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Workers’ Comp Settlement Program Falls Short by $242 Million, L&I Announces – Fuels Debate Over Reform Bill

L&I's Workers' Comp Advisory Committee, the battleground for business and labor interests, hears the disappointing news about the settlement program at its meeting Wednesday.

L&I’s Workers’ Comp Advisory Committee, the battleground for business and labor interests, hears the disappointing news about the settlement program at its meeting Wednesday.

OLYMPIA, June 20.—The state Department of Labor and Industries Wednesday finally made an announcement that surprised none of the players in the highly charged debate over workers’ comp reform – a highly restrictive settlement program authorized by the Legislature in 2011 has been a great big dud.

But the amount by which the state missed the mark might raise a few eyebrows. It was a whopper. So few injured workers took advantage of the state’s new voluntary settlement program, and so few settlements have been awarded, that L&I now concedes it will come up $242 million short. That adds to an already-enormous problem the state agency faces as it struggles to rebuild its reserves and adopt more realistic expectations of its investment returns on Wall Street. With the new financial figures released Wednesday, L&I now must find a way to cover a gap of $2.132 billion. Business worries that big rate hikes are just around the corner for the state’s industrial insurance program, which is mandatory for all but the very largest self-insuring businesses in Washington. A 10-year catch-up plan is due to begin when new rates are adopted for 2014.

The new figures, announced Wednesday at a meeting of the agency’s Workers’ Compensation Advisory Committee, play into a superheated debate now taking place at the statehouse. The largely Republican Majority Coalition in the Senate is pushing a bill that would ease some of the restrictions that were imposed on the new settlement program during a knock-down drag-out battle between business and labor in 2011. If those restrictions are eased, the agency estimates it might be able to save a half-billion dollars over the next three years. But labor is pulling out the stops as it attempts to defeat the bill, arguing that the agency is wrong about Wall Street, a brighter day is about to dawn, and that a bullish economy will produce investment returns that will erase the need for big tax hikes.

Senate Commerce and Labor Chairwoman Janea Holmquist Newbry, R-Moses Lake, is calling the argument absurd: “Of course I would love to see more Wall Street gains, but you can’t just pin your hopes, cross your fingers, hold your breath and wait for Wall Street to dig us out of the hole. You can’t do that.”

Whatever the political arguments, the figures released by L&I Wednesday demonstrated the program isn’t working the way it was supposed to. Back in 2011, the agency figured that workers would rush to settle their claims. By the end of this month, some 3,000 settlements were supposed to have been awarded. Instead, just 70 workers have applied to settle their claims during the first year-and-a-half of the program, and just 50 settlements have been awarded.

Program Imposed Big Restrictions

Exactly why so few claims have been settled is part and parcel of the current legislative debate. Most other states, 44 of them, allow injured workers to settle their claims, taking a one-time lump-sum payment instead of a long-term pension. Terms vary widely from state to state, but the basic idea is that the settlements reduce costs for workers’ comp programs, because the settlements are about 70 to 80 percent of the value of a pension, at the same time that they bring quick resolution to questionable claims that might otherwise be disputed. When Washington launched the program, however, the terms were considerably more restrictive than in other states.

After the bare-knuckle battle between business and labor in 2011, the final deal between the House and Senate required a unique “structured settlement” program rather than one-time payments – meaning that the money is still paid out over time. Instead of allowing all workers to take advantage as in other states, the settlements were limited to workers age 55 and over – though the age restriction will drop to 50 by 2016. And there has been a legal snarl over language requiring the state Board of Industrial Insurance Appeals evaluate settlement offers to determine whether they are in the “best interest” of workers. Though the language was intended to apply only to workers who are not represented by lawyers, the board maintains that it applies to all applicants, and it has been rejecting settlements negotiated by lawyers on the grounds that it cannot determine whether the agreements represent workers’ best interests.

