Washington Workers’ Comp: Rate Increase Coming to Rebuild the Contingency Reserve

By Marty Bask, Principal, Account Executive; Parker, Smith & Feek

The State of Washington, which administers the Workers’ Compensation system for the state, has a financial problem because revenues have been too low to fund workers’ comp expenses. The reserve fund to pay workers’ comp benefits is very low, primarily due to the 2008-2011 recession, and a slow economic recovery. On July 20, the Department of Labor & Industries held a meeting of the Workers’ Compensation Advisory Committee to discuss the agency’s plans to build the system’s surplus or contingency reserve. The primary strategies are to increase taxes on business and to reduce the Department’s pension discount rate.

Previously in June, the Department announced the need to increase the fund by $3.1 billion over 10 years, which would require workers’ comp rate increases of about 19% for ten years.  This scenario represents a worst-case scenario, which is not felt to be helpful for building a solution. The Department has two months to come up with a plan. In September the agency expects to announce a rate proposal for 2013. New scenarios for solutions still involve an increased premium rate for a substantial period of time.

• The agency has a “contingency reserve” of 5.2% – that is, it has 5.2% more than the amount needed to cover current liabilities. Nationally, the average for state funds is 36.5%. A 2007 agency policy sets a goal of 19.2%, the point at which it has only a 1 percent chance of running a deficit. To hit that target, the agency needs $1.7 billion.
• The agency uses a 6.5% discount rate when setting aside money for pensions. The 6.5% rate is considerably higher than current investment returns which are typical benchmarks to set the discount rate. A 4% discount rate, suggested by the agency’s actuary last month, would require an addition of $1.35 billion to the fund.
• The department might take five or 10 years to rebuild the fund.
• The department has the option to start with a smaller rate increase, and increase rates incrementally, year after year.

Washington is one of only four states which do not allow private companies to provide workers’ comp insurance. With a feeling among Washington businesses that the state has no incentive to control costs of workers’ compensation, the perception of state inefficiency lies in the background of the conversation to restore the reserve fund.

In the short run, it is feasible that a workable solution will be found. Any solution requires a rate increase, which is especially difficult for businesses to absorb at this time.

Source:  Special Workers’ Compensation Advisory Committee: Rebuilding the Contingency Reserve; Washington State Department of Labor and Industries; July 20, 2012

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