L&I’s worker compensation advisory committee gathers Friday in Tukwila.

TUKWILA, July 21.—The state Department of Labor and Industries, facing a problem that in round and somewhat fuzzy numbers could be counted as $3.1 billion, laid out a set of options Friday that might strike some employers as appealing as a choice between hanging and lethal injection. The question right now seems not to be whether worker comp taxes will increase, but how much and over what period of time.

It is a question that has roiled the business community for the last month, ever since the agency started laying the numbers on the table. In June an agency actuary suggested that it might take a 19 percent rate hike, sustained over 10 years, to rebuild reserves in the state-run insurance program that have been depleted during the current recession, and to adopt more realistic expectations of investment returns. That increase would come in addition to the cost of running the state-managed insurance program for injured workers.

At a meeting Friday of the agency’s workers comp advisory committee, L&I laid out other ideas that might be easier to swallow, but still would require big increases in taxes during the years ahead. It has two months to come up with a plan. In September the agency expects to announce a rate proposal for 2013.

Said Labor and Industries director Judy Schurke, “We are trying to stay in the real world, understanding the economy, the struggles that businesses have in Washington right now, trying to adapt our decisions, do that as much as we can – but understanding that we have a fiduciary responsibility to take case of people who get injured on the job.”

Basically, the agency might be able to shoot for a number a bit lower than $3.1 billion and accept a bit more actuarial risk. And there might be ways to smooth out those rate increases over time, to reduce the immediate impact.

It’s not just an esoteric matter. The state program, mandatory for all employers in Washington state except the big ones that self-insure, charges big premiums for high-risk job classifications, particularly in construction and logging. If the highest rates go up to $23 or $24 an hour, warned Association of Washington Business representative Kris Tefft, “you could potentially put an industry into extinction.”

A Matter of Process

At Friday’s meeting, the agency presented business and labor representatives with 24 proposals to bring the system back to a greater degree of actuarial health. The problem is two-fold. Right now, the agency has a “contingency reserve” of 5.2 percent – that is, it has 5.2 percent more than the amount needed to cover current liabilities. L&I says that’s not healthy. Nationally, the average for state funds is 36.5 percent. A 2007 agency policy sets a goal of 19.2 percent, the point at which it has only a 1 percent chance of running a deficit. To hit that target, the agency needs $1.7 billion.

At the same time, the agency uses a 6.5 percent discount rate when setting aside money for pensions – but that figure is considerably higher than is warranted by current investment returns. If it were to adopt the 4 percent figure suggested by the agency’s actuary last month, it would need an additional $1.35 billion. Self-insured employers also are affected by the discount rate calculation, because it affects the amount of money they must set aside for pensions.

Yet nothing is set in stone. That 2007 policy is a guideline, not a law. Some of the proposals placed before the committee would adopt a lower goal for the size of the reserve. Some would adopt a discount rate of five percent rather than four. The department might take five years to rebuild or it might take 10. And rather than adopting a big rate increase and sustaining it for the entire period, it might start small and increase rates incrementally, year after year.

Schurke said the agency is conferring with lawyers to determine what exactly it is required to do with regard to the discount rate. “We have some flexibility on the discount rate, so with your advice, what we will do is go back and play with that.”

Might be Hard to Sell

The discussion is taking place in the shadow of the long-running debate over the insurance program’s management practices – a seemingly eternal battle between business and labor about benefits levels and efficient claims-management procedures. This state is one of four that do not allow private companies to provide workers comp insurance, and business has long argued that the Washington program has little incentive to keep costs low. In 2010, the Building Industry Association of Washington pushed an initiative that would have allowed private insurers to enter the market, but was defeated at the polls.

The higher rates go, the more likely another effort to make big changes. Last year the Legislature staved off some of the pressure by adopting modest cost-saving reforms, including allowing “structured settlements” for certain older workers who are awarded permanent disability pensions. But due to labor opposition, lawmakers stopped short of expanding the option to all workers, or permitting the lump-sum settlements that are permitted in most states.

Labor interests are wary of keeping the rate increases too low. Rebecca Johnson, representing the state labor council, said the key thing is to ensure the system is sound. “It is [about] trying to strike the right balance at an acceptable level of risk in getting to a place where we all feel comfortable that we have a secure system that is not going to be incredibly volatile in the future.”

Meanwhile, AWB’s Tefft said that in the midst of a sputtering economic recovery, L&I is going to have a tough time selling employers on the need for a rate increase. “A lot of employers might understand certain increases based on inflation and so on. But it is a challenge for the department to have surplus-building  be the primary rationale for increasing rates at a time when most, predominantly small, businesses aren’t in a position where they can raise their costs in order to build surpluses. So it is a challenge for the department to articulate why a larger than needed rate increase might be coming, and just why it is needed.

“If it is a relatively small and smooth increase over a long period of time, spread over a broad base, if it has to come, that would be our preference. On the flip side of it, if you see 10-percent-or-above rate increases, that has been a catalyst for pitched battles in the Legislature between business and labor over benefit costs, and that is always something that has to be watched in this kind of conversation.”

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