Reform Retro!

Total Cost of Retro Subsidies may have exceeded $12 billion dollars

 

We are now going to put together all of the costs discussed above to determine the total cost of Retro subsidies during the past 10 to 20 years. The costs come in several different forms:

 

1.       First, there is the cost of the Retro refunds. Since Retro programs have always cost more than non-retro programs, there never should have been any retro refunds. Financial statements from L & I confirm that the total of these refunds has been about $1.3 billion dollars during the past 10 years ($2 billion during the past 20 years).

 

Retro subsidies have skyrocketed over time:

 

Ten Year Cost to Tax Payers of Retro Adjustments (In millions $) 

YEAR	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	Total
Retro $	133	119	102	110	111	145	157	160	124	117	$1.3B

Note: The above tables have slightly different numbers because one uses annual retro subsides ending each December 31^st while the other uses annual subsidies ending June 30th.

 

Annual Cost of Retro Subsidies

Second, since retro programs cost 10% more than non-retro programs, in addition to not getting refunds, they should have been charged extra. Since we know that total Retro refunds were $1.3 billion dollars and these refunds were about 20% of total retro premiums, they should have been charged at least another $0.7 billion dollars (for being 10% more) bringing the total tax payer cost of retro programs to at least $2 billion dollars for the past 10 years ($3 billion for the past 20 years).

 

The following chart confirms that there must be at least a third as yet undiscovered “error” in retro calculations because the Double Entry Coding Error and the Occupational Disease Error and the 45 month error can not fully account for the entire $2 billion just calculated.

 

Total Cost of Three L & I “errors” (total retro refunds = $1.3 billion)

	Double Entry	Occupation Disease	45 Month adjust	Other?	Total %	Total $
L & I estimate	10%	20%	4%	0%	34%	$442 million
My estimate	100%	20%	4%	30%	154%	$2.0 billion

 

Just considering these three sources, the tax payer cost was about $2 billion dollars during the past 10 years, or about $200 million per year.

 

Comparing the L & I estimated cost of 3 errors to my estimate

According to L & I, the double coding error cost was $10 million per year for 15 years or about a 10% error in excess retro subsidies. The occupational disease error resulted in another 25% increase in subsidies or about $25 million per year (actually $30 million per year for the past few years and much less before that for an average of 25%). Then the 45 Month adjustment limitation error put in another 5% excess refunds for another $5 million per year (all assuming retro refunds averaged $100 million per year). The total cost, according to L & I estimates is about $40 million per year or $600 million dollars in excess payments to which Retro groups were not entitled during the past 15 years.

 

I maintain that the actual cost is $3 billion dollars or 6 times greater than is estimated by L & I. The difference is nearly all in how the loss due to the double entry computer coding error is calculated.  L & I claims it is $10 million per year and I claim it is $100 million per year. However, L & I has never released either the data on how they calculated the coding error loss. Nor have they ever released the data on Non-retro premiums and claims for the past 15 years (despite my repeated requests that they release both sets of data). Thus, all I can do is estimate based on the studies showing retro costs to be higher than non-retro.

 

What was the latest annual reporting period cost of retro?

The cost of retro is not merely the cost of refunds. We should also include the cost of losses that exceed claims ($47 million per year). This the annual cost is not $96 M, but $143 million.

2007 Quarter	Premiums	Losses	P- L	Loss Ratio	Refund	Taxpayer cost	Refund Ratio	PAF
Jan	128	137	-9	107	16	25	13%	1.04
April	4	3	1	83	1	0	25%	1.05
Jul	558	593	-35	106	78	113	14%	1.08
Oct *	36	40	-4	111	1	5	3%	1.06
Total	726	773	-47	106	96M	143	13%	1.07

* Using Oct 2006 as proxy for Oct 2007 as Oct 2007 not yet reported.

How to address paying  the long term obligations of the Workers Comp Program?

But even $2 billion in Retro losses is minor compared to the $30 billion dollar difference between the $11 billion in net assets of the Workers Comp program and the $41 billion in long term obligations of the program. This tax payer obligation is growing at more than $3 billion per year of which about $1 billion can be attributed to retro employers. So not only are they getting refunds, and failing to pay extra charges, but they are also getting another billion every year in long term obligations which are being transferred to the tax payers.

 

Over a ten year period of time, the tax payer cost of this boondoggle is another $10 billion dollars. Thus, a reasonable estimate of the total cost of the Retro program to tax payers during the past 10 years has been more than $12 billion dollars or more than $1.2 billion dollars a year.

 

What is clear from the above is that non-retro programs probably need to pay a little more. A commission should be established to determine how much more is needed so that all employers and all employees are paying the true long term cost of the Workers Compensation program without any subsidies from the tax payers. It is clear that the current staff at L & I cannot be trusted to fairly calculate the correct amount of a rate increase for non-retro programs.

 

 

But retro programs need to pay MUCH MORE and they need to start paying their fair share immediately. One way to make sure they are paying their fair share is to end the practice of giving our retro refunds and replace refunds with CREDITS which would only be given when premiums are more than the cost of developed claims plus administration.

Most of all, what must be stopped is losing billions of dollars every year which is eventually going to have to be paid for tax payers.

 

The hidden “cost” of retro programs

But the true cost of the Retro program to our State is not merely the harm inflicted on tax payer dollars. There have been many harmful downstream effects of this huge diversion of public dollars to private corporations. Certainly our public schools have paid a devastating price since the creation of the Retro monster. School funding, as a percent of income, has dropped from 11^th in the nation in 1981 to 47^th in the nation today. The cost of the Retro program to public schools is at least $2 billion dollars a year. But the highest cost of the Retro program is the cost inflicted on the integrity of elections and public policy here in the State of Washington.

Corruption and kick backs are now so common place that tax giveaways and tax exemptions now exceed $50 billion dollars per year. The next section will provide an example of how BIAW as diverted millions of dollars of tax payer money to swing elections in Washington State.