Support The Wire

A Bit of Good News From Wall Street Has Labor Challenging the Case for Workers’ Comp Reform

Department of Labor and Industries headquarters in Tumwater.

Department of Labor and Industries headquarters in Tumwater.

OLYMPIA, May 9.—An uptick in investments at the state Department of Labor and Industries has labor challenging the case for a worker-comp reform bill that remains in play as Washington lawmakers return next week for a special legislative session.

Suddenly it’s clear what the argument is going to be – that a rebounding stock market ought to erase all worries that an enormous rate increase is around the corner. And that means lawmakers ought not to consider cost-saving reform legislation that would allow more workers to cash out their disability claims in the form of ‘structured settlements.’ Business isn’t buying it, and the Majority Coalition in the Senate continues its effort to pass a bill this year.

Strong investment returns these past few months have increased the value of the L&I portfolio by some $305 million. And an agency that had been looking at big rate increases on employers and workers to rebuild its depleted reserves by $1.1 billion suddenly doesn’t face quite so big a problem. Now it has to make up $720 million. Business and labor stakeholders were notified last week at a meeting of the agency’s workers’ comp advisory committee, and judging by reaction from the state Labor Council and the Association of Washington Business, it’s all a matter of how you look at things.

Labor says the case for reform is gone. Business says nothing has changed. And of course, there is an irony to it all. “I don’t think it is every day that you hear the state Labor Council praising the work of Wall Street,” says state Sen. Janea Holmquist Newbry, R-Moses Lake, the Commerce and Labor chair who is leading the Senate’s push for the bill.

Battle Continues in Legislature

State Senate debates worker comp measure Feb. 5.

State Senate debates worker comp measure Feb. 4.

Lawmakers this year are considering a measure, SB 5127, that would expand on a settlement program they launched in 2011 and could mean big savings for the state-run insurance system. In this state all but the largest self-insuring employers are required to participate in the state program, no private competition is permitted, and business for years has complained that the state has little incentive to run the program efficiently. That made the 2011 reform effort a watershed event: For the first time Washington allowed workers to settle their disability claims rather than battling for pensions.

It is a common practice, permitted in 44 other states, but here it provoked one of the biggest business-versus-labor battles in years. Though settlements are voluntary, the state saves money because the value of the settlement is less than the long-term payout via a pension – perhaps 80 percent, depending on the claim. Ultimately that translates to savings for the employers and workers who pay the premiums – a unique shared arrangement in this state. But labor argued that workers shouldn’t be allowed the choice. They wouldn’t be getting the full payout, and labor raised fears that workers would blow their cash long before retirement age, leaving them to turn to the state for assistance.

The ultimate bill represented a compromise, sort of a baby step toward settlements for everyone. Instead of allowing lump-sum settlements, it allowed “structured settlements” – in which some of the proceeds are still paid out over time. Since the start of last year, settlements have been allowed only for workers 55 and older, though the threshold will decrease to age 50 by 2016. Though settlement awards so far have been few, the state booked big savings – some $600 million – and that has helped L&I hold the line on rate increases.

This year’s bill would reduce the age for settlements to 40 – the median age for those who file long-term disability claims. That could mean even bigger savings for the system. A fiscal note from the Department of Labor and Industries provides a “mid-range” one-time savings estimate of $232 million on existing claims, and about $90 million a year on new claims — about a half-billion dollars over the next three years. The bill also would fix a glitch in the 2011 legislation that left the state Board of Industrial Insurance Appeals rejecting most settlements that had been negotiated by attorneys, on the grounds that it couldn’t determine whether they represented the “best interest of workers.”

The bill sailed out of the Senate in the first major vote of the session, with a bipartisan vote of 30-19, but it disappeared without a trace in the Democrat-controlled House, where the state Labor Council has considerable influence. And lawmakers in the Republican-leaning Majority Coalition in the Senate say they are determined to ensure that it is one of the bills that emerges in any session-ending deal.

