Workers’ compensation premiums for New York businesses are skyrocketing. The rates employers pay to insure their workers against on-the-job injuries have gone up by 85 percent over the last four years.
Workers’ compensation premiums have been driven up by a combination of factors: fraudulent claims, the rising cost of medical care, and enormous state-mandated increases in benefits. But the problem has been compounded by two factors unique to New York. The first is a budget gimmick employed by Governor Cuomo and the State Legislature: raiding the State Insurance Fund (SIF) to the tune of $1.3 billion.
This money must be made up by higher premiums. Because the SIF provides insurance to 45 percent of the state’s employers, these raids have, in effect, imposed a new multimillion-dollar tax on New York businesses. Clients of private insurance companies have been affected as well, since higher SIF premiums reduce the pressure on other insurers to keep their rates low.
The second is a twenty-year-old court decision that makes employers and their insurers vulnerable to liability for damages that far exceed the standard workers’ comp benefits. This directly contradicts the intended purpose of workers’ compensation: a no-fault system to compensate to provide workers for on-the-job accidents.
The state’s abuse of the insurance fund and failure to reform liability law have worsened the burden of workers’ compensation premiums on New York’s businesses, and damaged their competitive positions relative to out-of-state companies. “I get calls every day from businesses saying, ’I can’t handle these rates,”, says Bob Crandall, a lobbyist for the State Business Council. “This has been crushing businesses.”
Small firms have been hit especially hard. The owner of an upstate electronics store has seen his premiums more than double since the mid-1980s, though he has had only one minor accident in the last dozen years. I operate a tremendously competitive business and I’m not part of a chain,” says the owner, who asked not to be identified. “Workers’ compensation insurance, along with the burden of higher taxes and fees, is making it more difficult for independents like me.”
The State Insurance Fund
New York State lawmakers created the State Insurance Fund in 1914. It is completely self-sustaining, generating its operating and reserve funds from premiums and investment income. Although the SIF is a state-controlled agency with a board of eight commissioners appointed by the Governor, it operates as if it were a private insurance company, though under somewhat different rules. As the insurer of last resort, it cannot turn away any would-be client, but its premiums are generally competitive with those of New York’s private insurers.
State statutes limit the SIF’s investments to government bonds and notes, repurchase agreements, FHA mortgages, and certain corporate bonds. The fund’s solvency is ensured by avoiding riskier investments. In 1975, however, the Governor and State Legislature began transforming the SIF from a quasi-private insurance broker into a mandated market for public debt.
That year, the state established the Municipal Assistance Corporation (MAC), a public authority that would sell bonds to help bail New York City out of its fiscal crisis. State legislators doubted whether MAC would be able to attract enough private investment and whether it was a constitutionally permitted undertaking (the courts eventually determined that it was). To ensure that MAC’s bonds would be sold, the Legislature passed a law directing the SIF to invest $100 million in them. The same year, the Legislature ordered the fund to purchase $15 million in general obligation bonds from the city of Yonkers and up to $200 million in bonds from the Dormitory Authority, the Environmental Facilities Corporation, the Housing Finance Agency, and the Medical Care Facilities Financing Administration.
None of these investments turned out to be unsound, but they represented a disturbing precedent. The interests of SIF policyholders were no longer the only factor in choosing the fund’s investments. They would now be forced to compete with the political needs of state officials.
In 1982, facing a shortfall in the fiscal 1983 budget, Governor Hugh Carey and the State Legislature turned to the State Insurance Fund for a bailout. Legislation was passed directing the SIF to transfer $190 million in reserves directly into the state’s general fund. The legislation also required the state to establish an annual “dry” appropriation of $190 million, ostensibly to repay the insurance fund. This $190 million is considered an asset of the SIF, but it is only an authorization for the state to spend the money, not a requirement to do so. This “asset” is listed on the SIF’s balance sheets as a “contingent receivable” from the state, is “non-interest bearing,” and is payable “only [if necessary] to maintain the solvency” of the Workers’ Compensation Fund within the SIF.
Governor Cuomo, who had labeled the 1982 transfer an “atypical transaction,” nevertheless continued the practice, surpassing the amount of his predecessor’s raid by more than five times. He persuaded the Legislature to transfer $325 million from the SIF in fiscal 1987 and another $300 million in 1988 to pay for increased spending. In 1989 and 1990, another $250 million and $230 million, respectively, were transferred to cover year-end shortfalls.
