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Testimony before:
The Governor’s Study Commission on
Workers’ Compensation Special Funds

Presented by: Edward Reinfurt, Vice President, The Business Council
September 6, 2000

Good morning. I am Ed Reinfurt, Vice President of The Business Council of New York State, Inc. On behalf of our membership, we thank you for the opportunity to testify before the Governor’s Study Commission on Workers’ Compensation Special Funds.

We come before you today with an idea which would have been thought to be radical ten years ago, but one which necessity and purpose suggests should take place today -- the need to make sweeping changes to the second injury fund, including, closing it for all new claims.

The necessity stems from the dramatic escalation in workers’ compensation assessments we have seen over the past few years as well as the doubling of the size of second injury fund disbursements over the past five years.

But it is when one examines the question of “Why was the fund created?’ and “Does that purpose exist today?” that one finds the most compelling argument to why it is time for New York to follow the lead of other states and acknowledge that for the overall good of the workers compensation system to workers and employers alike the second injury fund should be transitioned out of existence.

We realize this recommendation will be controversial. Many companies benefit from the existence of the second injury fund and are quite proficient at using it. For some, an elimination may result in higher costs in the short term. For the majority of employers a continuation of existing trends can only mean higher costs for them this year, next year and for the foreseeable future.

In our minds this recommendation is similar to the one The Business Council argued for in 1998 when it called for significant restructuring of the state’s financing mechanism for unemployment insurance system. Some companies would pay more under the recommendations we made; others would pay less. It would have been easy to not act given this situation but the compelling issue was the long term health and fairness of the unemployment insurance system. Employers with stable employment were subsidizing those employers who had significant layoffs year after year. When compared to the rates charged stable employers in other states it was clear that New York State’s financing structure imposed significant additional costs not found in other states. We argued for a system that would reward stable employment and we applaud this administration and the legislature for acting decisively and quickly once all the facts were put on the table.

We applaud this Commission for its extensive work and research for you have put the facts on the table for all to see as they relate to the Special Funds.

These facts tell us a lot about one part of our workers’ compensation system. We would first like to address the system as a whole.

We believe that the purpose of the workers compensation system in this state, and, whatever and however many funding mechanisms and pools are put in place, should be to have attainment of the highest level of workplace safety as its number one goal. But once an injury occurs prompt and fair payment to workers and equitable assessment of costs to employers must be the priority.

The second injury fund has created a situation where employers with great safety records are being asked to subsidize a fund for injuries occurring in other work sites over which they have literally no control. When the assessments were much lower this, may have been an annoyance but not a reason to urge a major overhaul of the system. Times have changed and the current situation is undermining the integrity of the system which no longer can say that good experience alone will determine the rates you pay as an employer for the safety of the workplace you provide.

We believe New York companies with good workplace safety records but a lack of awareness or expertise in using the second injury fund should not be penalized by having to pay ever increasing costs of the special assessments, of which over fifty percent is for the costs of the second injury fund.

There is no question New York’s economic climate has improved over the past several years. We have seen a substantial drop in the workers’ compensation rates paid by fully-insured businesses, due in no small part to the 1996 reforms supported by Governor Pataki and the state legislature. Other states have also worked aggressively to lower their workers’ compensation costs. In surveys, and from feedback from our member companies we continue to hear an urgent call to reduce these costs even further.

This call comes despite the fact that New York State has a workplace injury record that is far superior to the national average. In 1997,the latest year for which data is available, private sector work-related injuries and illnesses declined by 20,000 cases for the year prior. The nation had an incident rate of 7.1. New York’s was 4.4 – 38% below the national average. Since 1993 this rates has decreased 27% while the national average decreased 16%.

Yet despite its laudable position in the rankings of workforce safety, New York state continues to have workers’ compensation costs that are 20% higher than the rest of the nation. While the average premiums have dropped each year since 1996, we have seen the assessments rise significantly. In 1999, the New York State assessment increased from 9.4% to 13.6% of standard premium. Effective this October it will rise another 2.6 percentage points from 13.6% to 16.2% of standard premium, an increase more than twenty percent.

As you are all aware, the assessments are charged to pay for the “special funds” and the operating expenses of the Workers’ Compensation Board. The cost associated with these “special funds”, specifically the second injury fund, continue to jump up with no end in sight. New York needs to follow the direction of the 16 other states that have closed or eliminated their second injury fund. We are aware that elimination will not immediately bring down the assessment rate. However, absent this change we can only expect to see continued increases in the assessment rates.

