become oriented, whether the techniques of orientation are taught in 
an intensive and formalized manner, or they are learned over a long 
period of time by trial and error. In general, it is vital that the in- 
dividual be started in the orientation process soon after blindness. If 
he is not, he is likely to become defeated and dependent because of the 
crushing weight of attitudes and opinions which equate blindness 
with dependency and helplessness. 

In general, those people entering the Orientation Center are new 
in the experience of being blind and must concentrate on those prob- 
lems raised by blindness; they do not have, nor is it reasonable to 
expect them to have, a clear vocational objective. In addition, there 
are many blind people who need orientation training and who will 
never develop a vocational objective ; for example, mothers and home- 
makers are an important group to whom this generalization would ap- 
ply- Although orientation is a necessary prerequisite of vocational 
training, it is not something uniquely of value to vocational rehabilita- 
tion. Spokesmen for the Department of Rehabilitation agreed in public 
testimony that the activities of the Orientation Center, though often 
followed by employment, are prevocational in character. 

Orientation in the techniques of daily living is much more a social 
service than a rehabilitation function. It falls directly within the scope 
of services for self-care and self -improvement. 



REHABILITATION POLICIES AND PROGRAMS 23 

If the Orientation Center were transferred to the Department of 
Social Welfare, 75% reimbursement would probably be available under 
the Social Service Amendments of 1962. The Committee is working 
with officials of the Department of Health, Education, and Welfare to 
clear up doubts raised in Committee hearings about such a transfer. 
The funding aspect is especially important, since another Orientation 
Center is projected for the Los Angeles area. 

This new source of funding is important because California is al- 
ready receiving maximum Federal matching under the Rehabilitation 
Act, but there is no ceiling on social service matching. In addition, the 
Orientation Center Program, when transferred to Social Welfare, 
would not have to be limited to serving persons with specific vocational 
goals. This high quality prevocational program could be continued and 
expanded under the general provisions of the public assistance Social 
Service Amendments. For many blind persons, orientation is a first 
step which eventually leads them to vocational training. Under the 
recommended reorganization, the orientation program would continue 
to stimulate the client's self-confidence and motivation to seek a voca- 
tional objective. The latter can be given greater attention by the De- 
partment of Rehabilitation when it becomes exclusively concerned with 
vocational matters. 

It is recommended that the Orientation Center program be trans- 
ferred to the Division for the Blind, already established in the State 
Department of Social Welfare. The existence of this division would 
seem in itself to be a contradiction of the functional principle enunci- 
ated earlier. However, orientation is not now provided to any other 
group even though persons suffering from other sudden and catastro- 
phic disabilities would no doubt benefit from similar programs. There- 
fore, until the orientation program is expanded to include physical 
disabilities other than blindness, it would seem practical to place it 
in the Division for the Blind of the Department of Social Welfare. 

One generalized benefit resulting from a clientele orientation toward 
the blind has been that the blind have been a pioneering and experi- 
mental group. Many changes which were later extended to others were 
originally tried on a pilot basis with the blind. But this does not 
justify the indefinite perpetuation of services exclusively for the blind. 
It is recommended that orientation programs be considered for other 
disabled groups. When this is accomplished, orientation of the blind 
would be provided within an administrative context of social services. 

FIELD SERVICE COUNSELORS FOR THE BLIND 

Many of the considerations applicable to the Orientation Center also 
apply to the Field Service Counselors Program. This service is pres- 
ently administered by the Department of Rehabilitation. 

Field Service Counselors visit blind people in their homes. Clients 
of this service range in age from the very young (16 years) to the 
very old. Thus the requirements of the clients vary from the need for 
stimulation and motivation to become self-sufficient, to palliative meas- 
ures designed to make the individual's situation a little more comfort- 
able at the close of life. The methods and techniques taught the blind 
clients in their homes must, of course, be those appropriate to blind- 
ness, but in addition, they must be adapted to the needs and prospects 



24 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

of the individual. Some of the people served by the field service coun- 
selor will become candidates for vocational rehabilitation services, 
but others will not. Because some of the services are not vocationally 
oriented, about half of the program is eligible for Federal matching 
as a rehabilitation program. It might be possible to revamp the ac- 
tivities and purposes of the service in a manner which would qualify 
for full federal reimbursement within the Department of Rehabilita- 
tion, but insofar as this is done, essential elements such as training 
in self-care would be sacrificed. 

According to testimony presented in hearings before the Committee, 
almost the whole battery of Field Services would come under the So- 
cial Service Amendments, including such services as protective serv- 
ices; the enlistment of relatives, friends and other resources for plan- 
ning ; the securing and maintenance of safe living conditions ; and per- 
sonal, home and money management. 

