L&I Kicks the Can Down the Road Another Year

Today the Department of Labor & Industries (L&I) announced it will not increase average workers’ compensation rates in 2013.  L&I has increased workers’ compensation taxes by 66% over the past 12 years.

L&I Director Judy Schurke attributes the good news to the modest reforms that were adopted in 2011 by the Legislature.   Schurke says those reforms have saved $300 million more than originally expected. 

That $300 million enables L&I to stave off its planned break-even rate increase of 4%.

A savings of $300 million from much-needed reforms is good news.  No increase in workers’ compensation taxes is also good news.  The bad news is this means almost nothing will be done to address the State Auditor’s repeated warnings that the state’s monopoly workers’ compensation system is approaching insolvency.  The other bad news is employers will at some point face a staggering, double-digit workers’ compensation tax hike.

In a June 21 meeting an L&I actuary recommended workers’ compensation rates be levied with a staggering 19% surcharge every year for the next ten years to plug the $3.1 billion hole in the program’s budget.  The 19% surcharge would be in addition to whatever break-even rate is indicated each year.  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.

L&I policy is to maintain the contingency reserve fund at 19.2% more than the amount needed to cover current liabilities. This is the midrange of the target, with 29.7% being the top of the range and 8.7% being the bottom of the range. Currently the contingency reserve is at 5.2% of liabilities.

State officials are required by law to reduce program costs or collect taxes to maintain the contingency reserve at a level that ensures the solvency of the Medical Aid and Accident accounts.  According to the state auditor, contrary to state law, L&I department officials have consistently failed to comply with this requirement.

Despite the $1.7 billion hole in the contingency reserve fund that the Auditor says puts the department in violation of state law, L&I is boasting the $300 million savings that make a zero percent rate increase possible will still enable the department to deposit $82 million into the contingency reserve account.  Needless to say, $82 million does not go far in replenishing a $1.7 billion deficit. 

Many observers predicted L&I would not dramatically increase rates in an election year, especially when the economy and jobs are the issue of the day.   In response to the backlash against the potential 19% rate surcharge L&I even developed 24 possible scenarios that phase in the higher taxes their own actuary said are needed, combining variations in the targeted range of the contingency reserve fund, the pension discount rate and the rate surcharge over various lengths of time in the hopes of softening the impact on employers.  Suffice it to say, a 0% rate increase was never one of those scenarios.

So while employers will appreciate a 0% rate increase in 2013, the fact remains that the contingency reserve fund is critically low and must be replenished.  At some point, probably in a non-election year, serious steps will have to be taken to rebuild the fund.  The serious step will likely be a massive, double-digit rate increase, as recommended by L&I’s own actuary.

You can only kick the can down the road for so long before you run out of road.