As we said earlier, companies that provide a safe workplace should be able to enjoy the benefits of lower workers’ compensation costs. However, the companies that have rigorous safety programs and keep
their experience modification low often do not experience the benefit they should. These companies may see their premiums decrease yet they still come out up short due to the rising nature of their assessments. This is inherently unfair. Until more is being done to bring equity to the system, many businesses with safe workplaces will continue to pay artificially higher prices.

The second injury fund is financed on a pay as you go basis. The amount that is expected to be paid out in benefits during a year is charged through assessments. The assessments are calculated using a formula based on indemnity payments made during the previous year. According to the Workers’ Compensation Board, in 1987, 36% of the assessments collected were going to the second injury fund, by 2000 that number had risen to 55.5%. In 1992, a total of $148 million was collected in assessments for the second injury fund, by 1999 that number had reached $410 million. In 1992 the second injury fund disbursement was $109.6 million. In 1999 that number had nearly tripled to $321.6 million. This is simple math. The cost of is skyrocketing and no one can tell us this trend will change.

We would now like to address the question posed earlier in this testimony, “What was the purpose behind the second injury fund?” and
“Does it continue to serve that purpose?”

The second injury fund was originally created in 1916 and remained virtually unchanged until veterans started returning home from World War II. It was during that time that the statute was amended to encourage businesses to hire returning veterans who had suffered an injury during the war. For example, if a veteran had lost a hand during the war, and then subsequently had a serious work-related accident the fund would pick up the cost of the second injury. That seems reasonable. For what these veterans did for our country and for future generations it was little to ask.

But that war is over and much has changed including the enactment of a American With Disabilities Act which prohibits the type of discrimination in employment that the restructuring of the second injury fund in the 1940's was intended to address.

We are all creatures of habit and it is understandable how the primary purpose of the second injury fund could have been forgotten. Had not there been a considerable change in use of the fund, in all likelihood, this hearing would not have been held and this Commission would not have been created.

The growth in payments by the second injury fund can only be attributed to the growing practice of transferring financial responsibility of injured claimants who have received over 260 weeks of payments to someone else. If legal why wouldn’t you? And make no mistake it is legal. But is it right?

I ask you what is the compelling purpose for why this fund exists today. Does it benefit the injured worker? Are people entering the workforce provided with greater employment opportunities because of it? Does it encourage greater safety in the workplace?

The fact is there is no compelling purpose as to why the fund exists today. There is a reason why it has grown. When employers, carriers or trust administrators are pressed on the value of the fund to them, you most often hear the answer “we benefit more than we pay in.”

It has moved the system away from not only its purpose but from the fundamental policy that says an employer should be financially responsible for the safety of his workplace. The continuation of this movement has serious policy implications for preserving the primary purpose of the system which must continue to be to promote worker safety. An employer should benefit by its own safety record – not the
subsidies of others.

In our estimation, it is time to overhaul this program. Will it be easy? No. Is it possible? Yes.

As Dan Walsh said recently: “If Congress can repeal the tax added to your telephone bill that was first imposed to fund the Spanish American War and never repealed until this year, then New York can eliminate the fund created to aid returning World War II veterans.”

In conclusion, we would ask that the members of this commission pay careful attention to the experience that other states have closed or eliminated their funds. Those states are Alabama, Colorado, Connecticut, Florida, Kansas, Kentucky, Maine, Minnesota, Nebraska, New Mexico, Oklahoma, Oregon, Rhode Island, South Dakota, Vermont and Utah.
What is perhaps most important to learn from these states are the transition issues? It is important to know how, based upon their experience, the transition can be made to work smoothly for all parties involved.

We understand that employers will not see significant short term rate reduction if it closes its second injury fund to any new claimant. We would expect to see a gradual reduction but it is changing the trend line which is important coupled with a return to a funding mechanism which puts financial responsibility on the safety of the workplace.

We hope that in 2001 New York will put in place policies that will see the experience of the assessments parallel what we have seen with workers’ compensation rates over the past six years – lower, more competitive and based on the safety record of the employer.

Thank you for this opportunity to address the commission.

September 6, 2000