The proposal made here is to transfer the Home Teacher Counselor 
Service to the Department of Social Welfare under the Social Service 
Amendments, thus enabling this important program to continue un- 
emasculated, and receive a higher share of Federal reimbursement than 
is available under the provisions of the Vocational Rehabilitation Act. 

It is likely that many aged and mentally retarded, as well as some 
severely physically disabled, could benefit from a Home Teacher-Coun- 
selor Service. During previous Legislative Sessions, proposals for a 
similar service for retarded persons have been presented, but have not 
been successful in being enacted. Future legislation should look to 
expansion of the Home Teacher-Counselor Service to appropriate 
groups. To avoid further fragmentation of service programs such as 
this one, the Legislature should establish the responsibility in the De- 
partment of Social Welfare before expansion to other groups takes 
place. 

SHELTERED WORKSHOPS 

Another area of special interest to this Committee is sheltered work- 
shops. Most sheltered workshops in California are privately operated 
and employ persons with various mental or physical disabilities, and 
sometimes the aged. There are also three State operated manufacturing 
workshops for the blind (California Industries for the Blind — CIB) 
and three Opportunity Work Centers for the Blind. 

The State operated shops are supported financially by production 
profits and State General Fund allocations. These shops are the direct 
administrative responsibility of the Department of Rehabilitation. 

Private workshops are financed by a combination of profits and dona- 
tions. In addition, some retarded recipients of Aid to Totally Disabled 
receive private workshop " training" paid for by the Department of 
Social Welfare, even though the expectation of competitive employment 
is minimal. The private workshops also receive referrals and adminis- 
trative guidance from the Department of Rehabilitation. Rehabilitation 
counselors use these workshops as a resource for their clients. 

There has been much confusion about the purposes of workshops. 
Some claim to be temporary training centers, yet they usually do not 
teach marketable skills and many, even most, workers remain year 
after year. Other workshops see their function as the provision of gain- 



REHABILITATION POLICIES AND PROGRAMS 25 

ful employment to severely disabled persons unable to compete in the 
labor market. Yet, regular work, adequate wages, minimum working 
conditions, and routine fringe benefits are not provided. Between HO 
and 90% of CIB workers, for example, still must supplement their 
wages with Blind Aid. Still other workshops claim to offer occupational 
therapy and other services to help the client develop good working hab- 
its, adequate relationships with others, activity, and a way to fill his 
time. 

Most workshops do not want to be stamped with the terminal em- 
ployment or therapeutic labels. Instead, they try to combine these 
functions with a rehabilitation function; the resulting danger is that 
none of the three purposes, training, the provision of employment, or 
therapy, may be adequately realized. The workshop becomes the " sin- 
gle door" through which the client is offered solutions to all his prob- 
lems. A Department of Rehabilitation fact sheet describes the "num- 
ber one goal of California Industries for the Blind" in these multiple 
terms: "Rehabilitation of the blind through dignified profitable em- 
ployment by means of work evaluation, work adjustment, on-the-job 
training, work experience and placement in private industry." 

Even skills which depend on products now in a declining market 
"offer opportunities for work evaluation, work adjustment, and work 
experience." These "opportunities" are not the opportunities sought 
by the employment-minded trainee. 

The same departmental fact sheet goes on to describe how four 
workers at the Los Angeles CIB facility achieved gainful, competitive 
employment. Two found employment in skills learned at the workshop ; 
one as a brush maker, the other in a drapery manufacturing company. 
The other two rehabilitants found work in their former professions of 
piano tuner and musician. In these latter cases, CIB takes the credit for 
giving them the "confidence and encouragement . . . that led to suc- 
cessful placement. ' ' 

If, as the Committee contends, the rehabilitation process is training 
in marketable skills, and the measurement of success is gainful employ- 
ment, then rehabilitation is a relatively minor function of workshops. 
To the extent that workshops do not fulfill a rehabilitation function, 
they should not be a primary economic training resource for the Depart- 
ment of Rehabilitation. 

Over the past three years, 41 persons have left CIB for other employ- 
ment. Out of the current 254 employees, 184 have been in the work- 
shop for at least one year and 105 have been there five or more years. 
Twenty persons have been there 20 years or more. 

As more positive and fruitful steps are taken to provide those services 
leading to the reintegration of disabled persons into society and for 
adequate public assistance where such reintegration is not feasible or 
does not include earning a livelihood (as in the case of the very old), 
the need and justification for the existence of sheltered workshops 
is progressively lessened, or at least is changed. In any event, full 
employment, full integration into society and a maximizing of the 
capacity to earn a livelihood of each disabled person are the appropriate 
goals to be sought, rather than a return to social isolation, the workshop, 
and economic dependency. 



