It was once the most controversial issue in workers'compensation, stretching as far back as the late 1990s when theDemocrats still held a majority in the House of Representatives.The Special Disability Trust Fund (SDTF), or the so-called secondinjury fund, initially was created in 1955 to encourage employersto hire previously injured workers by reimbursingemployers/carriers for a portion of a workers' comp claim that wasattributable to earlier workplace accidents. However, like manydecades-old legislative pro-grams, the fund had long since outlivedits original legislative purpose and had become a relic of aworkers' comp system, bearing little resemblance to the more modernsystem that emerged from reform laws enacted in the 1980s and1990s. But as is the case with many programs that outlived theiroriginal purposes, the SDTF found a new role as carriers discoveredother ways to make use of the financial structure of the fund.

As a result, when lawmakers finally turned their attentions tothe SDTF in the late 1990s, the debate over the fund far exceededits impact on workers or workers' comp claims. Instead, lawmakersfound themselves in the position of trying to prop up the fund, onwhich a large part of the industry had grown dependent, though itwas little more than an accounting method used to artificially pumpup a carrier's surplus. By the time lawmakers moved to close thefund to new claims as of 1998, the fund had run up a deficitestimated at $3.62 billion that was a crucial part of manycarriers' financial status. However, in 1997, lawmakers enacted aseries of reforms that stabilized the fund, gradually reduced itsfinancial role on carriers' balance sheets, and were designed toeventually reduce its economic burden on the industry.

Recently, the Boca Raton-based Preferred Insurance CapitalConsultants (PICC) actuarial firm, headed by Anthony Grippa, Sr.,released a comprehensive report on the state of the SDTF, whichsurveyed the fund's current financial and claim status. WhileGrippa acknowledges that there remain some unknowns when it comesto the SDTF (since it may take years before some final claims costsare known), the report shows that the fund is largely meeting thelegislative goals set out by lawmakers in 1997.

The actuarial study found that the SDTF's projected liabilityfor fiscal year 2005-2006 had declined from $3.62 billion to anestimated $1.67 billion, and after years of dealing with a largebackload of claims, the fund should be able to start paying claimsas they are received sometime between 2007 and 2009. As a result,employers/carriers could finally see a reduction in the SDTF'scurrent statutory-mandated assessment of 4.52 percent by the end ofthe decade, which could translate into lower workers' comprates.

Reducing the Reliance on Claims

Going into the 1997 legislative session, lawmakers identifiedthree salient points that needed to be resolved in order tostabilize the SDTF. The first point centered on howemployers/carriers would absorb the cost of paying for benefitsthat previously had been covered by the fund. Secondly, lawmakershad to address how insurers calculated their surpluses based onclaims that had been filed with the fund, but which had not beenformally reimbursed or approved by the fund. Lastly, lawmakers hadto reach an agreement with employers/carriers as to what level ofassessment should be levied to pay off the SDTF's liability.

Of all the issues, perhaps the most important was the impact onthe industry of closing the SDTF to new claims. Since the SDTF wasdesigned to apportion the cost of claims, by closing the fund, somecarriers argued that they would have to bear the full burden ofpaying claims. Critics argued that carriers' liabilities wouldincrease, which would translate into higher rates.

The argument was countered, however, by the overwhelming factthe SDTF was running so large a deficit that carriers would have towait years to be reimbursed. When lawmakers agreed to close thefund to new claims as of Jan. 1, 1998, actuaries calculated incould take up to 10 years before it could retire thousands ofbacklogged claims.

Given that backlog, lawmakers took the position that, for allpractical purposes, employers/carriers already were absorbing thecost of paying the medical and indemnity benefits that wereintended to be paid by the SDTF. As a result, studies showed thatclosing the fund to new claims would have a negligible impact onrates. Instead of affecting rates, lawmakers and supporters ofclosing the fund took the position that the SDTF had become nothingmore than a financial mechanism whereby carriers paid an assessmentto reimburse their own claims.

As a result, one of the first steps taken by lawmakers was toreduce carriers' reliance on the SDTF on paying parts of claims.There have always been limits to the reimbursements the SDTF wouldallow for second injuries. For example, on injuries with accidentdates between Dec. 31, 1993, and Jan.1, 1998, the fund couldreimburse employers/carriers up to 50 percent of benefits paid fortemporary total, temporary partial, and medical and attendant care.Eligible claims also could be reimbursed at 50 percent of permanenttotal disability benefits and 50 percent of supplemental wagebenefits.

