Labor & Industries: Washington’s Workers’ Comp System is Sound

Judy Schurke, director of Washington’s Department of Labor & Industries (L&I), said the state’s workers’ compensation system is not at risk of going insolvent and that characterizing it as such is wrong.

Schurke said she is concerned that characterizations of a State Auditor’s report on the State Fund could lead people to incorrectly believe that the system will soon become insolvent.

The report, which audited the financial statements of workers’ compensation funds administered by the L&I from July 2, 2008 through June 30, 2009, noted that during that fiscal year, the contingency reserves for both the Accident Fund and the Medical Aid Fund declined substantially. The decline was due to a decline in the market value of investments as a result of the nation’s economic recession and financial crisis; loss and loss adjustment expense liabilities; insufficient premium rates in 2008 and 2009.

The auditors further said considering L&I’s rate increases for 2010 — 4.5 percent in the Accident Fund and 8.4 percent in the Medical Aid Fund — the contingency reserve funds have a potential to fall below zero.

Specifically, the report said there would be a:

• 74.4 percent change of insolvency in the Accident Fund within two years, and
• 3.9 percent probability of insolvency in the Medical Aid Fund in two years.

The report noted both the Accident Fund and the Medical Aid Fund have sufficient assets to pay claims and perform day-to-day services, but that the contingency reserve funds have a potential of falling below zero. The auditors also indicated they thought the proposed rate increase for the Accident Fund was “outside a range of reasonable estimates.”

Schurke said confusion appears to come from a misinterpretation of the audit when it mentions the probability of “insolvency” in the State Fund. The insolvency mentioned in the audit refers to the contingency reserve, which is like a rainy day fund and which is only a very small portion of the system’s current total assets of $11 billion.

“The last thing we need to do is overreact to the possibility that the contingency reserve is low,” Schurke said. “In times like these, we need patience and a long-term view.”

“We have $11 billion in assets,” added Bob Malooly, assistant director for Insurance Services for L&I. “The issue that was raised os that we could exhaust our contingency reserve. That’s true, but the system is not collapsing. We’ll be able to pay our obligations for a long time.”

Malooly emphasized that L&I does not want people who are dependent on payments from L&I who are injured to be concerned that there is not enough money for their care. He said his department realizes the 2010 rates are less than what the actuaries indicated would be necessary, but that his department didn’t want to overreact to temporary effects caused by the economic downturn and raise rates when employers could least afford to pay them.

“Having a zero contingency is not where anyone wants to be,” Malooly said. But he said L&I has operated with a negative contingency reserve in the past. “It’s an uncomfortable spot to be in,” he said, “but given all of the economic stress that everyoen is under, it’s a better risk to take than the risk of raising rates too high in this circumstance, and then finding a couple of years down the road that we have too much money.”

“I want to assure every Washington worker that the benefits they need if injured on the job will continue to be available today and in the future,” Schurke said. “Businesses also need to know that L&I will continue to provide the insurance coverage that they expect and count on.”

She said it’s important to recognize that some interest groups and lobbyists have seized on the audit as a way to advance their agendas to significantly change workers’ comp.

“The fact is, we made a deliberate decision to draw down the contingency reserve in order to keep premiums low and help businesses keep their doors open in this tough economic time,” Schurke said.

“This has been done before and this year it’s more important than ever that we keep insurance costs as low as possible,” she said. “This was the right thing to do and doesn’t threaten the long-term financial integrity of our system.”

“I understand we’re cutting it closer to the edge this year, given the economy,” she said. “That’s why we are looking intensively at every way to cut costs while still providing protection for injured workers and employers.”

Washington’s workers’ compensation State Fund covers nearly 2.5 million people and 168,000 employers. It provides benefits to injured workers and insurance to employers from costly claims and lawsuits.

Malooly said instead of raising rates as high as the actuaries recommended, his department is looking at ways to lower costs in the system by helping injured workers to return to work more quickly. “We’re really trying to lower the cost of the system as much as possible, as appropriate to our mission,” he said.