26 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

Instead of relying on sheltered workshops, public or private, to pro- 
vide training in marketable skills for disabled persons, other training 
resources should be more fully utilized. The long experience of Califor- 
nia Industries for the Blind has demonstrated the workshops' failure 
as genuine training centers, even though they have enjoyed full State 
support. 

There are ongoing training programs, such as MDTA, which could 
conceivably include some handicapped persons. Colleges and voca- 
tional schools should be utilized more fully, perhaps by paying extra 
fees for any additional effort involved in including a handicapped stu- 
dent. Private vocational schools and private employers too should be 
given guidance and reimbursement to stimulate their involvement in 
training disabled persons. A disabled person who completes a training 
program along with nonhandicapped students has a headstart in ob- 
taining and adjusting to competitive employment. 

The Department is reimbursing some employers for giving on-the- 
job training to disabled clients. The Committee recommends a stronger 
emphasis in this direction. Another hopeful sign on the horizon is the 
Manpower Services Act, recently considered by Congress. This Act 
would transform present Employment Service Offices into job clearance 
centers which would give special attention to the disabled and disad- 
vantaged. These directions would seem more fruitful than a segregated 
workshop program, however well-developed. In addition, there is no 
doubt that using existing training and placement facilities would be 
more economical in the long run than creating a separate workshop 
training program for the handicapped. 

The majority of existing workshops, public and private, perform 
essentially prevocational adjustment functions or at best provide non- 
skilled extended employment for severely disabled, retarded, or aged 
persons. If workshop programs are to continue to rely on public finan- 
cial support, they would seem to be more appropriately a part of a 
broadly based social service program rather than a function of a reha- 
bilitation agency. If, as is contended here, the task of the Department 
of Rehabilitation is placement in marketable skills, workshops have 
not proven their contribution to this end. Funds allocated to work- 
shops under the present setup have not produced commensurate re- 
sults. 

The funds which the Department of Rehabilitation is providing for 
reimbursement and guidance to private workshops and the funds (in 
excess of $400,000) expended by State-operated shops should properly 
be transferred to the Department of Social Welfare. The worksnop 
goals of self-respect, work activity, and social stimulation can be more 
fully dealt with by that Department. Workshops which teach handi- 
crafts, sewing, and other such tasks can supplement or, in some cases, 
substitute for the types of activities now taught by Home Teacher- 
Counselors. For persons able to leave their homes during the day, but 
not able to benefit from formal orientation in a residential setting, a 
community workshop program could offer not only handicraft instruc- 
tion, but training in mobility, braille, lipreading, cooking, and other 
appropriate skills. Such shops could continue to provide day-time 
activities for aged, retarded, and disabled persons. These modified so- 
cial service type workshops or centers should be geared to the needs 



REHABILITATION POLICIES AND PROGRAMS 27 

of individuals and not confined to economic rehabilitation goals. Each 
client's potential for self -care and self -direction would be encouraged, 
and where an employment potential was evidenced, a referral would 
be made to the Department of Rehabilitation or to the Department of 
Employment. There is little question that these multiple functions 
would be reimbursable under the social service provisions, thus freeing 
rehabilitation money for the undiluted task of vocational training and 
placement. 

There is a particular need for social service work activity programs 
for the 9000 mentally retarded who comprise 11% of the Aid to Totally 
Disabled caseload. As the Chief of the Disabled Services Bureau of the 
Department of Social Welfare has stated: "For the mentally retarded 
. . . , the most valuable service that can be provided for those who 
are able to benefit is a work activity program. This helps to reduce 
institutionalization and possible delinquency and provides a construc- 
tive atmosphere and form of activity which is beneficial to the indi- 
vidual and his family. In some instances, it results in the transition 
to gainful employment. 

"Since 1964, through an agreement between the State Department 
of Social Welfare and the Department of Rehabilitation, work train- 
ing center services have been provided for an average of 200 MR's 
monthly in the State at a cost of a maximum of $50 a month per 
recipient. There is almost universal agreement that this is a very con- 
structive and desirable program and should be expanded because of 
the increasing numbers of MR's in the caseload. The current program 
is made available through a $30,000 Legislative grant matched by 
$90,000 Federal money. The Legislative appropriation should be doubled 
or tripled in order to take maximum advantage of existing protected 
work placements. For many of the retarded, the work training cen- 
ter is a long-term, indefinite placement which has positive values for 
the individual, the family and the community. ' ' 

There may also be a limited role for rehabilitation workshops which 
provide short-term, intensive work training for handicapped clients. 
This training needs to be oriented toward competitive employment and 
be established separately from the social service workshops. Such a 
bona fide training program could be part of a rehabilitation program. 