When lawmakers overhauled the SDTF in 1997, instead of changingthe reimbursement levels for benefits, they requiredemployers/carriers to pay a filing fee on submitted claims. Themove was designed to stop carriers from submitting questionableclaims.

Accordingly, carriers had to pay a $250 fee for each notice offiled or re-filed claim after July 1, 1997 prior to the fund'sclosure in 1998. Employers/carriers also had to pay an additional$500 fee for so-called proof of claim where the employer/carrierfiled the supporting information to substantiate the claim. The$500 filing fee was waived if the employer/carrier filed both aclaim and a proof of claim.

Grippa's study found that the filing fees have had theirintended effects. As of June 30, 2005, the SDTF had 8,432 openclaims, which represented a 1,400 reduction from the 9,758 openclaims reported as of June 30, 2004. The average length of timerequired to reimburse an open claim was 44.8 months at an averageadministrative cost per claim of $127.39. The estimated annualadministrative expenses of the fund equaled roughly $1.5million.

A Cap on Assessments

One issue faced by the industry was the level of assessments itwas willing to pay in order to support the SDTF's obligations.Since studies showed that the SDTF has little, if any, impact onemployers' premiums, lawmakers and actuaries concluded that thefund was largely a financial mechanism whereby carriers paid anassessment in order to reimburse themselves. In 1994, the SDTF'sassessment rate rose from 3.36 percent to 4.52 percent. Actuariesprojected that the assessment rate would rise to seven percent infiscal year 1995-1996 and up to 15 percent in fiscal year1996-1997. As a result, in the 1995 legislative session, lawmakerscapped the SDTF assessment at 4.52 percent, a level that wassubsequently made permanent in 1997.

Levied against carriers, commercial self-insureds, assessablemutual insurers, and individual self-insured companies, the 4.52percent assessment varies based on the net written premiums. Sincethe statewide net written premium base can fluctuate based onworkers' comp rates and other financial factors, the impact ofcapping the fund's assessment can clearly be shown. For example, infiscal year 2005-2006, the SDTF's premium base is projected to beroughly $4.5 billion. Without an assessment-rate cap, the fund'sgross assessment income would be $774 billion, which would requirean assessment rate of 16.45 percent. By comparison, at a 4.52percent, the assessment rate is projected to raise only $204billion in revenue, leaving a year-end deficit of $218 billionafter disbursements to carriers and administrative expenses aretaken into account.

After being closed to new claims for more than seven years, theSDTF is within striking distance of no longer starting the fiscalyear with a deficit. According to PICC, assuming a 1 percent growthin annual premium rate, the SDTF will start having a projected yearsurplus for the first time in fiscal year 2009-2010. As a result,the fund's assessment rate is projected to drop quickly, to aprojected 3.29 percent in fiscal year 2010-2011 and 0.61 percent inthe following year. The drop in assessments would have a directimpact on workers' comp rates.

Impact on Carriers Controversial

By far, the most contentious issue when it came to the SDTF washow carriers used the fund to increase their surpluses. At thetime, some insurers were approximating the SDTF reimbursements assurplus, which inflated the insurer's surplus on paper and allowedit to write more business. Critics said the business practiceplaced insurers and employers at risk since the claims had not beenformally accepted by the SDTF and, due to the fund's deficit, therewas no reasonable expectation that an insurer would recover in atimely fashion any money that it was owed.

Lawmakers finally negotiated a deal with carriers in order toend the business practice while granting insurers time to adjusttheir balance statements. This has not directly affected thefinancial status of the SDTF. Under the new accounting guidelines,which were phased in beginning in 1999, insurers were limited onthe amount of prospective SDTF reimbursements they could claim assurplus. Starting in 2000, insurers could only claim 75 percent oftheir 1996 prospective SDTF reimbursements. In 2001, the allowableamount was lowered to 50 percent and in 2002, 25 percent. As of2003, all insurers were prohibited from booking SDTF reimbursementsunless a claim was formally accepted by the fund.