The bill before the Legislature, SB 5127, would reduce the age restriction to age 40 and would clarify the legal language so that settlements negotiated by attorneys can proceed. Structured settlements still would be required.

Cautious Conclusions From L&I

Joel Sacks, director of the Department of Labor and Industries.

Joel Sacks, director of the Department of Labor and Industries.

Labor and Industries officials are doing their best to avoid injecting themselves into the Legislature’s current debate, and they are offering no comment on the restrictions lawmakers chose to impose. Asked why the program has fallen so far short of the agency’s expectations, they say they can only guess. “I think the question is a really good one,” says L&I director Joel Sacks. “We don’t know how much interest there really is from workers saying, hey, this is something I want.”

Says chief policy advisor Vicki Kennedy, “I think part of it is that you have a wholly new program that none of the players in Washington are familiar with. Injured workers haven’t used it before. Attorneys on either side were not familiar with it. No one really knew, as we moved forward, what ‘best interest’ meant. And everyone has been stepping back and waiting to learn more as cases begin to get through the system, so that has been part of our experience.

“Going forward, I think you’ll see more interest, and I think that has been taken into account in some of the actuary’s work, but we will continue to adjust [estimates] as we continue to gain more experience with this.”

The bottom line, though, is that the agency is conceding that its earlier figures were wrong by a factor of four. It has reduced its savings estimates by 75 percent. It has subtracted those $242 million in unrealized savings through 2017 from its calculations for its insurance reserves. And it has become clear that the total scope of the problem the agency faces is a big one. In order to rebuild its reserves to a level it considers prudent, it now needs $1.047 billion. Reduced expectations for Wall Street returns – an adjustment to its “discount rate” – require it to raise another $1.085 billion. That totals up to a $2.1 billion problem.

Makes Case for Reform, Business Says

AWB's Kris Tefft, right, is seated alongside Nancy Dicus of Vigilant.

AWB’s Kris Tefft, right, is seated alongside Nancy Dicus of Vigilant.

The problem is obvious, says Kris Tefft, lobbyist for the Association of Washington Business. The settlement program authorized by the 2011 Legislature was too restrictive. Back in 1990, when the state of Oregon authorized settlements for the first time, there was indeed the sort of rush to settle that L&I was predicting for this state. In the first year of the Oregon program, there were 3,000 settlements, and that number has been consistent ever since. The settlement program is one major reason Oregon has been able to avoid rate increases for the last 20 years. But there were a number of big differences – there was no age restriction, and lump-sum settlements were permitted.

Tefft said the news from L&I Wednesday “continues to validate our position that without legislative intervention, whether it happens in the next few days or the next few years, we are looking at a tax increase potentially in excess of $2 billion, which could be one of the largest tax increases that have ever been levied on employers in this state in the aggregate. Obviously Labor and Industries doesn’t have the authority to enact cost-saving changes. Only the Legislature can do that. And it underscores the entire campaign that we have been on throughout these last three sessions of the Legislature to see some further expansion of the program.”

L&I will have little choice but to consider big tax increases to cover its current $2.1 billion funding gap, he said. Although short-term investment returns have been good during the first three quarters of the current fiscal year, when the department sets new rates, it can’t count on a long and sustained bull market as existed before the recession – and indeed, its actuaries have strongly advised it not to do so. That leaves just two options, he says. Higher taxes or reforms aimed at driving down costs.

Debate to be Renewed

Commerce and Labor Chair Holmquist Newbry, of the fiercest critics of the workers' comp program, visits agency headquarters in this file shot from 2010.

Commerce and Labor Chair Holmquist Newbry, one of the fiercest critics of the workers’ comp program, visits agency headquarters in this file shot from 2010.