Thus, the annual “dry” appropriation has increased accordingly, and now stands at almost $1.3 billion. The SIF is, in effect, required to keep phony balance sheets, declaring this $1.3 billion as an asset, though the only way the state will repay this money is if the fund’s genuine assets fall below the liabilities for claims against them. By the end of 1991, the fund’s genuine assets exceeded claims liabilities by a precarious $152 million.
State officials claim they have merely made use of the insurance fund’s “excess working capital,” money that was unnecessary to meet liabilities. But the SIF surplus could have been invested and used to reduce the premiums paid by New York’s employers. Thus, the transfer of SIF funds has amounted to a backdoor tax on New York’s 190,000 participating employers.
This tax includes not only the amount of money directly involved in the transfers, but also the forgone investment earnings on these funds. Table I shows the date and amount of each transfer, along with the estimated present value of that money had it been invested at the time. The total value of the transfers, as of September 30, 1992, is approximately $2.2 billion, or an average of more than $11,500 for each business that has worker’s compensation insurance through the SIF.
If the SIF reaches the point where its genuine assets cannot cover claims against the fund, it will either have to raise its premiums further or the state will have to begin paying back the $1.3 billion it “borrowed.” The raids on the SIF will ultimately be paid for either by policyholders or taxpayers.
Governor Cuomo and the Legislature have found other, more devious ways to raid the SIF as well. In an attempt to balance the fiscal 1991 budget, the Legislature passed a series of “one-shot” gimmicks, including two
that transferred nearly $90 million of SIF money to the state, using the Urban
Development Corporation (UDC), a public authority established during the Rockefeller administration, as a conduit. This $90 million was in addition to the $1.3 billion transferred to the state in direct raids on the SIF.
The first of the one-shots mandated the SIF to “lend” the UDC $30 million for “legislative initiatives”—projects already begun by the corporation, in some cases several years earlier. The legislation specified that the UDC would pay the $30 million directly to the state. The corporation is supposed to pay back the loan to the SIF over thirty years at 10 percent annual interest. But repayment is only guaranteed if the loans made by the UDC for the initiatives are repaid to the corporation. If these UDC loans go bad, employers paying workers’ compensation premiums will be left holding compensation premiums the bag.
In the second transaction, the SIF was directed to invest in UDC reserve funds. These funds are used to pay the interest on bonds issued to finance prison construction. The SIF has since invested $57.5 million, which will be paid back only if there is still money in the reserve funds when the bonds are retired years from now. In the meantime, the SIF earns an unspecified rate of interest generated by the reserve funds. In exchange for the $57.5 million “investment,” the UDC was directed to forgive an equivalent amount that the state would otherwise pay to “rent” the prison facilities.
These transactions leave the State Treasury with millions of extra dollars and the SIF with highly questionable investments. Yet the legislation enacting these schemes declared them to be “reasonable, prudent, proper” undertakings by the SIF. The Governor and the Legislature have come to rely on looting the SIF to support their spending habit, while maintaining the pretense of a balanced budget.
It’s Perfectly Legal
In 1983, after the first transfer from the SIF to the general fund, Brooklyn’s Methodist Hospital, a SIF policyholder, sued the state, arguing that the SIF transfer violated the federal and state constitutions. Among the arguments were that the transfer constituted the taking of property without due process or just compensation, created a state debt without voter approval, and was an unlawful appropriation scheme and a de facto tax.
Ironically, the State Insurance Fund filed a “Points of Counsel” brief in favor of Methodist Hospital’s arguments, even though it was named as a defendant in the case. The SIF brief emphasized the contractual rights of the policyholders and argued that the reserves “seized” by the state “constitute a trust fund in favor of the insureds and their beneficiaries.” The SIF asked the court to order restitution of the $190 million.
The Court of Appeals, New York State’s highest court, ruled against these challenges. The SIF, the court held, is a state agency “for all of whose liabilities the state agency is responsible, rather than a mutual insurance pool.” SIF policyholders, according to the court, “have no property or contractual interest in the surplus of the Fund.”
Thus, the state was given a free hand to use the SIF as a cash cow.
State law specifies that the workers’ compensation system is a no-fault system, its benefits “exclusive and in place of any other liability whatsoever.” It was designed to protect both employers and employees from the financial consequences of work-related deaths and injuries. If an employee is injured or killed on the job, he or his survivors are entitled to compensation; the employer cannot argue that the accident was the employee’s fault. At the same time, the employer cannot be held liable for additional compensatory damages for negligence. Workers’ compensation insurance, mandated for nearly every employer in New York, is supposed to be the exclusive remedy for on-the-job accidents, regardless of fault.
