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

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

Recently, the Boca Raton-based Preferred Insurance Capital Consultants (PICC) actuarial firm, headed by Anthony Grippa, Sr., released a comprehensive report on the state of the SDTF, which surveyed the fund's current financial and claim status. While Grippa acknowledges that there remain some unknowns when it comes to the SDTF (since it may take years before some final claims costs are known), the report shows that the fund is largely meeting the legislative goals set out by lawmakers in 1997.

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

Reducing the Reliance on Claims

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

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

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

Given that backlog, lawmakers took the position that, for all practical purposes, employers/carriers already were absorbing the cost of paying the medical and indemnity benefits that were intended to be paid by the SDTF. As a result, studies showed that closing the fund to new claims would have a negligible impact on rates. Instead of affecting rates, lawmakers and supporters of closing the fund took the position that the SDTF had become nothing more than a financial mechanism whereby carriers paid an assessment to reimburse their own claims.

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

When lawmakers overhauled the SDTF in 1997, instead of changing the reimbursement levels for benefits, they required employers/carriers to pay a filing fee on submitted claims. The move was designed to stop carriers from submitting questionable claims.

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

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

A Cap on Assessments

One issue faced by the industry was the level of assessments it was willing to pay in order to support the SDTF's obligations. Since studies showed that the SDTF has little, if any, impact on employers' premiums, lawmakers and actuaries concluded that the fund was largely a financial mechanism whereby carriers paid an assessment in order to reimburse themselves. In 1994, the SDTF's assessment rate rose from 3.36 percent to 4.52 percent. Actuaries projected that the assessment rate would rise to seven percent in fiscal year 1995-1996 and up to 15 percent in fiscal year 1996-1997. As a result, in the 1995 legislative session, lawmakers capped the SDTF assessment at 4.52 percent, a level that was subsequently made permanent in 1997.

Levied against carriers, commercial self-insureds, assessable mutual insurers, and individual self-insured companies, the 4.52 percent assessment varies based on the net written premiums. Since the statewide net written premium base can fluctuate based on workers' comp rates and other financial factors, the impact of capping the fund's assessment can clearly be shown. For example, in fiscal year 2005-2006, the SDTF's premium base is projected to be roughly $4.5 billion. Without an assessment-rate cap, the fund's gross assessment income would be $774 billion, which would require an assessment rate of 16.45 percent. By comparison, at a 4.52 percent, the assessment rate is projected to raise only $204 billion in revenue, leaving a year-end deficit of $218 billion after disbursements to carriers and administrative expenses are taken into account.

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

Impact on Carriers Controversial

By far, the most contentious issue when it came to the SDTF was how carriers used the fund to increase their surpluses. At the time, some insurers were approximating the SDTF reimbursements as surplus, which inflated the insurer's surplus on paper and allowed it to write more business. Critics said the business practice placed insurers and employers at risk since the claims had not been formally accepted by the SDTF and, due to the fund's deficit, there was no reasonable expectation that an insurer would recover in a timely fashion any money that it was owed.

Lawmakers finally negotiated a deal with carriers in order to end the business practice while granting insurers time to adjust their balance statements. This has not directly affected the financial status of the SDTF. Under the new accounting guidelines, which were phased in beginning in 1999, insurers were limited on the amount of prospective SDTF reimbursements they could claim as surplus. Starting in 2000, insurers could only claim 75 percent of their 1996 prospective SDTF reimbursements. In 2001, the allowable amount was lowered to 50 percent and in 2002, 25 percent. As of 2003, all insurers were prohibited from booking SDTF reimbursements unless a claim was formally accepted by the fund.

Special Reports /

Little Noticed! SDTF Slowly Declines

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