Spokesmen for the Department of Rehabilitation have warned 
against classifying any workshop clients as ' ' terminal. ' ' They feel that 
when workshops serve a variety of purposes, no one entirely loses 
hope of employment. As the Deputy Director of the Department of 
Rehabilitation stated to the Committee : " In the matter of commingling, 
the question of whether you do better by keeping those with high vo- 
cational potential separate from those with relatively low vocational 
potential, it's my feeling and it's the feeling of many, many people 
in the rehabilitation profession that it's unfortunate to place a stamp 
of nonfeasible or hopeless on any individual, because this changes in 
time. This changes with what is happening in the outside world, the 
job market, pressures for one kind of material advantage and another, 
with the response that an individual feels to the outside world. It 
changes with the individual and development of maturity, shall we 
say. We get a youngster into a workshop who has never had any work 
experience before, doesn't even know what a job means and what it 



28 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

entails, the 8-hour a day routine, the coffeebreak, the lunch hour, 
etc., and when he comes in there, he may look to be completely hope- 
less' because o fthe fact he has no pattern, no habits aiming toward 
work. Give him three months. Give him one month. Give him X period 
of time there, working with people who are molding themselves to- 
ward an objective and toward a goal, a prospective goal, and a change 
very often takes place. So that I, for one, would balk very seriously 
and very definitely at saying that we should place a label of terminal 
on any individual, that this terminal label is a relative thing and can 
change at any point, and exposing the individual to experiences which 
affect his motivation is one of the objectives of Rehab.'' 

While this philosophy is commendable, the Committee considers that 
the placement of a potentially employable young handicapped person in 
a sheltered shop, with workers who have been there for many years, may 
well have the negative effect of discouraging rather than encouraging 
him. At the same time, the Chairman pointed out that no one would 
want to label any individual "nonfeasance." 

"We'd have to agree with you maybe philosophically, and if it was 
not a question of State expenditures. But our concern is that the func- 
tion of Rehab should be to deal with people who can be rehabilitated for 
gainful employment, can become self-supporting and be put back into 
the economic arena. And the people who are going to need custodial 
care should be under Social Welfare. The welfare worker in his func- 
tion can begin to try to encourage these people who will develop and 
may have a hidden potential, who can then be transferred over to Voca- 
tional Rehabilitation. We're trying to have a more straight-line function 
here." 



SECTION IV 

CONCLUSION 

The ultimate aim of rehabilitation is the achievement of gainful em- 
ployment. When he becomes competitively employed and self-support- 
ing, a disabled individual enters the mainstream of society. But many 
disabled persons are denied this opportunity because rehabilitation serv- 
ices have been so limited. ' ' Hire the Handicapped " is a slogan heard one 
week of the year, but is quickly forgotten and too often not translated 
into reality. As an ultimate goal, rehabilitation enjoys universal accept- 
ance. The Committee is concerned with transforming this ultimate, ab- 
stract goal into something immediate and concrete. 

The public has a great investment, both financial and humanitarian, 
in disabled citizens. Considerable amounts are spent for special educa- 
tion programs for handicapped children, and additional funds are ex- 
pended on welfare payments and institutional care. The public cannot 
afford to default on these investments in the disabled. A slightly greater 
effort, which turns tax consumers into tax producers, will bring a higher 
return on the total investment. 

California has, up to now, had a low rate of return on its investment 
in the disabled. In 1964-65, out of 54 states and territories, California 
ranked 54th in the number of rehabilitants per 100,000 population. (See 
Appendix 15.) In 1965-66, California again ranged 54th. In considering 
these figures, it must, of course, be recalled that the Department of Re- 
habilitation has a stated policy of concentrating on the relatively more 
difficult cases. Even granting this, California has a poor record as the 
Nation's largest and, presumably, most progressive state. 

The Department of Rehabilitation has not questioned some of its 
methods, such as the use of sheltered workshops, which have failed to 
produce results. It also has not devoted sufficient attention to ' ' selling ' ' 
the capabilities of the handicapped to employers. The Legislature, for 
its part, has failed to give policy direction and, because it has had no 
clear formulation of rehabilitation goals, has been reluctant to authorize 
additional State funds. As Appendix 15 shows, California is 37th in 
per capita expenditures for rehabilitation purposes. It ranks 25th among 
the states in the rate of increase in state rehabilitation expenditures over 
the past 10 years. If the Legislature adopts the framework recommended 
by this Committee, it can proceed more confidently in authorizing addi- 
tional State expenditures in the rehabilitation field. The Committee re- 
gards the improvement of California's rehabilitation record as one of 
the greatest challenges confronting State Government. As has been 
pointed out in the body of this report, the peripheral service functions 
of the Department of Rehabilitation are of great importance to the per- 
sons being served. The Committee recognizes this importance and would 
like to see such functions transferred out of the Department, in order 
that more people may be assisted. In transferring these peripheral func- 



(29) 



30 ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

tions, the Department of Rehabilitation would be able to fully concen- 
trate its efforts in the area of skilled training. 

