L&I Has Run Out of Road to Kick the Can Down

Two years ago Department of Labor & Industries (L&I) director Judy Schurke went to great lengths to dismiss the State Auditor’s findings that the state’s monopoly workers’ compensation system was at risk of insolvency.

Responding to the 2009 Auditor’s report, Schurke said the state run system “is not at risk of going insolvent and that characterizing it as such is wrong.”  Schurke downplayed the Auditor’s findings, saying the warning of insolvency referred not to the system itself, but to the program’s contingency reserve fund.  She said:

 “The last thing we need to do is overreact to the possibility that the contingency reserve is low...The fact is, [L&I] made a deliberate decision to draw down the contingency reserve in order to keep premiums low and help businesses keep their doors open in this tough economic time.”

Two subsequent reports by the State Auditor continued to sound the alarm over dwindling contingency reserve funds, with the most recent estimating a 56.9 percent chance of insolvency in the next five years without a massive infusion of funds into the historically low contingency reserve.  Maintaining adequate reserves is important to cover unexpected losses as well as shortfalls in premium and investment income.  When the contingency reserve falls below zero, the fund becomes insolvent, because liabilities exceed the value of assets.  

It appears the Auditor’s warnings are no longer being ignored, but the result of L&I’s fiscal neglect may be a massive increase imposed on Washington employers.  In a June 21 meeting an L&I actuary recommended workers’ compensation taxes be increased by a staggering 19 percent every year for the next ten years to plug the $3.1 billion hole in the program’s budget.  The shortfall is the result of the critically depleted contingency reserve funds, in need of some $1.7 billion, and a decrease in expected investment returns that increase the value of future pension liabilities by $1.35 billion.

If 19 percent is not enough of a sticker shock, that number does not include whatever annual increase is necessary to keep pace with the program’s break-even costs.  So employers would face a minimum 19 percent increase each year, on top of the normal inflation rate of around 3.5 percent.

The problem is L&I has not relied on tapping the contingency reserve fund to spare businesses a hefty tax hike in just “this tough economic time,” as director Schurke claims.  Underscoring the inherent problem with the state's monopoly workers’ compensation system, L&I has been dipping into the contingency reserve almost every year over the past 12 years to artificially avoid the tax hikes that are inherent in a state monopoly system. 

In all but one year between 2000-2012, L&I actuaries determined the rate increase (the actuarially indicated rate) to keep the workers’ compensation system solvent to be significantly higher than the rate the agency actually adopted.   L&I has routinely used contingency reserve money to politically “buy down” the rate, in some years by more than 24 percent.  The rate increases adopted by L&I over that 12-year period total 66 percent—a significant burden for employers, but far less than the rising costs of running the state program each year.

So even during the economic boom, the system was failing.  L&I managers masked the crisis by using contingency reserve funds to “buy down” those actuarially warranted rate increases.

Artificially suppressing workers’ compensation rates has allowed L&I and those who support the state’s monopoly on workers’ compensation to conceal the program’s failings and to avoid a healthy debate on how to fix the broken system.  It is difficult to recognize the need for major reform when supporters of the status quo hide the true condition of the system with artificially low rates and tout those rates as proof there is nothing wrong.

Of course, the problem with deliberately suppressing rates is that L&I can only kick the can down the road so many times before they run out of road.  After years of “buying down” rate increases the contingency reserve has been drained to a precarious level that can no longer be ignored by L&I officials.   Now employers are forced to participate in a weakened state program that likely contains years of crippling tax hikes.

Washington Policy Center has long recommended the state’s monopoly on workers’ compensation be ended by legalizing the sale of high-quality private workers’ compensation insurance.  The state recently closed its monopoly liquor business.  Similarly, the state should close its monopoly insurance company and let employers buy worker coverage in the private market at competitive prices, based on quality standards set by the state—as employers in 46 other states currently do.

Such a policy change would move the system toward greater choice and competition, which would lead to more efficient and less expensive workers’ compensation options for employers, faster claims payments, and better coverage for workers.