The state's auditor is required by law to conduct annual audits of the financial statements and actuarial assessments of the Workers' Compensation Fund. The latest audit shows that the Workers' Comp funds may be heading towards insolvency within as little as two years.
The workers' compensation system is made up of three components: the Medical Aid Fund, which pays for medical care for claimant; the Accident Fund, which pays non-medical claim costs such as wage replacement benefits, most vocational rehab, and disability and survivor benefits; and the Pension Reserve Fund, which pays benefits to all permanently disable pensioners. Both employers and employees pay L&I premiums.
It is no surprise that the contingency reserves for the Workers' Comp trust fund dipped substantially during the time in question (July 1, 2008 through June 30, 2009) gi! ven what happened with the stock market and the economy in general, as the audit points out.
But one of the worries that we, and other business owners and groups have been saying in response to L&I's announcement of a 7.6% rate increase for 2010, is that it is not enough. No, businesses don't want an even higher increase in workers' comp taxes. The point is that the system is so broken, that the 7.6% increase during the worst recession in 70 years is not enough to make the system whole; which means that the tactic of raising taxes year after year in this area should be rethought. It's time for different measures.
The audit says that there is
"A 74.4 percent chance of insolvency in the Accident Fund within two years, 81.4 percent within three years and 89.5 percent within five years. A 3.9 percent probability o! f insolvency in the Medical Aid Fund in two years, 12.9 percen! t within three years and 26.5 percent within five years."
So, what if the Department wanted to raise rates in order to shore up the funds' possible insolvency?
"The Actuarial firm calculated a range of break-even rate level changes...the firm's "best" estimate is that a 33 percent rate increase would be necessary for the Accident Fund to break even. The Department estimates that a 23.3 percent rate increase would be necessary for the Accident Fund to break even. The Actuarial firm believes the Department's estimate is outside a range of reasonable estimates." [emphasis added]
"For the Medical Aid Fund, the firm's "best" estimate is that a 24.5 percent rate increase would be necessary to break even. The Department estimates that a 21.5 percent rate increase would be necessary for the Medical Aid Fund to break even. The firm belie! ves the Department's estimate is within range of reasonable estimates."
In other words, the Department (L&I) underestimated how much rates would have to go up in order to stave off insolvency in the Accident Fund. But for 2010, the L&I approved 7.6% rate increase reflects in part a 4.5 percent rate increase in the Accident Fund and 8.4 percent increase in the Medical Aid Fund.
The business community has been sounding the bell about an unsustainable workers' comp system for awhile now, and that cost containment measures are needed in order to lower costs to the system. The Department recognized that raising workers' comp taxes by the 20-30% needed to shore up the funds would have resulted in an unrealistic burden on employers and employees. But let's hope the Department and policymakers also recognize that simply putting off higher workers' comp taxes until the economy improves is not the solution -- cutting co! sts is.