By having the Department of Rehabilitation responsible only for job 
training and placement, measures of its success would be more valid. 
Prevocational programs would be shifted to Social Welfare, the primary 
social service agency, which would continue to work with the clients 
toward increased independence. The Department of Rehabilitation 
would concentrate on economic rehabilitation. 

There are, of course, some difficulties with measuring the Department 
of Rehabilitation's success in terms of number of placements, since this 
may lead to rejection of difficult or long-term cases. As long as there 
is a good rehabilitation potential, any person should be accepted for 
service. Statistical measures of success could differentiate between per- 
ns with initially more severe handicaps (from a physical, mental, and 
educational standpoint) and persons with less severe handicaps. 

The narrowing of the Department of Rehabilitation's goals to a focus 
on training in marketable skills and employment placement will allow a 
broadening in another way. Increased funds already authorized should 
permit a more liberal interpretation of what constitutes an employment 
disability, something the Department is already contemplating. 

One of the most important trends is the liberalization of the definition 
of employment disability by the Department of Rehabilitation which 
should have the corresponding effect of decreasing the Department of 
Social Welfare's responsibility for employment counseling, training, 
and placement of the handicapped. Social Welfare has justified much 
of its employment training efforts on the basis that welfare recipients 
are so often rejected by both the Department of Employment and 
the Department of Rehabilitation. The Department of Employment 
frequently considers a recipient too disabled for placement, or too un- 
skilled and uneducated. The Department of Rehabilitation may reject 
a person on the grounds that he does not have a sufficient mental or 
physical disability to constitute an employment handicap or, conversely, 
that because he is so severely limited, the likelihood of placement is re- 
mote. 

If Rehabilitation expands its clientele to include those whose physi- 
cal or mental disability itself is slight, but whose disability together 
with a lack of skills produces a bona fide employment handicap, and 
those severely disabled persons who have some chance of success with 
long and intensive effort, then the Department of Social Welfare should 
be relieved of much of the training responsibility it has assumed by 
default. There would appear to be no necessity for having the De- 
partment of Social Welfare establish duplicate rehabilitation pro- 
grams. That Department already has a sufficient range and variety of 
functions. 

In speculating on the effect on Social Welfare of a redefinition of 
the Department of Rehabilitation's aims, the Committee recognizes 
that no agency operates in a vacuum. The Committee is well aware 
that in the immediate future, it must devote equal study to the goals 
and functions of the other social agencies and to the proper relation- 
ship among those agencies. 



REHABILITATION POLICIES AND PROGRAMS 31 

Because this report is concerned principally with the Department of 
Rehabilitation, it is like the completed portion of a puzzle whose other 
components will be added later. The recommendations made here re- 
garding the Department of Rehabilitation must be viewed in this light, 
recognizing that the Committee is not unmindful of the broader effects 
of its proposals on all social programs. 



APPENDIXES 



REHABILITATION POLICIES AND PROGRAMS 



35 



APPENDIX 1 



FORM R-305 
(June 1960) 



All Rehabilitants 

FORM APPROVED 

BUDGET BUREAU NO. 83-R045 



U. S. DEPARTMENT OF 
HEALTH, EDUCATION, AND WELFARE 

OFFICE OF VOCATIONAL REHABILITATION 
OUTCOME OF REHABILITATION 



Year ending June 30, 1965 
Check type of agency : 



Vocational rehabili- 
tation agency, State of California 
Agency for 
General agency [x] the blind □ 



Part 1. — Number of rehabilitants, grouped by type of occupation at closure, with 
the blind shown separately from other rehabilitants (Items 13a(l), 11, 
15) a 



(a) 



(b) 



(c) 



(d) 



Types of occupation 


All 
disability 

groups 
combined 15 


Blind 

in 

both eyes 


Other 
disability 

groups 
combined 


(1) Total (Lines (2) + (11) + (12)) 


3,462 


155 


3,307 






(2) Occupations (for pay or profit), except in sheltered workshops (lines 

(3) through (10)) c 


3,127 


128 


2,999 






(3) Professional occupations (Codes 0-0 through 0-3) 


147 


18 


129 


(4) Semiprofessional, managerial, and official occupations (Codes 0-4 
through 0-9) 