The debate is part of a bigger argument that has raged for years, over whether the state insurance program is being managed efficiently. Another factoid from the financials released by L&I, for example, shows that pension awards are on the rise. The last two consecutive quarters have seen the highest level of pensions in the last 10 years. Exactly what is going to happen with this year’s workers’ comp reform effort is one of the big questions in the waning days of the 2013 legislative session. Senate leaders offered Tuesday to drop their effort to pass the bill and other reform measures this session if the House would back off its proposals for tax increases. But in a news conference Tuesday, leaders of the Majority Coalition appeared to suggest they might be willing to trade the workers’ comp bill for a pair of tax bills – a telecom measure and bill narrowing a sales-tax exemption for certain out-of-state residents who shop in Washington. Those bills would raise roughly $135 million. Action today on the Senate floor could put that offer in motion.

Holmquist Newbry, the Senate Commerce and Labor chairwoman, said the new numbers from L&I make the need for the measure clear. “The workers’ comp advisory committee numbers highlight that yes indeed, we are facing a $2 billion tax increase if the Legislature and the governor fail to act this session. I know our employers are counting on us, as well as our workers, and we need to act this session.”

Labor Argues Problem Isn’t Urgent

Washington State Labor Council President Jeff Johnson attends Wednesday hearing.

Washington State Labor Council President Jeff Johnson attends Wednesday meeting.

Labor’s position in the argument has been a bit murky. Late last week it circulated a “one-pager” on the Hill that challenged the $2 billion problem statement put forward by Holmquist Newbry and the business community. Although the figure was based on the latest public financial statements released by the Department of Labor and Industries, reflecting the latest investment returns, the one-pager said it “was based on a fantasy scenario from a year ago – which was based on numbers from a year before that – that assumed no economic recovery.” In a statement on its website, the Labor Council appears to clarify its stand, arguing that it did not intend to challenge the $2 billion problem statement, but rather the idea that a tax increase would be required in order to deal with it.

In a further statement on the Labor Council website, Washington State Labor Council President Jeff Johnson argues that the Labor Council all along believed the cost-savings estimates for the settlement program were too large. And if they were too large in 2011, they may be just as far off in 2013. “Now some legislators want to double-down on this failing experiment by expanding the buyouts and they have a new set of ‘projected savings’ that are also grossly inflated.”

“The good news is that the workers’ compensation system is in stronger financial shape than it has been in five years. Even after taking out this $242 million, the system’s reserves increased 19 percent to nearly $700 million in the second half of 2012. As has happened for decades, the workers’ comp system and its reserves recover from recessions as the economy recovers. After two years of zero rate increases in 2012 and 2013, and even with today’s announcement, the system is in stronger financial shape and there is no reason to believe a significant rate increase is in store for 2014.

“Organized labor and other advocates for injured workers continue to oppose structured settlements. The only way they save money is if injured workers and their families accept less money than they would otherwise receive. The fact that it’s not saving as much money as its supporters promised is evidence that many workers understand these buyouts are not in their best interests. That’s why buyout supporters inserted language in this year’s legislation that explicitly prevents state officials from considering what’s in the ‘best interests’ of injured workers when approving certain buyouts. Such legislation undermines and weakens this important safety net, and ultimately would shift costs to taxpayers in the form of social services for disabled workers whose buyout has run out.

“Lawmakers should stop chasing phantom savings down this rabbit hole. It’s harming injured workers and their families.”

Comes Full Circle

In essence, labor’s position might represent another option – the Department of Labor and Industries could defer rate increases, as it has in the past, in hopes that Wall Street will rebound. It should be noted that the department basically did the same thing during the worst of the recession, artificially keeping rates low, so as to avoid the big tax increases that would have been required to cover the full cost of the insurance program. That caused it to draw down its reserves to the point that the state auditor’s office declared portions of the workers’ comp program technically insolvent. The practice would not have been allowed of any private insurance company; what makes the workers’ comp program different is that it is backed by the faith and credit of the taxpayers of Washington state. But the financial trouble is one of the factors that has driven the current debate over restoring the program to fiscal health. “They are pinning all their hopes on Wall Street,” Holmquist Newbry said. “Well, there we go again.”

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