Reform Retro!

 

October 2, 2009

 

From David Spring, M. Ed. Director,

Fair School Funding Coalition,

PO Box 303, North Bend, WA 98045

This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

Re: Request that immediate action be taken to halt the diversion of millions of tax payer dollars into political campaigns

 

Dear Governor Gregoire,

 

Recently the United States Senate held a hearing to determine how Bernie Madoff could have constructed a $50 billion dollar Ponzi scheme without any federal regulators noticing his questionable accounting practices. I believe we have uncovered an even worse Ponzi scheme - being run in our own State. At least Madoff was only losing the money of private investors. The Ponzi scheme we are about to describe involves the loss of billions of tax payer dollars, millions of which were improperly diverted to subvert hundreds of elections throughout our State. In short, what we are about to describe is the worst economic and political scandal in the history of our State.

 

Attached to this letter is a 85-page report which provides evidence that more than $10 million dollars per year is being diverted from the State Workers Compensation insurance pool into political campaigns. In 2007 alone, nearly $200 million dollars of tax payer money was gifted through the Workers Compensation “Retro” program to private Retro agencies. The total cost to tax payers of this questionable Retro “refund” program has been more than $1.3 billion dollars during the past 10 years and is rising rapidly.

 

The justification for these Retro program costs has been that the Retro program “reduces claims and improves safety.” However, a 2005 study conducted by the Washington State Department of Labor and Industries confirmed that there is no pubic benefit to the Retro  program. They have not reduced costs or improved safety. In fact, using data from the recently released Wyman study, Retro programs are so much more expensive than non-retro that they should have been charged an extra $70 million per year meaning the cost to tax payers of the retro refunds has actually been more than $2 billion dollars in the past 10 years.

 

Another justification for this program was that it merely refunded over-payments of insurance premiums by returning the savings to those enrolled in the Retro program. This also is not true. Millions of dollars in Retro “refund” checks have been issued even when Retro Claims have exceeded Retro premiums by millions of dollars. The tax payers are paying twice. First, we must cover the cost of Retro claims that exceed Retro premiums. Then we pay again to cover the cost of Retro “refund/subsidy” checks which are not actually refunds but simply extra tax payer dollars – subsidies- being sent to private insurance agencies.

 

Finally, Retro agencies have claimed they should be allowed to do whatever they want with the Retro refund checks because “it is their money.” Even if it was their money, Workers Compensation insurance funds should only be spent for legitimate workers safety reasons.

But given the fact that Retro checks are issued even when Retro claims exceed Retro premiums, the funds are clearly tax payer “subsidies” and therefore should never be used for political purposes.

 

In addition, the retro program is part of a larger Workers Comp program scandal that has left tax payers with a debt of more than $30 billion dollars and is growing at a rate of more than $3 billion dollars per year.

 

While there have been investigations of the Retro program in the past, the attached report offers evidence supporting four allegations never raised before:

·         First, the Retro Reform program is not saving the State money.

·         Second the Retro Refunds are not refunds of over-payment of premiums after paying off claims. Instead, they are tax payer subsidies amounting to hundreds of millions of dollars every year being diverted for improper purposes.

·         Third, this problem is growing rapidly such that the cost is now well over $1 billion per year in tax payer losses.

·         Fourth, the Workers Compensation Program is now over $30 billion dollars in debt as a result of questionable and “actuarially unsound” accounting practices.

 

For example, according to the Department of Labor and Industries, in 2006, total Retro premiums were $727 million and total claims paid out were about $730 million. Yet Retro “Refunds” totaled nearly $129 million for a total loss to the State’s tax payers of $132 million.