300 


35 


265 


(5) Clerical and sales occupations (Code 1) 


823 


23 


800 


(6) Service occupations (Code 2) 


608 


17 


591 


(7) Agricultural, fishery, forestry, and kindred occupations (Code 3) 


74 


3 


71 


(8) Skilled occupations (Codes 4, 5) 


615 


14 


601 


(9) Semiskilled occupations (Codes 6, 7) 


406 


14 


392 


(10) Unskilled occupations (Codes 8, 9) 


154 


4 


150 


(11) Work in sheltered workshops (Item 11, Code 2) 


154 


15 


139 


(12) Homemakers (own home) and other unpaid family workers (own 
family) (Codes 000, XXX) 


181 


12 


169 



a Item numbers refer to Form R-300. Code numbers refer to the USES "Dictionary of Occupational Titles", Volume II, 

major occupational groups and divisions; and OVR's "Vocational Rehabilitation Manual", Chapter 13, Section 2, 

pages 13-2-69 through 13-2-87. 
b Disability classification is on the basis of client's condition at time of acceptance. If, at acceptance, a rehabilitant was 

blind in both eyes, he should be included in column (c). If, at acceptance, a rehabilitant was blind in only one eye or 

had a visual defect less than blindness, he should be included in column (d) . 
c Regardless of occupation, all rehabilitants working in sheltered workshops should be omitted from lines (3) through 

(10) and included in line (11). 



36 



ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

All Rehabilitants 



APPENDIX 2 



FORM R-305 (Jun« 1960) 



Part 2. — Number of rehabilitants, grouped by total earnings in week before 

closure (Item 16) d 



(a) 



(b) 



Earnings group 


Number of rehabilitants 


(1) All rehabilitants (Lines (2) through (9)) 


3,462 


Rehabilitants with earnings of: 


xxxxxxxxxxxxxxxxxx 


(2) Zero 6 


178 


(3) More than zero but less than $10 


15 


(4) $10-19 


56 


(5) $20-39 


306 


(6) $40-59 


624 


(7) $60-79 


873 


(8) $80 and over 


1,410 


(9) Amount not reported (Code XX) 






d Item number refers to Form R-300. 

e This line should include homemakers (own family), unpaid family workers (own family), and farmers (if self- 
employed) , but no one else. 



REHABILITATION POLICIES AND PROGRAMS 

All Rehabilitates 

APPENDIX 3 

FORM R-304 (July 1, 1963) 



37 



(a) 



(b) 



Time measured 


Number of rehabilitants 


Part 6. — Length of time from employment to closure (Item 4b(2) ) (Cont'd) 


xxxxxxxxxxxxxxxxxx 


(6) 7 months or more 


735 


(7) Time not reported (Code X) 






Part 7. — Number of rehabilitants, grouped by source of case services ; 
specified types of services received ; cost of those services (Item 18) d 



(a) 


(b) 


(c) 


(d) 


(e) 




Number of rehabilitants 




Source and type of service 


Total 


With cost 
toVR 
agency 


Without cost 
toVR 
agency 


Cost to 

VR agency 

(dollars) 


Case services provided: 

1. By rehabilitation or adjustment centers 


180 


177 


3 


35,230 


2. By workshops 


197 


189 


8 


50,058 


3. By other sources: (Lines A through H) e 


XXXXXXXX 


XXXXXXXX 


XXXXXXXX 


2,371,928 


A. Diagnostic procedures 


3,420 


3,293 


127 


180,500 


B. Surgery and treatment 


623 


614 


9 


185,440 


C. Prosthetic appliances 


620 


617 


3 


102,461 


D. Hospitalization and convalescent care f 


173 


162 


11 


73,140 


E. Training and training materials 


2,446 


2,329 


117 


988,760 


F. Maintenance and transportation 


1,837 


1,837 





714,253 


G. Tools, equipment, and licenses 


378 


378 





98,204 


H. Other (Items 3-H, Form R-300) « 


137 


116 


21 


29,165 


I. No services reported in Item 18, Form R-300 


32 


XXXXXXXX 


XXXXXXXX 


XXXXXXXX 



d This item number and the letters at left margin refer to Form R-300. 
e Line H does not include vocational guidance or placement. 
1 Other than for diagnosis. 



