Article by Erik Smith. Published on Tuesday, September 14, 2011 EST.

Rate Hike of 4 to 8% Would Replenish Cash Reserve – Business Fumes About Another Tax Increase in the Middle of a Recession

The rate-setting process begins as L&I’s Workers’ Compensation Advisory Committee meets Monday.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Sept. 13.—The state Department of Labor and Industries is pitching another worker-comp tax increase next year, the third big rate hike for business since the start of the Great Recession.
            But this time it’s not because costs are out of whack. No one is talking about insolvency. No siren is going off. No alarm bell is ringing. In fact, the state workers’ comp program is in the best shape in years.
            It’s because L&I wants to put the money in the bank.

            The department hopes to raise taxes somewhere between 4.5 percent and 8 percent to replenish the state-run insurance program’s cash reserve, which has been depleted during the state’s three-year economic slump.

Business interests are not amused. Seems like the state can always find a reason to raise taxes, says Patrick Connor, director of the Washington-state chapter of the National Federation of Independent Business. But raising them at a time like this? Just to sock the money away?  

“If the system is as solid as the department said last year, there is absolutely no reason we should rush to restore the reserves – particularly not when tax increases could cost jobs,” he said.

L&I released its proposal Monday to a state workers’ compensation advisory committee, launching the annual decision-making process that will culminate in new insurance rates for Washington businesses next year. Let’s just say this proposal won’t go down easy.
 

Not Technically Necessary

The irony is that the proposal comes as the department is announcing its best bit of financial news in ages. The state-run insurance program for injured workers seems to be in the pink, thanks to a highly controversial reform measure that passed the Legislature this year.
            What happened is that lawmakers heard the squeals from small-business owners who were stuck by big tax increases two years in a row. Recession exposed big systemic problems in the state workers’ comp program, which is mandatory for all employers too small to self-insure. As unemployment soared, skyrocketing claims costs were shouldered by fewer workers. Employers faced an average 7.6 percent tax hike in 2010, followed by 12.1 percent this year. Many paid far more.
            Last year business pushed an unsuccessful ballot measure that would have allowed competition from private insurers, and even Democratic Gov. Christine Gregoire expressed fear that the furor would eventually tear the program asunder. Business found a receptive audience at the statehouse for its argument that the system had been skewed by years of political decisions and management practices that favored workers at the expense of the bottom line.

A session of open warfare with labor interests produced a relatively modest compromise. The most important change is that next January older workers with permanent injuries will be allowed to take voluntary lump-sum buyouts instead of pensions. That’s a small first stab at a practice that saves big bucks in other states. Another reform will allow the state to crack down on doctors who allow workers to linger on the rolls too long. There are others, too, but what matters is the final accounting. L&I actuaries say the reforms will save $1.1 billion over four years.

No one has actually seen the savings yet. But at least on paper the result is striking. The projected savings were precisely big enough to wipe out what otherwise have been an 8.1 percent premium hike next year.
            If current costs were the only issue, worker-comp taxes would go down 0.3 percent.

Cash Reserves Were Depleted

So how come the department wants to increase taxes? It’s because the state burned through its cash reserves over the last couple of years. Those hefty rate increases in 2010 and 2011 went only part of the way toward covering the state’s costs. L&I says it drew down its cash reserves by $332 million to keep the system whole.

So now it wants to start building up the bank account again. The bigger the increase, the faster that money can be set aside. “It is critical that we restore the workers’ comp reserves,” Schurke argued in a statement released after the Monday meeting. “Savings from the reforms create an opportunity to do this without large rate increases.”

L&I argues that the state reserves are low by industry standards. For every dollar held in reserve by other public worker-comp programs, Washington state has 20 cents.

And during the Monday meeting, Schurke called the set-aside a matter of prudent management. The State Investment Board manages L&I’s accounts in the financial markets, but the ups and downs lately are just too much. 

“We are looking at pretty positive numbers for the June 30 financials, [but after] what happened to the markets in August we expect a lot of volatility, and your guess is as good as ours for how this is going to end up at the end of the quarter,” she said. “Just as an example, the State Investment Board told me last week that since the end of the quarter, equities are down $200 million. They could easily come back up, they could easily go down further. We just don’t know.”

L&I is asking for input from stakeholder groups – business and labor – and will announce a proposed rate Sept. 20. Public hearings will be held in October.

Raising Taxes and Banking the Money

If the economy looks dicey to L&I, it looks even more frightening to the businesses that pay for the program. For them fast-rising worker-comp taxes are part of the problem. Here’s how your typical green-eyeshade bookkeeper might see things. In 2009, the average worker-comp rate was $2.12 for every $100 of payroll. Today it is $2.42. And if L&I’s maximum increase goes through, that’s $2.61 – 49 cents in additional taxes since the start of the Great Recession. Or an additional $20 in taxes on a $4,000 monthly paycheck. 
            It starts to add up.

Meanwhile, it’s not as if the state program is in danger of going broke – on June 30, it had total assets of $12.2 billion.

Of course, it has liabilities, too. By the end of the year, the state figures the difference between assets and liabilities will be just $563 million. That’s what L&I means when it says it has a $563 million reserve. Yet even if another stock market crash wiped out the entire reserve and then some, the program could still pay current obligations and have a bit of time for catch-up. That’s because its more than $11 billion in liabilities wouldn’t all come due at once.

Connor argues the state can afford to let things ride for a while. “We’re being asked to swallow a 4.5 to 8 percent rate increase to rebuild reserves the department squandered over several years,” he said. “Small business didn’t create this problem and it didn’t occur overnight. We should give the reforms adequate time to work and be expanded upon to restore long-term stability to the accident fund reserves.”

            State Rep. Cary Condotta, the House Republicans’ point-man on the worker-comp issue, said the state ought to set rates so that no further damage is done to the reserve. But raising taxes and banking the money displays a certain lack of sensitivity to the problems small-business owners face at this particular moment. “This isn’t the time to be rebuilding the contingency reserve,” he said.

            The Association of Washington Business, which has a seat on the advisory committee, hasn’t taken a formal stand, though AWB’s Kris Tefft says the situation proves the value of this year’s reforms – they turned the department’s financial position right-side-up.

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