 

Retro Refund Summary 2006 (from L & I Retro Financial Quarterly reports)

Agency Reporting Quarter	Retro Premiums ($M)	Retro Developed Claims ($M)	Premiums Paid In - Claims Paid Out	Retro “Refunds” Total (in $ millions)	Cost to State Taxpayers ($M)
January	120.8	128.5	-7.8	14.7	22.5
April	4.0	4.2	-0.2	0.8	1.0
July	566.8	557.4	9.4	112.1 (BIAW=39M)	102.7
October	35.5	39.5	-4.0	1.2	5.2
2006 Total	727.1	729.6	-2.5	$128.8 million	$132 Million

 

Because Retro claims were not properly calculated (due to several “actuarially unsound” errors in calculation as described in the Wyman report), the real difference between premiums and claims was more than $100 million – not $2.5 million. This brings the tax payer cost up to over $200 million for 2006.  There was also another billion in long term Retro obligations not shown on this chart bringing the total 2006 tax payer cost of Retro to $1.2 billion dollars.

 

The largest of these Retro programs, BIAW, received $39 million dollars in retro refunds despite the fact that their claims equaled their premiums. Thus, the entire $39 million given to the BIAW in 2006 was from tax payer dollars. BIAW then diverted 20% of these tax payer dollars into political campaigns meaning BIAW alone misused $8 million in tax payer dollars in 2006.

 

The Merriam Webster Online Dictionary defines the word Refund to mean “To give, put back or return”. It is not a refund to return an amount which is much more than was actually put in.

It is a subsidy from the tax payers.  It is bad enough that undeserved tax payer money is being given back to corporations. It is even worse when millions of dollars in tax payer funds are misused to control elections throughout our State.

 

In the attached report, we have raised numerous concerns about the BIAW in particular, about retro programs in general and about the lack of oversight as well as numerous accounting errors by the Department of Labor and Industries.

 

 

These concerns include the fact that while the Department of Labor and Industries was giving away hundreds of millions of dollars in undeserved subsidies to Retro programs during the past 3 years, it also lost over $2 billion dollars from the Reserve Fund. We estimate that the long term claims of the Workers Compensation are now over $41 million dollars and increasing at a rate of more than $3 billion per year. We further estimate that total assets are now less than $11 billion for a total debt of more than $30 billion dollars.

 

In addition, an August 2009 Wyman Actuarial Review of the Retro program found several “errors” in Retro refund calculations which caused Retro Refunds to be much more than they should have been. These errors included:

1.       A “double entry computer coding error which caused Retro refunds to be at least 10% too high (costing tax payers $130 million per year).

2.       A mis-assignment of Occupational Disease Claims which caused Retro refunds to be at least 20% too high (costing tax payers another $30 million per year).

3.       Actuarially unsound limitation of adjustments to 45 months which caused Retro refunds to be 4% too high costing tax payers another $5 million dollars per year. 

 

In addition, L & I supplied Wyman with Loss Ratio charts and data which L & I knew to be incorrect, but failed to adjust for the known errors. We believe L & I supplied Wyman with incorrect data in order to cover up the role of L & I in the Retro scam.

 

We believe that at least four laws may have been broken by the BIAW and/or by the Department of Labor and Industries:

 

1. USE OF TAX PAYER DOLLARS TO FUND POLITICAL CAMPAIGNS

We believe that the BIAW and other Retro groups may have violated:

 

RCW 42.17.128  Use of public funds for political purposes.

Public funds, whether derived through taxes, fees, penalties, or any other sources, shall not be used to finance political campaigns for state or school district office.

 

Because retro subsidies are clearly taxes and public funds as defined by

RCW 51.08.015  "Amount," "payment," "premium," "contribution," "assessment."

Wherever and whenever in any of the provisions of this title relating to any payments by an employer or worker the words "amount" and/or "amounts," "payment" and/or "payments," "premium" and/or "premiums," "contribution" and/or "contributions," and "assessment" and/or "assessments" appear said words shall be construed to mean taxes, which are the money payments by an employer or worker which are required by this title to be made to the state treasury for the accident fund, the medical aid fund, the supplemental pension fund, or any other fund created by this title.

