Article by Erik Smith. Published on Friday, December 31, 2010 EST.

Planned Rate Increase Won’t Cover Costs for Second Year in a Row – Report Says Practice Violates State Law

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Dec. 31.—A new report from the Washington state auditor’s office says a big chunk of the state worker’s compensation program is insolvent, and another big piece of it is heading that direction in 2011.

            It also says that the Department of Labor and Industries is breaking state law by adopting rates that fail to cover the costs of the program.

            Aside from that legal question, none of it is really new or unexpected. Department officials say they knew they were going to cross a few lines more than a year ago when they ignored their actuaries. They wince at the term insolvent, but that’s what you call it when your fund starts eating into reserves. They just don’t think there’s anything wrong – other than maybe a lousy economy.

They say they play by a different set of rules than private insurance companies. They aren’t about to run out of money. And they say they are just trying to give business a break.

            Business organizations see things differently, of course. They say you have to wonder why the program’s costs are skyrocketing in the first place. They see the report as yet another indication that the program is in serious trouble. If the state was a private insurer, the insurance commissioner would be sounding the alarm and the receivers would be on the way.

            Eating Into Reserves

            Labor and Industries is the sole provider of worker compensation insurance in Washington, meaning that every business has to buy insurance from the state unless it is large enough to self-insure. That makes the rates charged by Labor and Industries a matter of public concern. And the simplest way to explain what has been happening over the last two years is this:

            L&I has been raising rates. It just hasn’t been raising them enough.

            Because of it, the state accident fund went negative last year, eating into reserves by $360 million. According to the auditor’s report, that makes the fund insolvent.

            Now the same thing is about to happen to another big fund, the auditor’s report says. Proposed rates for the medical aid fund are so far out of whack that it says the fund is all but certain to become insolvent within five years, most likely within three.

            Such a Nasty Word

            What makes the accident fund insolvent is the fact that liabilities exceed assets. That’s what the word means.

            Last year L&I had some problems with that word. It sounded so negative. It objected when a 2009 auditor’s report suggested insolvency was just around the corner. But the auditor’s office didn’t back off. In fact, this year’s report uses the words “insolvent” and “insolvency” five times in nine pages.

This is why the report says it matters: “It is important to maintain adequate reserves to cover unexpected losses as well as shortfalls in premium and investment income.”

            In the private sector, the term “insolvency” is synonymous with financial disaster. Yet both the auditor’s office and Labor and Industries agree that the department has plenty of money to cover the program’s obligations. It just doesn’t mean the same thing here, said Elaine Fischer, spokeswoman for the department. The program still has $11 billion in assets, and there is no danger that injured workers will lose their insurance.

            “We agree with the auditor that it is good to have a reserve,” she said. “In this case we had to choose between maintaining a surplus or using a surplus to help businesses keep their doors open. We used the surplus to keep rates as low as possible.”

            The idea is that eventually the economy will recover and the state will eventually be able to replenish the reserve.

Still Has Problem

            Whatever you want to call the problem, it’s going to get worse. In 2011 the department is planning another inadequate rate increase. The actuaries say a 17.8 percent increase is needed, but the department is planning only 12 percent.

            That means employers will pay an average 6.5 cents more for each hour worked by an employee.

            Hearings on the 2011 rates are scheduled for next week. Hearings are set for Tuesday, Jan. 4, at 10 a.m. at the Tacoma Convention Center and the CenterPlace Regional Event Center Auditorium in Spokane Valley.

            A Great Big Red Flag

            You really have to think about the big picture here, said Kris Tefft of the Association of Washington Business. The problem is not that the worker comp program is going kaput. But you have to wonder why the costs are going up so much in the first place. AWB and other business groups have argued for some time that the state’s monopoly status gives L&I no incentive to restrain costs.

“The Legislature should worry about this independent audit,” Tefft said. “It’s the latest attempt to sound the alarm on a system that many have said for a long time needs reform. The report shows there are basically two paths workers’ comp can go in Washington – finally get a handle on the costs of providing benefits in this generous system, or keep raising rates every year until there aren’t any more small businesses and employees to pay them.”

May Violate State Law

L&I says there’s nothing new about what it’s doing this year. There have been numerous times in the past that it has disregarded the recommendations of its actuaries, adopted a lower rate, and gambled on the prospect of economic recovery.

But this year’s audit report makes a new charge. The auditor’s office is suggesting that the practice may violate state law.

In an audit finding it says that the 2011 proposal doesn’t maintain the soundness of the accident fund. But state law requires Labor and Industries to make a proposal “in accordance with recognized insurance principles.”

“We recommend that the department adopt a premium rate necessary to maintain the actuarial solvency of the accident account in accordance with recognized insurance principles.”

If L&I is breaking the law, there probably won’t be any consequence. It’s not as if any party is likely to go to court demanding that business pay higher worker-comp taxes…But still – consider it a great big sticky-note.

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