The Assault on State-Regulated Workers' Comp

A critical component of our national “safety net,” the state-regulated workers’ compensation system, is being besieged, another victim of politicians reaching everywhere to generate short-term benefits by increasing services without raising taxes.

In one case, the principle that “politics makes strange bedfellows” was confirmed again last week when Ohio officials announced they were planning through two steps to provide a $1.9 billion cash rebate to the state’s employers by tapping the reserves of the state’s actuarially-sound workers’ compensation fund.

Although it wasn’t stated that way, in effect Ohio Gov. John Kasich was borrowing a page from New York Gov. Andrew Cuomo new playbook, a playbook first written by Andrew’s father, Mario.

That’s because earlier this year Gov. Cuomo’s proposed budget for the next two fiscal years called for two changes in the state workers compensation system.

The first would equalize the premium-assessment system used by private insurers and the State Insurance Fund by raising premiums in the state fund by approximately 10 percent.

The proposal also calls for reducing SIF’s surplus by $1.75 billion over three years in order to provide for increased state spending without a tax increase.

In another case, the Oklahoma legislature last week approved a workers’ compensation reform measure that includes a provision allowing employers to opt-out of the current system by purchasing a program regulated by the federal Employee Retirement Income Security Act (ERISA).

Politics is a factor in all three. Kasich is a former key Republican House leader in the Bush administration and ran for governor on a platform of reducing taxes and the state budget.

But Kasich’s early efforts to curb the salaries and pension of government workers, especially teachers, generated strong opposition.

An improving economy has improved his re-election chances but recent efforts to lower personal income and small business taxes have run into opposition from his own party.

State Workers Compensation Bureau officials said a higher-than-expected return on investments is making possible the $1 billion dividend. But, the fact that the rebate will be made in July 2014, just as the gubernatorial re-election campaign heats up, is not just coincidental.

An additional $900 million in rebates will be generated by changing the system used to fund the Bureau of Workers’ Compensation Fund, the exclusive provider of workers’ comp in the state. State Legislature approval will be needed.

It also comes at a time when the state is challenging a court verdict upholding an $860 million judgment against the BWC in a class action lawsuit alleging overcharging of some businesses from 2001 to 2007. Officials of the BWC said a reserve for that potential payment has also been created.

In New York, the rate increase designed to equalize the premiums charged by the State Insurance Fund and private insurers is being criticized because it will raise rates paid by the state’s many private landlords, both residential and commercial, as well as to non-profits.

Moreover, money to fund state programs will be taken from the SIF’s surplus despite the fact that the state owes it money because it has absorbed some of the cost of state workers’ claims as third-party administrator workers comp provided state employees.

The state owes $3 billion from prior workers’ comp claims paid out but not reimbursed by the state, This expenditure is cited as a “contingent receivable” by SIF in its 2011 annual report.

Additionally, the State Insurance Fund is currently reporting $1.295 billion in “contingent reserves” due from New York state from prior transfers of reserves, according to independent members of the SIF board.

And, in 2016, Gov. Mary Fallin said she is “looking forward” to signing the WC reform bill when it reaches her desk as early as this week.

Fallin, according to the Wall Street Journal, is being touted as part of the new, softer “face” the Republican Party seeks to present to the American voter.

And, according to a Dallas insurance broker who specializes in so-called “alternative” workers compensation coverage, a number of other states are also looking at a program that has existed in the U.S. up to this time only in Texas.

While the Oklahoma program doesn’t allow an employer to go “naked,” as does Texas, it does constitute a huge potential problem.

For example, as pointed out by an independent consultant hired to look into whether Tennessee should consider providing an “opt-out” option, allowing employers to purchase alternative WC coverage ends the state’s ability to ensure that its workers are treated fairly and promptly when they are injured on the job.

 As the Tennessee report points out, it will also take away from the pool of funds used to provide WC to employees who continue to participate in the state program, generating uncertainty as to rates and destabilizing the existing private-run WC programs.

An additional factor was brought out by the Dallas Morning News this weekend. It disclosed that West Fertilizer had only $1 million in property insurance, although losses from the April 17 disaster could be as high as $100 million.

The Dallas insurance broker who lobbied strongly for the opt-out provision in Oklahoma confirmed that West had workers’ comp coverage, but only through “alternative coverage.” Because the warehouse exploded in the evening, only first responders were involved; 11 were killed. They are covered through a traditional WC plan offered to the state’s municipalities.

The executive director of that plan said that the loss could be dealt with through the actuarially-sound municipal program, but everyone acknowledges that an “alternative plan” would have been unlikely to adequately compensate West Fertilizer employees if the explosion had occurred while they were working.

In general, this trend to replace actuarially-sound fiscal policies in the financing of workers’ compensation pools with policies driven by the election cycle is dangerous.

It is driven by the need for politicians to provide extra services to constituents without the need for tax increases. And over time it will substantively weaken the safety net Americans have come to depend on.

In a recent column, American economist Robert Samuelson noted that “the ‘safety net’, private and public, is besieged.”

“Our expansive notion of entitlement rested on optimistic and, ultimately, unrealistic assumptions,” Samuelson said.

Samuelson did not cite WC programs in his columns. But, it is obvious from what is happening in Ohio, New York and Oklahoma that workers compensation -- like improving schools and social welfare programs -- have joined such private “safety net” programs as defined benefit plans, and health insurance for retirees as a fading entitlement for Americans. 

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