 

It is especially clear that retro subsidies are public funds when the subsidies exceed the difference between premiums and claims. Since the entire amount of the premium was used to pay for claims, what else could the subsidies be besides public funds?

 

2. UNFAIRLY SHIFTING THE WORKERS COMP TAX BURDEN FROM RETRO TO NON-RETRO PROGAMS

We believe that the Department of Labor and Industries may have violated:

 

WAC 296-17-90402 requires that retro employers as a group and non-retro employers as a group fund the same portion of their total claim costs relative to their total premium charges.

 

In other words, each group is required to have the same final loss ratio.  We have described at least four areas where L & I unfairly shifted the tax burden from retro to non-retro. These include the double entry computer coding error, the mis-assignment of occupational disease claims, the 45 month retro adjustment limitation and the numerous L & I attempts to deceive oversight groups about the true costs of retro claims (including but not limited to submitting false data to the Wyman study authors). All of these policies and actions were likely violations of WAC 296-17-90402.

 

3. UNFAIRLY SHIFTING THE TAX BURDEN FROM RETRO PROGRAMS TO THE TAX PAYERS

We believe that the Department of Labor and Industries may have violated State laws requiring the Workers Comp program to be self supporting and solvent:

 

RCW 51.16.100  Classification changes.

It is the intent that the accident fund shall ultimately become neither more nor less than self-supporting… 

 

RCW 51.16.105… Departmental expenses, financing.

All department expenses relating to industrial safety and health services of the department pertaining to workers' compensation shall be paid by the department and financed by premiums…  

 

Given these two laws, why is the Workers Comp program being allowed to put the tax payers in debt with long term obligations of more than $40 billion dollars? Also these two laws make it clear that premiums must be adequate. It is not permissible to bankrupt the Accident Fund just to give out Retro subsidies.

 

4. L & I FAILURE TO REQUIRE RETRO GROUPS TO FULLY RETURN RETRO SUBSIDIES RESULTING FROM L & I ERRORS AND FORMULAS INCONSISTENT WITH WAC 296-17-90402

We believe the Department of Labor and Industries is violating State law by failing to require retro groups to fully return all retro subsidies resulting from errors in L & I formulas which are inconsistent with WAC 296-17-90402. In particular, the entire amount of the double coding error ($150 million) and the entire amount of the occupation disease assignment error ($300 million) MUST be returned to the Accident Reserve Account with interest:

 

RCW 51.48.260 Liability of persons unintentionally obtaining erroneous payments.

Any person, firm, corporation, partnership, association, agency, institution, or other legal entity, but not including an industrially injured recipient of health services, that, without intent to violate this chapter, obtains payments under Title 51 RCW to which such person or entity is not entitled, shall be liable for: (1) Any excess payments received; and (2) interest on the amount of excess payments at the rate of one percent each month for the period from the date upon which payment was made to the date upon which repayment is made to the state. [1986 c 200 § 3.]

 

Note the word SHALL. It is not legal for L & I to fail to recoup the $450 million dollars in retro subsidies that were erroneously given to retro groups due to the computer coding error and the Occupational Disease Mis-assignment error.

 

We are hoping you will recognize the seriousness of these problems and take immediate steps to address them.

 

We ask that you immediately take the following corrective actions:

 

First, we ask that you appoint an independent expert to investigate the many issues raised in this report. So that all concerned can have confidence in the fairness of this investigation, such an investigator must not be affiliated with the Governor’s office or with the Attorney General’s Office or with the Department of Labor and Industries or with any Retro agency. In addition, the investigator must not be affiliated with either political party. Finally, the investigator must be extremely knowledgeable about mathematics, accounting and statistical analysis.