38 



FORM R-303 
(June 1960) 



ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

All Rehabilitants 



APPENDIX 4 



Form approved 

Budget Bureau No. 83-R043.1 



U. S. DEPARTMENT OF 
HEALTH, EDUCATION, AND WELFARE 

VOCATIONAL REHABILITATION ADMINISTRATION 
DISABILITY OF REHABILITANTS 



Year ending June 30, 1965 
( 'heck type of agency : 



Vocational rehabili- 
tation agency, State of California 

Agency for 
General agency [x] the blind □ 



Part 1. — Number of rehabilitants, grouped by major disabling condition (Item 

13a(l)) ; cost of specified types of services (Item 18) for each 

disability group a 



(a) 


(b) 


(c) 


(d) 


(e) 


(f) 


(g) 


Disability group 


Cost of 
specified 
services 
(dollars) 

b 

(see 
footnote) 


Number of rehabilitants 


Tele- 
scoped 
OVR 
code 
no. 


Detailed 

OVR 

code 

no. 


Description 


Total 


Those 
receiving 
specified 
services, 
with cost 
toV.R. 
agency ° 


All 

other 
rehabili- 
tants 


00-24, 
29 


- 


All groups 


2,371,928 


3,462 


3,433 


29 






Amputation or absence of upper extremities: 
Group A 
Group B 


XXXXXX 


xxxxxx 


XXXXXX 


XXXXXX 


00 


02,09 


12 


1 


1 





01 


00,01,03-08 


37,618 


61 


61 









Amputation or absence of lower extremities: 
Group A 
Group B 


XXXXXX 


XXXXXX 


XXXXXX 


XXXXXX 


02 


12, 17 


8,602 


10 


10 





03 


10,11,13-16 


70,433 


91 


91 





04 


18, 19 


Amputation or absence of upper and lower ex- 
tremities 


4,601 


3 


3 









Orthopedic deformities or impairments (except 
amputations) of upper extremities: 

Group A 
Group B 


XXXXXX 
XXXXXX 


XXXXXX 
XXXXXX 


XXXXXX 
XXXXXX 


xxxxxx 
xxxxxx 


05 


?1, 26, 28, 
33, 35, 40 


7,109 


11 


11 





06 


20, 2?-25, 
27, 29-32, 
34, 36-39 


98,421 


159 


159 









Orthopedic deformities or imoairments (except 
amputations) of lower extremities: 

Group A 
Group B 


XXXXXX 
XXXXXX 


XXXXXX 
XXXXXX 


XXXXXX 

xxxxxx 


xxxxxx 
xxxxxx 


07 


42, 45, 46, 
48, 51, 53, 
56 


123,855 


133 


132 


1 


08 


41, 43, 44, 
47, 49, 50, 
52, 54, 55 


199,462 


251 


250 


1 






Orthopedic deformities or impairments (except 
amputations) of upper and lower extremities 
and trunk: 

Group A 
Group B 


XXXXXX 

xxxxxx 
xxxxxx 


XXXXXX 
XXXXXX 
XXXXXX 


XXXXXX 

xxxxxx 
xxxxxx 


xxxxxx 
xxxxxx 
xxxxxx 


09 


57-59, 61-63, 
65-67, 69 


504,007 


749 


747 


2 


10 


60, 64, 68 


6,889 


7 


7 






FORM R-303 (July 1, 1963) 

(a) (b) 



REHABILITATION POLICIES AND PROGRAMS 

All Rehabilitants 



39 



(c) 



(d) 



(e) 



(0 



((?) 



Disability group 


Cost of 
specified 
services 
(dollars) 

b 

(see 
footnote) 


Number of rehabilitants 


Tele- 
scoped 
OVR 
code 
no. 


Detailed 

OVR 

code 

no. 


Description 


Total 


Those 
receiving 
specified 
services, 
with cost 
to V.R. 
agency 


All 
other 
rehabili- 
tants 






Orthopedic deformities or impairments of other 
parts of the body: 

Group A 

Group B 


xxxxxx 
xxxxxx 


XXXXXX 

xxxxxx 


XXXXXX 

xxxxxx 


XXXXXX 

xxxxxx 


11 


70-73, 77 


13,510 


21 


21 





12 


74-76 


31,924 


39 


39 





13 


78 


Blind in both eyes 


21,982 


155 


154 


1 


14 


79-82 


Other visual impairments 


62,041 


90 


89 


1 


15 


83 


Deaf, unable to talk readily 


83,232 


140 


138 


2 


16 


84 


Deaf, able to talk readily 


53,289 


56 


56 





17 


85 


Other impairments of hearing 


69,177 


125 


125 





18 


87,88 


Impaired speech 


22,585 


30 


29 


1 


19 


89,90 


Psychosis and psychoneurosis 


233,957 


352 


343 


9 


30 


91 


Personality, character, and behavior disorders 


65,328 


110 


109 


1 


20 


92 


Mental retardation or deficiency 


43,890 


155 


151 


4 



40 



ASSEMBLY INTERIM COMMITTEE ON SOCIAL WELFARE 

All Rehabilitants 



APPENDIX 5 

Vocational rehabili- 
tation agency, State of California 

Agency for 
General agency [x] the blind □ 

Part 1. — Number of rehabilitants, grouped by major disabling condition ; cost 
of specified types of services for each disability group (Continued) 



FORM R-303 (July 1, 1963) 



Year ending June 30, 1965 
Check type of agency : 



(a) 


(b) 


(c) 


(d) 


(e) 


(0 


(g) 


Disability group 


Cost of 
specified 
services 
(dollars) 

b 

(see 
footnote) 


Number of rehabilitants 


Tele- 
scoped 
OVR 
code 
no. 


