His efforts were applauded by a national insurer group.

Mr. Garamendi yesterday enlisted the help of the state's 58 district attorneys in combating employee and employer fraud.

The State Fund, he said, is "in need of aggressive action to right its financial ship." Mr. Garamendi said he is working directly with State Fund management to correct its financial problems.

He said the State Fund's premium writings have grown too rapidly over the past few years because private insurance companies reduced their business in California and employers have been forced to insure through the State Fund.

This extreme growth has led to serious financial problems, he said, noting that the State Fund's surplus has not increased commensurate to its written premium and reserve growth, "and its total adjusted capital is not at a desirable level," he said.

Failure to take action now "could have disastrous consequences for both State Fund and the California economy," he said. "With nearly 54 percent of workers' comp insurance policies that cover more than half the employers in the state, a solid, well run State Fund is absolutely essential."

He said the "course is clear for the Legislature as well?it must act immediately to stop the cost escalators that are so entrenched within the system."

Nicole Mahrt, director of public affairs for the American Insurance Association in Sacramento, is encouraged that Mr. Garamendi recognized the system needs help and acknowledged that the State Fund is "an important system" vital to California's economy.

"Medical costs are what is driving a lot of these expenses," she said. "We need to do something about the cost of errors in the system."

She said Mr. Garamendi has "mentioned" the costs, "so I think that's great. You have a situation where self-insureds, private insurers and the State Fund are seeing medical costs that are escalating. There is a hole in the system and money is flowing through it."

Unless the costs can be properly predicted, she continued, "we can't adequately price the product."

The next step, she said, is to see what bills are introduced and what regulations are proposed, and "we'll work with them on a case-by-case basis."

Mr. Garamendi said that at his direction, State Fund has prepared a comprehensive business plan designed to accomplish several major goals, including: reducing premium income, increasing surplus and profitability, strengthening management, and creating operating efficiencies.

State Fund's business plan, he continued, includes the following steps:

? Retaining a management consultant to ensure that it operates as effectively and efficiently as possible. It will also retain a consultant to assist the new chief financial officer.

? Taking steps to dramatically reduce new business. Business submitted by brokers and agents will have to demonstrate that insurance is not available from any other source.

? Effective July 1, implementing a further rate increase on new and renewal policies. This increase will be adequate to ensure that premiums paid by policyholders are sufficient to pay all claims and claims-associated expenses and restore surplus to an adequate level.

? Reducing broker commission rates and conducting a review of business submitted by brokers and their companies. Those brokers found to consistently write unprofitable books of business will lose their certification.

? Exploring reinsurance arrangements to reduce the strain on its surplus caused by the rapid growth in new and renewal business.

? Strengthening its underwriting practices to ensure control over the quality of new business it must write because there are no other markets for those accounts.

? Reviewing all of its accounts. It will then implement appropriate surcharges and reduce merit rating credits for unprofitable accounts upon renewal.

The combined impact of implementing rate increases, the reduction in commissions, and a renewed focus on profitable underwriting should help the State Fund's surplus by more than $1 billion, and help achieve a reduction in the amount of premium written, Mr. Garamendi explained.

He said it is also imperative that private companies return to the California market to provide competition and capacity. These steps will stabilize State Fund and thereby help stabilize the state's workers' comp market and attract new insurers.

"If the State Fund, with more than 40 percent of the premium in the state market, can charge adequate rates that allow it to meet its financial obligations, other insurers should feel confident that they could write profitable business in California as well," he said.

Mr. Garamendi told deputy district attorneys and white-collar crime investigators at a statewide conference that "fraud is just one more skyrocketing workers' comp cost driver that must be brought under control."

He said the department's fraud division investigated more than 1,200 workers' comp fraud cases. From those cases, 141 arrests were made and DAs filed 121 cases for prosecution.

"While these efforts are admirable, clearly we must do more, and we will," he said.