 

In the course of my investigation, the only credible independent analysis I was able to uncover which I had any confidence in was supplied by Professor Stephan Sefcik at the University of Washington. Dr. Sefcik is an Associate Dean of the University of Washington School of Business. He also is also an MBA , a CPA and Professor of Accounting at the UW. If he is not willing to do this investigation, perhaps he would know other professors at the UW who would. I have personally taken statistical analysis courses from several professors at the UW and I have found all of the professors to be extremely ethical and knowledgeable (note that I have never met Professor Sefcik. I merely read a report which he wrote). But regardless of who is chosen to conduct this investigation, we ask that this investigation begin immediately.

 

Second, if it is found that the “Retro Refunds” exceed the difference between claims and premiums or involve the use of tax payer dollars or the inappropriate use of any other funds outside of the Retro program, we ask that the Retro Refund/Subsidy program be immediately halted until a final determination can be made as to the appropriate distribution of funds. 

 

Third, we ask that you immediately order the Director of the Department of Labor and Industries to require that all retro subsidies given as a result of errors in the computer coding ($150 million) and errors in the occupational disease assignment formula ($300 million) - both clear violations of WAC 296-17-90402- be returned to the Accident Reserve Fund with interest as required by RCW 51.48.260. We believe that L & I proposals to only recover $30 million of the $150 million and not a penny of the $300 million are a reckless disregard of the law and a failure to comply with their financial duty to protect the tax payers money.

 

Fourth, in order to further protect the tax payers money, we ask that the accounts and balances of the BIAW, BIAW-MSC, and all 15 BIAW affiliates be frozen except for those funds needed to maintain current payroll and other essential administrative costs. The purpose of freezing these accounts is to return to the State treasury as much tax payer dollars as possible.

 

Fifth, we ask that the accounts and balances of all BIAW affiliated Political Action Committees be frozen except for those funds needed to maintain current payroll and other essential administrative costs. The purpose of freezing these accounts is to return to the State treasury as much tax payer dollars as possible.

 

Sixth, also in accordance with RCW 51.48.260, we ask that any political campaigns, political action committees or other political organizations which have been given contributions from the BIAW or the 15 BIAW affiliates or the 20 BIAW supported PAC’s be required to return those contributions directly to the State Treasurer.

 

We believe that BIAW PAC’s have at least one million dollars of tax payer money in their accounts and that millions more are in the accounts of BIAW, BIAW MSC and the 15 BAIW affiliates. We would like it all returned to the State Treasury as soon as possible.

 

Seventh, we ask that a review be conducted of the processes, policies and accounting practices of the Department of Labor and Industries to determine how hundreds of millions of tax payer dollars could be erroneously given away from the Accident Reserve Fund – without a requirement to return the funds once the errors were discovered -  at the same time that the Reserve Fund lost more than $2 billion dollars and how the total obligations of the Workers Compensation program can now exceed total assets by nearly $30 billion dollars.

 

Despite State law requiring a solvent program, our Workers Comp Contingency Reserve Fund is now the lowest in the nation and less than 10% of national insurance standards. For L & I to erroneously give away $450 million dollars and then not require its full return after the errors were discovered is not merely illegal. It is a serious breach of the public trust.

 

We recognize that Wyman Actuarial just conducted a review. But their review made numerous errors and was based upon mis-information from L & I which Wyman did not check for accuracy. Thus, the Wyman report raised more questions than it answered. We need a real review and not just a blind acceptance of L & I statements.

 

Given the difficult financial position our State is in due to the national recession, and the likelihood of yet another billion dollars in cuts during the next legislative session, and the L & I request for an 8% to 10% increase in Workers Comp rates simply so they can give yet another $100 million dollars away to Retro programs in 2010, we can simply no longer afford to give hundreds of millions of dollars per year to a retro program that offers no public benefit.

 

I would be happy to answer any questions you may have and to provide you with any additional information you may need. Thank you for your assistance with this matter.

 

Sincerely,

David Spring, M. Ed.

Executive Director

Fair School Funding Coalition

P.O. Box 303

North Bend, WA 98045

This e-mail address is being protected from spambots. You need JavaScript enabled to view it