Governor Proposes $1 billion of Savings in Unemployment Ins. and Workers’ Comp.

January 4, 2011 by Carl Gipson

Governor Gregoire today announced some changes to both the state’s Unemployment Insurance and Workers’ Compensation systems in order to pass up to $1 billion in savings on to the business and employee community.

This announcement comes in the wake of the Department of Labor and Industries (which runs workers’ compensation) and the Employment Security Department (runs unemployment insurance) announcing substantial tax increases for 2011.

Late last fall the Employment Security Department announced an average UI rate increase of about 40%. This followed a similar 40% rate increase for 2010. And last November the Department of Labor and Industries announced an average 12% rate hike, following a 7.6% rate increase the year before. Seeing as how the state’s economy is seeing some positive signs, but is certainly not out of the woods, these two hits had many small businesses worried about the increasing cost of labor. Washington’s unemployment rate remains stuck at about 9% so making it more expensive to hire workers for struggling businesses was ill-advised.

The reforms the Governor addressed today in the UI system benefit the businesses (both large and small) that cut costs without cutting labor. The UI system is made of two components — an experience rating tax, where the tax rate is dependent upon a business’ recent claim history, and a social-cost tax, which is paid by nearly all employers and recovers the cost from the previous year that cannot be attributed to a specific employer (most likely because that emlployer has gone out of business).

Businesses that have not laid off employees over the last year would see their social-cost tax rate stay the same (avoiding the 36% increase in that tax rate) but businesses that have laid off employees recently would see that reflected in their experience-rating tax.

The Governor expects to save the business community about $300 million in 2011 through this action and another $50 million over the next 6 years for a total of $350 million. This legislation would have to hit the fast track, however, as the deadline is February 8th for legislation to pass before it’s too late to redo the state’s UI system for 1st quarter tax payments.

In addition to this UI reform is another provision that expands the UI program in order to procure $98 million in federal UI modernization money. Worker training benefits are fine, but what happens when that federal money runs out in approximately 4-5 years (ESD says this benefit costs about $19-22 per year)? If the legislation were written in a way that sunsetted the program at the end of the funding or idenfified future funding options, that would make taxpayers breathe a little easier. Why set up the state for more unfunded mandates? But it’s not necessarily a deal-breaker to get the other UI issue through.

Turning to workers’ compensation, the Governor’s proposals somewhat mirror a bi-partisan bill that legislators introduced last year but received no support from the leaders of the House or Senate Commerce & Labor committees.

The first reform is to create a network of credentialed health care providers (Medical Provider Network), which are groups of certified health providers that engage in a best practices approach to treating industry injuries. This is something WPC and the business community has been asking for for years. Again, the proposed legislation has not been released yet so the devil is in the details but this is at least a move in the right direction. This is supposed to save $160 million over the next four years.

A similar assessment can be said about expanding the Centers of Occupational Health and Education (COHE) and the wage subsidy program proposed. Other states have a system where an employer holds a job open for an injured worker to return, and upon the worker’s return the state provides a subsidy to the business. It will be interesting to see the cost to the state of this program, but keep in mind that the subsidy would not be paid out of the general fund but out of the workers’ comp funds. A dollar amount in savings was not identified.

Lastly, both the Governor and L&I directory Judy Schurke acknowledged the problematic state of long-term pensions. Both pointed out that the pensions constitute eight percent of the claims but make up 85% of the cost to the system. An “unsustainable” trend, as the Governor puts it. As a result, the Governor is proposing lump-sum benefits for older workers, something WPC and the business community has been pushing for years. She is also proposing adjusting the pensions of total disability beneficiaries who earn income through limited work.

This will allow greater flexibility on the part of the business in order to get the cost of the pension of its books and will help streamline things over at the Department. This is supposed to save businesses about $560 million over four years.

So, all-in-all, $1 billion could be returned back to the business and employee community over the next several years. We still have issues with the financial stability of the workers’ comp system, and UI will still require some long-term reforms, but this is a positive move by the Governor today. However, will policymakers on both sides of the aisle sign off on her request legislation? Most likely yes for capping the UI tax increase but it’s anyone’s guess on the workers’ comp reforms. We’ve heard the song of reform sung many a time on workers’ comp, so perhaps getting the Governor behind the need for reform will produce results in 2011.

— Carl Gipson | Director, Small Business, Technology and TelecommunicationsWashington Policy Center206.937.9691 (ph) | 206.289.0701 (cell) washingtonpolicy.org | washingtonpolicyblog.org