L&I’s 10-Year Plan: A Double-Digit Tax Hike

On the heels of L&I’s unexpected announcement that average workers’ compensation tax rates will not increase in 2013, department officials are trying to assure businesses they will not face a double-digit tax hike in the future by shifting an increase from an election year (now) to a non-election year in near the future.

But a double-digit increase is exactly what is in store for employers over the next decade.

L&I’s informal plan is to adopt a 10-year strategy of rate increases and a gradual pension rate reduction that will translate into an annual rate increase of no more than 5.5% every year for the next decade.  This 5.5% rate cap would include the break-even rate indicated each year, assumed to be 3.5%, with the remainder used to begin replenishing the critically depleted contingency reserve fund.  

So how did L&I go from a possible 19% rate surcharge every year for the next 10-years, which L&I’s own actuary said was needed to restore the system to optimal fiscal soundness, to a rate increase of no more than 5.5% each year?

In addition to the $300 million unexpected savings from the reforms passed by the Legislature in 2011, L&I is simply lowering it’s target level for the contingency reserve fund and not decreasing the pension discount rate to the extent originally suggested by the department’s actuary.

Instead of restoring the reserve fund to L&I’s target of 19.2% more than the amount needed to cover future liabilities, L&I is lowering the target to what they call a “low-mid reserve level” of 14%.  While certainly better than the current critical level of around 5%, it is far from the national state average fund surplus of 36.5%.  Oregon’s workers’ compensation fund maintains a ratio of 26% and Ohio is at 28%. 

As for the pension discount rate, the original plan calculated a reduction from the current 6.5% to 4%.  The new plan gradually reduces the discount rate over the 10-year period to 4.5%, which is still higher than many consider prudent given low interest rate and investment income.  For example, Oregon’s pension discount rate is 3.5% and Colorado’s is 2.5%.  The lower the discount rate, the more money the state is obligated to put into the fund.  Failing to reduce the discount rate to an appropriate and realistic level could plague the system with crippling unfunded liabilities for disability pensions.

Keep in mind this is not an official plan—it is simply a “framework” L&I plans to use to rebuild the contingency reserve fund, albeit to a lower level than previously targeted.   In theory it will function as a “starting point” for L&I when determining rates each year.   Since L&I is not increasing rates for 2013, the new strategy is slated to begin taking effect in 2014.  

No one would argue the state’s small businesses do not deserve a break from ever-increasing workers’ compensation taxes (which have increased 66% over the past 12 years).  The fact remains, however, that the state-run workers’ compensation system is failing.  A rate increase of 0% for 2013 would be great news if the system was not teetering on insolvency due to poorly-managed contingency reserves and looming pension liabilities.

L&I’s newest 10-year fix may avert an immediate tax hike, and is certainly less painful than the originally proposed 19% annual rate surcharge, but it still constitutes a significant, double-digit tax increase on small businesses over the next decade—close to 40%.  Worse, it will not restore the contingency reserve fund to the department’s own target levels, rather sets a standard whereby a weaker, less financially-sound system is the new normal.

It’s increasingly clear the state’s monopoly workers’ compensation program, one of only four left in the nation, is not working.  Lawmakers should close down this state-run insurance company and let businesses buy worker protection coverage on the open market, and let competition, not top-down bureaucratic orders, set prices and control costs.