September Business Breakfast

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“What is that Assessment on My Worker’s Comp bill?”

Tom Underwood

NFIB/Kentucky State Director

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Government and You

Worker’s Comp Special Fund

• Created in 1996

• Part of Worker’s Comp Overhaul by Governor Patton

• Designed to stop burden of “Black Lung” claims on non-coal business

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Worker’s Comp Special Fund

• All pre-1997 claims to be paid from fund

• Assessment on all employers

• $19 Million from coal severance tax

• Additional Assessment on coal industry

• Fund to be paid off by 2019 and assessment dropped

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Worker’s Comp Special Fund

• $1.6 Billion Dollar Liability

• Currently 9400 Active Claims

• 58% Black Lung Claims

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Worker’s Comp Special Fund

• Employers got 40% reduction in WC premiums from 1996 reforms.

• Labor Cabinet to receive program funding from Special Fund for overhead

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Labor Cabinet Funding

• KRS 342.122 (1)(a) clearly states that all Labor Cabinet program expenses to be paid by transfer from fund

• No maximum on “take”

• No mechanism for “take”

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Income vs. Outgo

• Employer Assessment Income decreased by 12.1% between 2010 and 2011.

• Claims paid increased by 8.2%

• Cash Flow of -$5.4Million

• General Assembly takes away $19Million in coal severance money income.

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Over Time

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The Rational Response

• What would most businesses do when facing a cash flow shortfall?

• Labor Cabinet increased “take” by +12.8% between 2010 to 2011.

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The Budget Cut That Wasn’t

• Over the last few budget years, state agencies have taken annual budget cuts.

• While the Labor Cabinet took a cut from the General Fund, they simply increased the “take” from the Special Fund.

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Labor Cabinet “Take”

2010 - $21,651,600

2011 - $24,429,500 +12.8%

2012 - $25,810,450 +5.6%

2013 - $29,193,700 +13.1%

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Percentage

• For 2010 – Labor Cabinet took 29% of all employer assessments for their operations

• For 2011 – Labor Cabinet took 37% of all employer assessments for their operations

• For 2012 – Taking an additional 8%

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Fiscal Year 2013

Question: What percentage of employer assessments are projected to be sent to the Labor Cabinet in FY 2013?

Answer: Approximately 45%

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Bury the Increases

• Most legislators unaware of the increases

• Showed up in Executive Branch Budget as “Restricted Funds” transfer

• Most Businesses unaware of what the assessment is or that they have an outstanding benefit liability.

• Hidden Tax

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Effects on Business and Fund Amortization

• After 15 years employers still owe $1.487 Billion in liabilities

• Projected payoff moved from 2019 to 2029 – Total of 33 years

• Extends and preserves cash flow for Labor Cabinet

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Lose a Few Dollars Per Unit, Make It Up On Volume

• $380,000,000 in reserves• Change of Investment Strategy• State Auditor found could not use outside

investment agency• Result – liquidated all equities and moved

reserves to T-notes and T-bills at approximately 1% yield

• Have now turned over reserves to Deutsche Bank for short term investment lending

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Audience Participation

Time

Final Benefit Payout

• Question: When does the Fund project that the last benefit check will be mailed?

•Answer: 2087

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How Long?

That means that it will have taken employers

91 years to pay off the special fund liabilities

Almost 5 generations!

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Assessment Rates

Pre 1989 23.30% 1996-2001 9.00%

1989-1991 16.90% 2002-04 11.50%

1992-1993 11.68% 2005 9.00%

1994 12.30% 2006-11 6.50%

1995 9.70% 2012-13 6.28%

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Decision MakersJudy B. Long, Chairman – Wells Fargo (Self-Insured Representative)

Michelle C. Landers, Secretary-Treasurer - KEMI (Insurance Representative)

Jeffery R. McIntosh – Energy Insurance Agency, Inc.

(Commercially Insured Employers)

William G. (Bill) Finn, Vice Chairman- IBEW (Labor Representative)

Larry Roberts, Secretary - Labor Cabinet

Lori H. Flanery, Secretary - Finance & Administration Cabinet

Larry Hayes, Secretary - Economic Development Cabinet

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Solution: Focus on Fund Closure

• Limit “leakage” to Labor Cabinet

• Focus on lump sum settlements using a portion of reserve funds

• Get this thing off employers backs

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Labor Cabinet

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Labor Cabinet

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Labor Cabinet

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Thank You!

Tom Underwood

State Director

NFIB/Kentucky

[email protected]

502-223-5322

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