OLYMPIA, June 17.—As the Legislature launches into what might be a final big debate on workers’ comp reform this year, a $2 billion-plus problem at the Department of Labor and Industries has been thrust into the spotlight by an unusual attack from the state Labor Council. The Labor Council is accusing a prominent Republican senator of presenting “bad information” by warning fellow lawmakers of a $2.2 billion shortfall in the state’s workers’ comp program.

But here’s the funny part. The numbers come from L&I itself, the agency that administers the state-run insurance program.

State Sen. Janea Holmquist Newbry brought up the figure in a speech on the Senate floor June 9 when she warned that the big difference between the agency’s cash reserves and its financial targets could mean whopping tax increases for employers and workers, unless something is done to reduce costs. The Moses Lake Republican was arguing for a workers’ comp reform measure that would expand a settlement program authorized by the Legislature in 2011 that so far has been a bit of a dud. But her remarks might have made a quickly forgotten talking point if it hadn’t been for a Labor Council “one pager” now being circulated at the Capitol. It challenges the accuracy of her numbers and calls the senator out by name. “It isn’t true,” says the broadside. “The statement is based on a fantasy scenario from a year ago – which was based on numbers from a year before that – that assumed no economic recovery.”

Now the chairwoman of the Senate Commerce and Labor Committee is seething, and as the argument over workers’ comp threatens to push the Legislature to the brink, the attack on the numbers raises a question — just how bad are those problems at L&I?

Holmquist Newbry says the numbers are the most current available from the Department of Labor and Industries, reflecting the very latest investment returns. Indeed, Washington State Wire was able to confirm at least $1.8 billion of the problem statement with the agency Monday. “I’ve always been willing to have an adult conversation based on the facts,” Holmquist Newbry says. “But instead of sticking to the facts, the Washington State Labor Council appears to have an agenda of discrediting my integrity. It is disheartening and unacceptable, and if they are questioning me, they are also questioning L&I, since we are using L&I’s numbers.”

Reform Bill at Stake

You might say it shows how heated the arguments are getting in the final days of this year’s legislative session, as the debate narrows to just a handful of topics. As the state nears a June 30 deadline for the passage of a new budget, the state House and Senate appear just a couple of hundred million dollars away from a compromise. And as that final deal approaches the interest groups that are affected by the “endgame” issues are telling lawmakers not to compromise. Environmental groups are inundating supporters with email “calls-to-action” as they push a tax on “big oil.” The Washington Education Association, the state’s dominant teacher’s union, is pumping out Web-based attacks on the largely Republican Senate majority for education-reform measures that would weaken the union’s position at the bargaining table.

But the Labor Council’s attack on the numbers isn’t just an ordinary matter of political rhetoric. It challenges a fact-based argument that is based primarily on financial statements released by the Department of Labor and Industries. Those public statements confirm $1.8 billion of the problem. Another major component of the department’s funding gap was disclosed to lawmakers and interest groups toward the end of April – big savings from settlements that never happened.  

The agency itself hasn’t added up the numbers, but the math isn’t very difficult, say lawmakers and business organizations. If you assume the latest disclosure reflects a problem of $400 million, the total scope of the problem amounts to $2.2 billion. Or you might call it $2 billion-plus, just to be safe.

If the department tries to make up that shortage with rate hikes alone, it could mean an 11 percent tax increase on the state’s employers, sustained over 10 years, Holmquist Newbry says. Which explains the push for a workers’ comp reform bill this year: SB 5127 would expand the structured settlement program launched in 2011 and ease some of its restrictions. Savings would amount to a half-billion dollars in the first three years alone. The biggest change would enable workers over age 40 to settle their disability claims rather than taking costlier long-term pensions. The settlements amount to about 70 to 80 percent of the cost of a pension; currently the settlement program is limited to workers over age 55. The Labor Council has traditionally opposed settlements, arguing that workers might be tempted to take less than their claims are worth, leaving them without cash to support themselves over the long haul.

On the business side of the argument, there has been considerable scratching of heads ever since the Labor Council broadside began circulating at the Dome last Friday. Political rhetoric is one thing, says Kris Tefft, lobbyist for the Association of Washington Business – everyone is used to that. But the Labor Council is saying the numbers don’t reflect the latest financial information and the latest investment returns. In fact they do. And saying something that isn’t so – that’s something that just isn’t done. “I understand that they are waging a legislative campaign here, and they want to see a bill defeated that the business community is supporting and that some of their adversaries are insistent upon,” Tefft says. “At the same time, while we as interest groups are entitled to our opinions, we are not, as the saying goes, entitled to our facts.”

