Article by Erik Smith. Published on Wednesday, November 12, 2010 EST.
State Delayed Announcement While Worker Comp Initiative Was on the Ballot – One of Several Big Hits in Store for Business Owners Next Year
Department of Labor and Industries headquarters in Tumwater.
By Erik Smith
Staff writer/ Washington State Wire
OLYMPIA, Nov. 10.—Worker comp taxes will rise an average 12 percent next year, says the state Department of Labor and Industries – one of several steep increases in state-imposed business costs that employers will face in 2011.
Yet the increase isn’t enough to cover spiraling costs in the program – meaning that if all goes according to plan the state worker-comp program will continue eating into its reserves. Unless a remarkable turnaround takes place in the state’s investments on Wall Street, or the department finds a way to quickly rein in its costs, the insurance program could drain the last of its contingency reserve accounts within the next two years.
Next year’s steep increases have been expected for months by the state’s business groups. They have watched troubles blossom in the state-managed insurance program over the last two years. The latest announcement means business will get a triple whammy next year, from workers’ comp, a 40 percent increase in unemployment taxes, and a hike in the state minimum wage that will give Washington the highest state rate in the country. All of it during the most sluggish economic situation since the Great Depression. But just wait until employers find out.
Patrick Connor of the National Federation of Independent Business predicts a hue and cry from business owners that will make this year’s protests in the Legislature seem mild. “I’m going to get calls from business owners wanting to know what they can do about it,” he said. “Unfortunately the outrage is going to be too little, too late.”
This year business backed an initiative that would have changed the underpinnings of the workers’-comp program. Washington is one of only four states that do not allow private insurance companies to offer workers’ compensation insurance, and Initiative 1082 would have allowed them to compete.
But I-1082 never really caught fire outside Olympia. That may have been because the Department of Labor and Industries postponed the rate announcement until after the election. The department cited technical difficulties, and said it didn’t want to confuse business owners by making a rate announcement it might have to change later. But by postponing the announcement, the department certainly denied fuel for the fire. The measure flopped 59-41.
To understand what’s going on the program, you have to go back two years. Between July 2008 and June 2009, the state insurance fund for injured workers lost a whopping $1 billion. It still hasn’t recovered.
The Wall Street meltdown was only part of the problem. About half of the big loss was due to skyrocketing claims costs. State claims managers were returning injured workers to the job at a slower pace and awarding a growing number of permanent disability pensions. New figures for the last year are due to be released today at a worker-comp advisory committee meeting, but all indications are that the performance of the state program has worsened over the last year.
“There’s an attempt to blame it on the recession,” said Kris Tefft of the Association of Washington Business. “But something’s going on that is germane to L&I. It is contrary to the experience of all other states.”
Tefft has been watching worker-comp rate announcements nationwide. Washington appears to be raising rates by at least a third more than any other state program.
Will Burn Through Reserves
The department’s latest rate plan is a continuation of last year’s. The increase isn’t enough to cover costs. Instead, the department is gambling that its investments on Wall Street will rebound. In the meantime, it will burn through reserves.
This year the actuaries for the department say a 17.8 percent increase would be required in order to cover the program’s costs.
In adopting a 12 percent rate increase, the department plans to make up the difference by spending $117 million in reserves.
That’s what it did last year, too. It adopted a 7.6 percent rate increase while the actuaries said a 19.4 percent increase was needed. The result was that the state accident fund, the largest of the worker comp funds, was drained of $360 million.
A Big Gamble
A private insurance company wouldn’t be allowed to roll the dice that way, but Labor and Industries has a backer with deep pockets – the people of the state of Washington. If the system runs out of money, taxpayers pay the bills. The department points out that it has played the same system in the past, and the taxpayers have won the gamble every time.
L&I says it has enough money to keep rates low for now. “We’re going to be drawing the reserves down as low as we can to do that,” said Elaine Fischer, spokeswoman for the department.
She notes that the department found another $200 million through internal cost-cutting measures.
And there’s at least one sign that the gamble is paying off. By delaying the announcement nearly three months, the department was able to include another quarter of investment returns in the calculation. Wall Street did its job – state investments began to recover. Fischer said that if the department’s actuaries had recommended an “indicated rate” back in August, they would have called for a 24.5 percent increase.
Day of Reckoning Coming?
It’s the kind of game that gives some people the willies. Last year, the state auditor’s office took a look at the numbers and said they were worse than the department made it seem. The auditor’s office predicted a 75 percent chance of insolvency within two years in the state accident fund unless a 33 percent rate increase was adopted.
It’s not that anyone in business wants a 33 percent rate increase, Connor said. But the actuaries are sounding a warning bell about the state system.
“It’s going to be a big hit for small business, but it’s not as big as it could have been or it should be,” he said. “An indicated rate of 18 percent shows that once again the state is setting rates based on political calculations rather than on long-term solvency or standard insurance practices.“This latest announcement from the department, in addition to raising the minimum wage 12 cents an hour and the expected 40 percent increase in unemployment insurance taxes, is yet another indication that our state’s jobless recovery will be extended, thanks to public policy decisions made in Olympia.”