There is, however, a major loophole in New York State’s workers’ compensation law. While an injured employee cannot sue his employer directly for damages, he can sue a third party, typically the manufacturer of a product that allegedly contributed to the injury. This third party can then sue the employer. If the employer is found to be partially responsible, it—or its insurer—can be forced to pay a share of the third party’s liability. Thus, an employer can be held liable for an on-the-job injury or death—but only if another company is shown to be partially responsible.
This odd set of rules resulted from a 1972 Court of Appeals decision, Dole v. Dow Chemical Company. The Dow Chemical Company was sued by the widow of an employee who had been killed on his job at the Urban Milling Company when he inhaled a fumigant manufactured by Dow and used to control insects in grain storage bins. The New York State Supreme Court ruled that Dow was negligent because its labels did not provide adequate warning of the product’s dangers. Dow brought a third-party complaint against Urban Milling, claiming that Urban was partially responsible because it used the fumigant improperly. The Supreme Court agreed and allowed Dow to recover some of its damages from Urban. The case made its way to the Court of Appeals, which upheld the judgment.
New York State has the dubious distinction of being the only state in the nation permitting third parties to recover damages from employers. In 44 states, employers are protected from any fault-based tort claims against them in cases involving worker injury or death; the third party in such cases would be liable for the entire judgment. In the remaining five states, employers can be held liable to a third parry only for the amount they would otherwise be liable to the employee. Illinois recently adopted this reform, leaving New York as the last holdout. By compromising the integrity of the no-fault workers’ compensation system, Dole subjects New Yorkers to a substantial and unique burden.
Paul Magaril of the New York Chamber of Commerce and Industry argues that “Dole only protects the interests of third parties—essentially out-of-state companies—at the expense of New York employers, without providing any additional benefits for injured workers.” The New York Compensation Insurance Rating Board, a trade group, estimates that third-party liability claims cost New York employers $141 million in 1991. The New York Chamber of Commerce and Industry estimates that self-insured companies (approximately one in five New York employers) pay an additional $29 million per year, and that attorneys’ fees for all New York employers cost another $20 million. Thus, the total estimated financial burden of Dole, cases was $190 million in 1991 and growing.
The impact of third-party liability on the SIF has been particularly pronounced, in part because the fund is the insurer of last resort and is not allowed to reject high-risk insurance applicants. In 1990, the SIF paid nearly $60 million, or 14 percent of its total payments, for third-party claims, including legal fees.
Reforming Workers’ Comp
In 1990, state officials missed a unique opportunity to reform New York’s workers’ compensation system. That year, when Governor Cuomo and the State Legislature were negotiating increases in workers’ compensation benefits, several organizations, including chambers of commerce from across the state, called on the Legislature to bar third-party liability claims against employers in conjunction with any benefit increase. In the end, however, the state enacted only a large increase in benefits, which is expected to cost New York employers a staggering $1.8 billion annually when fully implemented in a brief two-year period. Not a single reform to reduce the fiscal burden on employers was included in the legislation.
Several steps should be taken immediately to reform SIF practices. The state should curb third-party lawsuits by passing legislation to repeal Dole v. Dow, thereby restoring the no-fault basis of New York’s workers’ compensation system.
No further transfers from the SIF to the state should be allowed. The SIF exists to provide workers’ compensation coverage, not to provide easy cash for politicians in Albany. The state should establish a repayment schedule, with interest, to rectify past raids. The SIF could then pay larger premium rebates to policyholders, provide greater security that it will meet its liabilities, and, most importantly, reduce the rates it charges businesses for insurance.
The state should no longer force the SIF to make particular investments designed to accomplish goals other than ensuring the financial integrity of the fund. Mandated investments have misused workers’ compensation revenue and compromised the intent of the SIF: to make investments aimed at reducing costs and ensuring an “affordable insurance package” for policyholders. The UDC investments are particularly irresponsible, since the SIF is not even guaranteed repayment of the original investment.
Finally, the state should examine whether it any longer makes sense to operate a public insurance fund that competes with private carriers. In 28 states that require employers to have workers’ compensation insurance, private companies are the only entities that write these policies. In some states, the state government stepped in as a provider only in a crisis or to offer immediate fulfillment of the coverage mandate, but quickly ceased its involvement in the market once these temporary situations had been addressed. Ultimately, the best protection against political abuse may be to privatize the State Insurance Fund.