How Those Numbers Add Up

As with seemingly everything with the state workers’ comp program, the description of the financial problem gets a bit complicated. It has to do with a long-running debate over financial targets for the state-run insurance program, which covers about four-fifths of the state’s workers – basically anyone who works for an employer too small to self-insure. The agency drew down its financial reserves during the recession, keeping rates low in order to avoid the big rate increases that would have been required to cover the full cost of the program. The state auditor’s office warned that reserves had been drawn down to the point that the program might technically be considered insolvent. For the last year the agency has been considering ways to restore the program to a point of financial health, and with much grumbling about inefficiencies in the state-managed system, business interests have conceded that some sort of rate increase is the likely outcome.

The picture isn’t looking as dire as it did a year ago, thanks to the rebound on Wall Street. Like private insurers the state invests its money on Wall Street, and good returns last summer and fall brought the reserves to $953 million by Dec. 31, 2012. But that’s still a long way from the target. Last year the agency’s worker’s comp advisory committee settled on a goal of $1.673 billion for its reserves, and that means L&I is still $720 million short.

But that’s not the whole picture. Last year the agency’s actuaries also said L&I ought to reduce its long-term expectations of investment returns. Under a 10-year plan endorsed by the advisory committee last year, the adjustment to the “discount rate” will cost the agency $1.085 billion.

So that’s $1.8 billion so far. And there’s more – the disappointing return from the structured settlement program. The department anticipated $600 million in savings, but there hasn’t been the rush the agency expected; just 22 settlements had been awarded during the program’s first year, rather than hundreds. L&I has not discussed the problem in a public forum, and Washington State Wire was not able to confirm the shortfall figure Monday with the agency’s communications staff. But lawmakers and business-community representatives say the department has conceded during private meetings that L&I will come up short by about $200 million to $600 million – probably in the $400 million range. Holmquist Newbry says she has it from a rather highly placed source. “I heard about that from director [Joel] Sacks, who has been in my office numerous times this session,” she said. “He broke that news to me.”

Add it all up and you get $2.2 billion.

What’s the Impact?

Can employers expect proposals for $2.2 billion in rate hikes sometime soon? The department points out that nothing about those targets is set in stone, that continued good returns on the stock market might reduce the problem, and that it is planning to deal with problems over a 10-year time frame, not all at once. Exactly when it might begin raising rates to cover that funding gap is another question – the catch-up plan might begin in 2014, maybe later. Those decisions won’t come until next year’s rate-setting debates begin later this summer.

Meanwhile, the Labor Council, in its battle against the workers’ comp bill, is expressing more confidence in Wall Street investment returns than the agency does. In a written response, Labor Council president Jeff Johnson refers to the broad panoply of reforms enacted by the Legislature two years ago, which allowed the department to book immediate savings and avoid short-term rate increases.  “In 2011, we approved major reforms to our workers’ compensation system that haven’t been fully implemented yet, but have so far saved $1.5 billion and helped avoid rate increases over the past two years,” he said. “Meanwhile, as the economy recovers, the system is now running a surplus and reserves are quickly being restored to safer levels. The responsible course is to allow those 2011 changes to fully take effect and then to assess their impact on injured workers and their families and on employers’ costs. It would be irresponsible to rush through more contentious cost-cutting legislation under the duress of a potential shutdown of state government. While there is no imminent threat to our workers’ compensation system, there is an imminent threat to our education system and other state services our citizens rely on.”

State labor council spokesman David Groves adds that talk of a $2.2 billion burden that might be assumed by employers is “willfully ignoring” the improvement in the state’s investment returns. “The $2.2 billion number assumes no economic recovery, no investment earnings to help restore reserves and no operations surplus for the next 10 years. All of those things are happening right now. It also assumes that the only way the system can boost reserves and adjust its actuarial assumptions is by taxing businesses, and that’s demonstrably not true. It’s an alarmist scare tactic intended to create a false emergency. That’s the only way they can try to justify holding up the budget and risking a state government shutdown over yet another benefit cut for injured workers.”

Still a Bit Stung

That’s a matter of political debate, Holmquist Newbry observes, but it is rather different than denying there is a problem, claiming that the figures are out of date, or saying that investment returns have been ignored. Certainly there is no telling how much of that $2.2 billion will have to come out of employers’ pockets, but she says relying on the stock market does seem a bit of a gamble. The only other way to reduce the burden is to reduce the cost of the insurance program – hence this year’s bill. “Why our friends are burning so much political capital opposing this is beyond me,” she says. “It is ironic that the Washington State Labor Council wants to pin all its hopes on the stock market. I’m also thinking that a lot of people aren’t realizing the fact that this is mostly small employers that this is going to affect. According to the most recent information from the Department of Labor and Industries, small employers have little choice but to brace themselves for a decade of workers’ comp rate increases that could average as much as 11 percent per year based on 2012 premiums.

“Wall Street and self-insured big businesses may be enjoying an economic recovery, but that recovery has so far bypassed small businesses. Small employers who are required to buy workers’ comp insurance from our state-run monopoly simply cannot cross their fingers and hope Wall Street or the government will bail them out. If the Legislature does nothing, Washington’s small employers will see a rate hike. The only questions are how soon and how much.”