Department of Labor and Industries headquarters in Tumwater.

OLYMPIA, Dec. 4.—The Department of Labor & Industries is getting set to hike workers’ comp rates again next year, but you aren’t hearing a lot of squawking about it. After spending the last two years preparing business for the worst, L&I announced this week that average rates would rise only 2.7 percent in 2014. The reaction seems to be a big yawn.

“They are taking less of a bite than they could have,” says Kris Tefft of the Association of Washington Business.

So much for an announcement that often goes over like a declaration of war and sends business and labor to the trenches. Olympia doesn’t have to worry about a big worker-comp battle next session — of course there will be one. It’s just that this year’s rate announcement won’t be the subject.

Instead the issue will be next year’s rate hike, and the further increases that are contemplated over the next decade. L&I right now is struggling to cover a $2 billion problem in the state-run insurance program. Focus will be on fixes to a 2011 reform program that so far has been a dud. Boeing may be a player – it was a very interested party in previous debates. If it can hold off on a siting decision for its new 777X plant until after the end of the next legislative session, it may wield much influence in the debate.

But this year’s rate announcement? No one will be talking about that. “That really wasn’t a surprise,” says Patrick Connor of the National Federation of Independent Business.

Rate Increase Was Expected

Joel Sacks, director of the Department of Labor and Industries.

For one thing, there was plenty of warning. L&I has been warning employers for two years now that it will have to raise rates in order to restore reserves depleted during the recession. The annual rate decision is a matter of public debate and political scrutiny in a state where the insurance program is publicly managed. In Washington, unlike most states, private firms are not allowed to offer worker compensation insurance. L&I’s program covers 160,000 businesses and 2.5 million employers – the only exceptions are those firms large enough to self-insure. So that makes workers’ comp policy a matter of public concern. Labor does its best to ensure worker benefits are generous, business complains that the program is inefficient, and each year the department, after consulting with actuaries, makes a judgment about what sort of rate might be politically palatable.

L&I kept rates artificially low during the worst of the recession – they didn’t cover the program’s fast-rising costs, a point of irritation for business. In fact, the department drew down its reserves to the point that the state auditor’s office began sounding the alarm that the program is technically insolvent. Not that it was ever in any danger of going bust, as a private insurance company might – for better or worse, the L&I program is backed by the faith and credit of Washington taxpayers.

And then there was another problem – L&I’s expectations of investment returns were pegged quite a bit higher than might be considered reasonable in this post-recession era. Actuaries say that needs to be scaled back.

If you add the reserve issue and the rate-of-return problem together, you get $2 billion in trouble. That amount has to be made up somehow, either by socking employers with rate increases or by making the program more efficient. In June 2012, an L&I actuary’s report sent shock waves through the state’s business community when it suggested that the agency might need a 10 percent rate increase for the next 10 years, just to put the program on a sound financial footing. Since that time, L&I has scaled back its financial targets, and as usual there has been enough jiggering of financial expectations to reduce the need somewhat. But rate increases still will be needed over the next decade – it’s just not clear exactly how much.

L&I said as much in its press release announcing the 2.7 percent average rate increase. It quoted L&I director Joel Sacks as saying, “This modest increase in rates is part of a long-term plan to ensure steady and predictable rates by benchmarking against wage inflation. It will also help to gradually rebuild the workers’ comp reserves.”

Will Need $200 Million a Year

Kris Tefft of the Association of Washington Business.

It could have been worse, but it also could have been better, said AWB’s Tefft. Actuarial reports show that if it wasn’t for the structural financial problems in the state insurance program, L&I might have been able to decrease rates by 1 percent. In other words, the increase attributable to the financial fixes was 3.7 percent.

All told, L&I will have to find about $200 million a year to plug the hole over 10 years, Tefft said. That sets the stage for the debate of the coming session. “We’re worried that they are going to raise it purely through rate increases. So let us pass some further system reforms that can further drive down the pressure on those increases.”

Central issue next session will be continuation of a debate that began this year, over expansion of a worker-comp settlement program. Until 2011, Washington was one of only a handful of states that didn’t allow workers to voluntarily settle their claims. The procedure reduces insurance costs elsewhere but workers in this state were required to take pensions for long-term disability claims.

After a debate that year that nearly shook the Capitol from its foundations, the state took a baby step in that direction. Lawmakers restricted the new settlement program to workers age 55 and up, with other limitations that further reduce its appeal. Further complicating the process is a dispute over adjudication procedures at the state Board of Industrial Insurance Appeals – it won’t approve settlements negotiated by attorneys. And the result? The state expected that 3,000 settlements would have been awarded by last June; instead the number was 50, and returns have been so dismal that the state has had to reduce its savings expectations by $242 million.

Boeing is Wild Card

Boeing’s new 777X is the wild card.

Count on business to push a bill again next session that would expand the program to workers 40 and up. The measure had strong support from Boeing this year. Boeing’s support may mean even more next year, now that its plans for the 777X are a front-and-center issue. Boeing has been hinting the next-generation airliner might go to a sunnier state. But if it wants to drive a deal, the big question is whether it will stick around long enough to see the bill through the statehouse. Boeing could easily announce its siting decision before the Legislature finishes its session next year and allow pressure to evaporate.

Workers’ comp “obviously relates to the push for aerospace, but all of that is up in the air,” Tefft said. “It is hard to say how it will play, but even if you don’t have a major debate going on about aerospace, we are still going to be asking the Legislature to look at these issues for all of the employers in the state.”

NFIB’s Connor said Boeing’s support was a key factor in passage of the 2011 reform measure, and it certainly would be nice to see it again. “It would be nice to think that Boeing is committed enough to Washington state and the Puget Sound workforce that they would continue to push for meaningful workers’ comp reforms, but whether or not they have already decided to fly the friendly skies remains to be seen.”    

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