Whose to Blame?
Who is to blame for allowing this problem to go on for so long?
If the tax payers money is the bank, the legislature is supposed to be the bank guard. So why did the legislature allow this billion dollar boondoggle to happen?
To be fair, many members of the legislature have been trying to reform retro for years.
Also it is certain that few if any members of the legislature were aware of the full extent of this problem. For example, the authors of House Bill Report for HB 1975 in 2005 grossly under-stated the unfairness of retro refunds. They stated:
“In some instances, refunds are paid even though the value of the claims exceeds the amount of the premiums by up to 20 percent.”
Because of extreme delays in reporting by L & I (another problem that has to stop),
It is likely that the 2005 legislature only had access to data through 2003.
But even this data reveals a much more serious problem:
Cost to taxpayers of the BIAW portion of the Retro program for the years 2002 & 2003:
BIAW Retro Program, Refund/Assessment Summary 2002 & 2003 (in $ Millions)
|
Year |
BIAW Premium |
Claims Losses |
Premium -Losses |
Retro “Refund” |
“Refunds as % of difference |
Cost to Tax Payers ($M) |
|
2003 |
137 |
129 |
8M |
36.0 |
450 % |
28.0 |
|
2002 |
106 |
103 |
3M |
25.4 |
847 % |
22.4 |
|
Total |
143M |
232M |
11M |
61.4M |
558 % |
$50.4M |
Source: WA ST B&I Retrospective Rating Program, Refund/Assessment Summaries, July 1st
A more accurate statement would have been that refunds exceeded the difference between premiums and losses by 558%. In other words, refunds are not just 20% more than they should be, but 558% more than they should be. Thus, the problem was 25 times worse than stated in the House Report. Also not one word was mentioned about the fact that over $50 million in tax payer money was included in these $61 million in “refunds.”
Despite the fact that the supporters of HB 1975 themselves grossly understated the problem, opponents of Retro Reform further mis-informed the legislature by stating:
“There is no way that refunds would be paid if actual losses exceeded premium payments. The difference is between actual losses and developed losses.”
Apparently no one in the legislature understood that DEVELOPED LOSSES ARE ACTUAL LOSSES! The mere fact that they have not yet been paid out yet does not even slightly lessen the actual obligation.
It is difficult to blame legislators who were clearly not aware of the full extent of the problem. Legislators have to deal with over one thousand bills per session and they rely on their staff to inform them about the facts behind bills. Even legislative aides cannot be blamed because they are answering the phones and emails from millions of citizens. There is a research staff for both the House and Senate who write up House and Senate reports. This group clearly dropped the ball on the Retro problem. However, it is likely that they relied on the Department of Labor and Industries to supply them with information on Retro.
This is where the real problem is. What if L & I is fudging the data?
There is no one making an independent review of what is going on at L & I.
What about the annual audits of L & I?
The annual financial statements of L & I are reviewed. But these reviews are little more than a rubber stamp review that the books balance. While L & I is audited annually by the Washington State Auditor, who hires an independent auditor, all of these reviews assume that L & I is reporting the data accurately. As we saw, even the Wyman Report blindly accepted the data from L & I and included it in their report even though the data was obviously wrong.
Nevertheless, Washington law requires that L & I manage the funds in a manner which maintains the solvency of all Workers Comp accounts and this clearly has not been done:
RCW 51.44.115 Financial statements and information -- Annual audit and report.
(1) The department shall:
(a) Prepare financial statements on the state fund in accordance with generally accepted accounting principles, including but not limited to financial statements on the accident fund, the medical aid fund, the supplemental pension fund, and the second injury fund. Statements must be presented separately by fund and in the aggregate; and
(b) Prepare financial information for the accident fund, medical aid fund, and pension reserve fund based on statutory accounting practices and principles promulgated by the national association of insurance commissioners for the purpose of maintaining actuarial solvency of these funds.
(2) Beginning in 2006, and, to avoid duplication, coordinated with any audit that may be conducted under RCW 43.09.310, the state auditor shall conduct annual audits of the state fund. As part of the audits required under this section, the state auditor may contract with firms qualified to perform all or part of the financial audit, as necessary.
(a) The firm or firms conducting the reviews shall be familiar with the accounting standards applicable to the accounts under review and shall have experience in workers' compensation reserving, discounting, and rate making.
(b) The scope of the financial audit shall include, but is not limited to:
(i) An opinion on whether the financial statements were prepared in accordance with generally accepted accounting principles;
(ii) An assessment of the financial impact of the proposed rate level on the actuarial solvency of the accident, medical aid, and pension reserve funds, taking into consideration the risks inherent with insurance and the effects of the actuarial assumptions, discount rates, reserving, retrospective rating program, refunds, and individual employer rate classes, as well as the standard accounting principles used for insurance underwriting purposes;
(iii) A statement of actuarial opinion on whether the loss and loss adjustment expense reserves for the accident, medical aid, and pension reserve funds were prepared in accordance with generally accepted actuarial principles.
(c) The department shall cooperate with the state auditor in all respects and shall permit the state auditor full access to all information deemed necessary for a true and complete review.
(d) The cost of the audit shall be paid by the state fund under separate contract.
(3) The state auditor shall issue an annual report to the governor, the leaders of the majority and minority caucuses in the senate and the house of representatives, the director of the office of financial management, and the director of the department, on the results of the financial audit and reviews, within six months of the end of the fiscal year. The report may include recommendations.
(4) The audit report shall be available for public inspection.
Who is supposed to be looking out for the tax payers money?
WAC 296-17-90486 Impartial review of L&I decisions.
L&I determinations applicable to the retrospective rating program are subject to independent review by the board of industrial insurance appeals (chapter 51.52 RCW).
The following is from the Board of Industrial Insurance Review’s website:
Retrospective rating adjustments: The Department of Labor and Industries the Department cannot, simply by regulation, restrict or eliminate the Board of Industrial Insurance Appeal's review of these types of Department decisions. Absent explicit legislative prohibition, Department orders concerning retrospective ratings are both appealable to and reviewable by the Board under the general terms of Chapter 51.52 RCW. ....Washington Metal Trades Association, 89 2296 (1990)
So clearly the Board of Industrial Insurance Appeals has the authority to review the policies and decisions of the Department of Labor and Industries. But the problem with the Board of Industrial Insurance Appeals is that they are swamped with too many other things to do.
They oversee 60 appeals judges who handle over 12,000 Workers Comp appeals per year. This is 200 appeals per judge, or about 60 appeal every day.
What about the Office of Financial Management?
This group has conducted reviews of L & I for several years. Like all the other reviews, they have accepted the word of L & I regarding all their figures.
What about the State Auditor’s Office?
This group has also conducted reviews of L & I for several years. Like all the other reviews, they have also accepted the word of L & I regarding all their figures.
What is the solution to this problem?
We either need more and better researchers working for the House and the Senate or we need more funding for the State Auditor’s office. Ironically, one of the many things cut during the 2009 legislative session was funding for the State Auditors Office.
So there are plenty of groups to blame here. However, clearly some other watch dog group is need to more closely oversee the Department of Labor and Industries (and at the very least to double check their math). What we need is a real full time bank guard that does not take anyone’s word for anything.