Suddenly, a New Argument

So what does that have to do with investment returns? Part of the case for the reform bill is that big increases lie just ahead, to replenish L&I’s “contingency reserve.” It drew down its accounts during the recent recession, far below levels that would have been permitted of a private insurer, to stave off big rate increases that were recommended by actuaries. At one point, the state auditor concluded a major component of the program, the accident fund, was technically insolvent – not that there was ever any worry that the program would go bust. Business contends that L&I’s dip into the reserves artificially masked big inefficiencies in the program — one big reason for the reform drive two years ago. Now that the economy appears on the mend, L&I and most participants in the program concede that it is time to rebuild the accounts. But the recovery plan has caused business to gulp. At one point last year, when L&I hit the business community with a worst-case scenario, it suggested it might need a 19-percent rate increase that would be sustained for 10 years. The howls came from across the state.

Things have simmered down a bit – L&I has adopted less-ambitious goals for its reserve account – but until last week it appeared it still would have to raise $1.1 billion. The news from Wall Street relieves a bit of that pressure. The insurance program continues to operate at a loss, some $69 million, but that is covered by the investment returns. The rest goes to the reserve – but when all is said and done the agency still has to come up with $720 million. That money will be covered by worker comp taxes.  The first payment will come when L&I adopts rates for 2014, sometime this fall. From there, it’s a matter of spin.

Staking Out Positions

Jeff Johnson, president of the Washington State Labor Council.

Jeff Johnson, president of the Washington State Labor Council.

In recent days business and labor seem to have been staking out their debating positions. In a salvo delivered via its website, The Stand, the state Labor Council is arguing that the improved investment returns blow a hole in the reform argument: Over time you can count on a resurgent Wall Street to make up the difference. “The latest numbers are good news for our workers’ compensation system and they strengthen the case for allowing the 2011 changes to be fully implemented before rushing through more legislation that puts injured workers at risk,” state Labor Council president Jeff Johnson is quoted as saying. “Although we’d like to see those reserve funds even higher, this will decrease the pressure to raise rates for employers and workers.”

But business says it makes the case all the stronger. In an issue brief for the Association of Washington Business, lobbyist Kris Tefft calls the reported investment returns “welcome news,” but notes that big rate increases are still coming –they just won’t be quite as big. And the good news about the bill is that the rate increases might be entirely wiped out by its passage. “In other words, despite its modest changes to the structured settlement program, ESSB 5127 would substantially, or perhaps entirely, mitigate the need for high annual surcharges to recover the contingency reserve.”

Highest Costs in Nation

Steve Mullin, president and CEO of the Washington Roundtable.

Steve Mullin, president and CEO of the Washington Roundtable.

It is a curious case where labor appears to be expressing more confidence in Wall Street than the state’s business lobby. But the more important thing is that an investment uptick does nothing to address the systemic problems with the state insurance program, says Steve Mullin, president and CEO of the Washington Roundtable, the association that represents the state’s largest employers. He points to a report last year from the National Academy of Social Insurance, which collated data from workers’ comp programs nationwide – and concluded that Washington’s system has the most expensive industrial insurance program in the country. In 2010, Washington provided $865.67 per covered worker, compared to a national average of $443.47.

“When you have a monopoly system like we do, there are various things the state can do wherein they don’t necessarily raise rates to the point the actuaries would like,” Mullin said. “These divorce the premium costs from the underlying system costs, but over time those are going to balance out, and if we have the highest cost per worker over time, our premiums are going to be very high as well. The issue isn’t the size of the surplus. It is what that cost means in terms of our relative competitiveness with other states.”

Says Scott Dilley of the Washington State Farm Bureau, “We need to be engaged in a good substantive policy discussion about how to make the system work in a way that is affordable for employers, and we can’t base those decisions on a couple of months of financial data. What we’ve seen over the past several years has really led to this point, and we need to make sure that the system actually works well for everyone involved. And that is why we need those reforms in place right now.”

Push Continues

Holmquist-Newbry says it has been a bit frustrating trying to get the House to move on this year’s reform bill. The measure got seven Democratic votes in the Senate but not even a hearing in the other chamber – and the Senate has made it clear that it will insist on the bill during the session endgame. If the upcoming rate increases weren’t reason enough, the fact that the insurance program is operating at a loss ought to be a “clear signal” that work remains to be done, she says. “While labor is content to rely on Wall Street for our workers’ comp system, I still think we have 720 million reasons to fix it for Main Street.”

Your support matters.

Public service journalism is important today as ever. If you get something from our coverage, please consider making a donation to support our work. Thanks for reading our stuff.