Detailed 

OVR 

code 

no. 


Description 


Total 


Those 
receiving 
specified 
services, 
with cost 

toV.R. 

agency 


All 

other 
rehabili- 
tants 


21 


94 


Cardiac diseases 


136,309 


200 


196 


4 


22 


96 


Epilepsy 


68,512 


77 


76 


1 


23 


99 


Tuberculosis, pulmonary 


82,009 


102 


101 


1 


24 


93, 95, 97, 
98, YY 


Disabling conditions NEC 


223,174 


334 


334 





29 


- 


Not reported 















* Item number and telescoped OVR code numbers refer to Form R-300. 

b The services are those covered by Form R-304, part 7, except lines 1 and 2 thereof. 

c The distinction between "with cost" and "without cost" is based solely on the services covered by Form R-304, 
part 7. The cost in column (d) of this table (Form R-303, part 1) was incurred for the rehabilitants in column (f) of 
this table. Column (g) includes rehabilitants shown in Item 18, Form R-300, as receiving the foregoing services but 
without cost to the VR agency; plus rehabilitants for whom Item 18 does not report any services. 



Part 2. — Number of rehabilitants, grouped by mobility at acceptance and 

at closure (Item 14) d 



(a) 



(b) 



(c) 



(d) 



(e) 



d Item number and code numbers refer to Form R-300. 
e With or without help of device. 



(f) 





Number of rehabilitants 




Total 
(Columns (c) 
through (f)) 


Housebound 
(Code 1) 


Capable of activity outside home e 




Time 


With help of 

other person 

(Code 2) 


Without help of 

other person 

(Code 3) 


Not 
reported 
(Code 9) 


At acceptance 


3,462 


7 


37 


3,418 









At closure 


3,462 


2 


17 


3.443 


o 







REHABILITATION POLICIES AND PROGRAMS 

All Rehabllltants 



41 



FORM R-303 (June 1960) 

Year ending June 30, 1965 
Check type of agency : 



APPENDIX 6 



Vocational rehabili- 
tation agency, State of California 
Agency for 
General agency [x] the blind fj 

Part 3. — Number of rehabilitants, grouped by primary cause of major 
disabling condition (Item 13a(2)) ' 



(a) 


(b) 


(c) 


(d) 


Primary cause 




OVR 
code no. 


Description 


WHO 
code no. 


Number of 

rehabilitants 


50-69 


All primary causes 


__ 


3,462 


50 


Poliomyelitis 


080-081 


106 


51 


Infective and parasitic diseases except poliomyelitis 


001-074, 
082-139 


116 


52 


Cancer and related neoplasms except benign 


140-205 


21 


53 


Benign neoplasms and those of unspecified nature 


210-239 


9 


54 


Diabetes mellitus 


260 


35 


55 


Alcoholism 


307, 322 


8 


56 


Vascular lesions affecting central nervous system 


330-334 


2 


57 


Multiple sclerosis 


345 


7 


58 


Cerebral spastic infantile paralysis 


351 


41 


59 


Other cerebral paralysis 


352 


30 


60 


Refractive errors 


380 


6 


61 


Cataract 


385 


17 


62 


Glaucoma 


387 


13 


63 


Inflammatory diseases of ear and mastoid process 


390-394 


8 


64 


Other diseases, injuries, and congenital conditions of ear and 
mastoid process 


395-398 


311 


65 


Arthritis and rheumatism, except rheumatic fever 


720-727 


146 


66 


Miscellaneous congenital malformations of nervous system 
and sense organs 


753 


31 


67 


Other congenital malformations 


750-752, 
754-759 


127 


68 


Diseases and injuries NEC 


K 


2,428 


69 


Not reported 


9 


9 



f Item number and OVR code numbers refer to Form R-300. 

« Among these are Codes 240-254, 270-306, 308-321, 323-326, 340-344, 350, 353-379, 381-384, 386, 388, 389, 400- 
716, 730-749, 760-795, E919, N800-N848, N851-N869,