State Insurance Commissioner Steve Poizner announced Thursday he will file a lawsuit to block the sale of $1 billion worth of assets of State Compensation Insurance Fund designed to help close a mammoth budget deficit.

As part of the budget package signed in June, Gov. Arnold Schwarzenegger and the Legislature agreed to attempt to sell part of State Compensation Insurance Fund’s book of business to generate up to $1 billion.

State Compensation Insurance Fund is the state’s largest workers’ compensation insurer; its constitutional role is the insurer of last resort for businesses such as construction companies with high risk of worker injury. The entity is run like a private company but has a government-appointed board. Over the years, it has expanded to offer market rate coverage for lower risk companies like professional service firms.

In announcing the lawsuit, Poizner said a sale of State Fund assets is unconstitutional because its assets must be used solely for providing compensation to injured employees and their dependents. He also said such a move could endanger the fund’s solvency.

“The pilfering of funds used to pay the claims of injured workers to instead help fill the state budget gap is both unconscionable and unconstitutional,” Poizner said in a statement announcing the lawsuit.

“It is a direct affront to the state’s jobs and business climate,” Poizner continued. “In these tough economic times, the state should be doing everything possible to create jobs, not use budget gimmickry to hurt the economy.”

Schwarzenegger administration spokesman H.D. Palmer has previously said the state plans to hire a “sale side advisor” by the end of September to explore the feasibility of selling the assets.

“We continue to believe we can negotiate this transaction in a manner that is legal and that maintains the integrity of State Fund,” said Palmer told the Business Journal Thursday.

Word of the plans to sell part of State Fund’s book of business sent shock waves through the state’s small business community. The sale would likely drive up premiums for small businesses in higher-risk industries such as tree-trimming or construction. That’s because currently, larger, lower-risk companies subsidize the riskier policies.

Responding to Poizner’s action, State Fund spokeswoman Gina Simons said

“The insurance commissioner oversees and well understands California’s historically challenging and volatile workers’ compensation market, and the unique and stabilizing role we play in it. It is appropriate that his office be involved.”