Analysis Item 30: Department of Consumer and Business Services Workers Compensation Premium Assessments

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1 Analysis Item 30: Department of Consumer and Business Services Workers Compensation Premium Assessments Analyst: Matt Stayner Request: Acknowledge receipt of a report on changes to workers compensation premium assessment rates. Recommendation: Acknowledge receipt of the report. Analysis: Although specifically exempted from the SB 333 fee ratification process, statute requires the Department of Consumer and Business Services (DCBS) to report changes in workers compensation premium assessment rates made by the Department through administrative rule to the Emergency Board. The report presents changes to rates impacting revenues of the Premium Assessment Operating Account (PAOA) and the Workers Benefit Fund. Workers Benefit Fund revenue is primarily derived from a cents-per-hour assessment on all wages paid in Oregon. The rate is split evenly between employers and employees. A portion (1/16th of one cent) of the assessment supports a special payment to the Oregon Health and Sciences University, Oregon Institute of Occupational Health Sciences for research on occupational illness and disease. Secondary revenue is from recovered claims cost from non-complying employers, fines, interest income, and other revenues. The fund supports a variety of programs that provide assistance to employers and injured workers. The rate is set to provide an adequate fund balance for projected claims and supported program expenditures. The rate information provided by DCBS on the centsper-hour assessment is not required by statute to be included in the report, but has been provided by DCBS as a courtesy and to provide additional context to the state of the workers compensation system as a whole. The primary reason for the rate reduction is an increasing fund balance, both actual and projected, and no projected substantial increase in claims or administrative costs. The Premium Assessment Operating Account is funded through an assessment against the earned premiums of insurers providing workers compensation coverage, including the State Accident Insurance Fund, private, and self-insured employers and employer groups. The assessment percentage includes a general assessment rate for all employers and additional supplemental rates charged against policies of self-ensured employers, the proceeds of which fund adjustment reserve accounts. These funds are used to pay the claims of injured workers of these employers when they cannot obtain payment due to self-insured employer insolvency. The general assessment funds the Workers Compensation Division (including the Ombudsman for Injured Workers and the Small Business Ombudsman), a portion of the Oregon OSHA program, and the Workers Compensation Board. Generally, the premium assessment rate results from a basic formula that divides the net planned and forecasted expenditures and transfers by the forecasted premium base, with modifications for adequate fund balance. The DCBS report notes that a reduction in one of the factors that are used Legislative Fiscal Office 1 Emergency Board December 2016

2 to derive premium rates (the pure-premium rate) will result in a reduction in the total assessable premiums that would have otherwise been forecasted, and would, therefore, reduce the total assessment revenue to the PAOA without an increase in the assessment rate. The following table illustrates the projected impact on earned premiums, the projected loss of assessment revenues at the anticipated realized rate (which is slightly lower than the stated rate), and the increase in the premium assessment rate that would be required to recoup the lost assessment revenues. Loss in earned premium due to pure-premium rate change FY 2018 FY 2019 FY 2020 FY 2021 Before pure premium change $ 968,877,300 $ 1,028,070,760 $ 1,079,091,690 $ 1,122,836,420 After pure premium change $ 919,640,960 $ 959,280,100 $ 1,010,791,200 $ 1,058,137,040 Difference $ (49,236,340) $ (68,790,660) $ (68,300,490) $ (64,699,380) Loss of assessment at realized rate $ (3,027,101) $ (4,190,471) $ (4,153,194) $ (3,929,781) Resultant rate increase required to negate revenue loss In addition to the loss of assessment revenues due to reductions in the pure premium rate, the net expenditures and transfers of the PAOA supported programs are projected to increase during the next two biennia. The following table illustrates the net transfers and expenditure (expenditures and transfers less non-assessment revenues) increases and the required increase in the assessment rate that would be required to cover the additional increase. FY 2018 FY 2019 FY 2020 FY 2021 Change in net expenditures and transfers $ 2,763,655 $ 2,622,269 $ 3,161,918 $ 2,136,406 Rate change required due to change in transfers and expenditures The combined average rate increase required to resolve both of these issues is percent, which is slightly higher than the.600 percent increase implemented by the agency. DCBS appears to have accounted for this difference by assuming a small increase in the realized rate of assessments (98.9% vs. 98.4%) from the previous rate and a decrease in the rate of the increase in the fund balance that would have been otherwise anticipated. The Legislative Fiscal Office recommends acknowledging receipt of the report. Legislative Fiscal Office 2 Emergency Board December 2016

3 30 Department of Consumer and Business Services Heath Request: Report on workers compensation fee changes as required by state law. Recommendation: Acknowledge receipt of the report. Discussion: The Department of Consumer and Business Services (DCBS) runs the state s workers compensation and employee safety and health programs. Two fees, the Workers Compensation Premium Assessment (WPCA) and the Workers Benefit Fund Assessment, account for most of the funding for these programs. The Director of DCBS has the power to set each fee annually in order to operate these programs and to maintain an appropriate fund balance. The Director is required to report changes to the WPCA to the Legislature. DCBS is increasing the WPCA for most employers from 6.2 percent of premium to 6.8 percent of premium. The Workers Benefit Fund Assessment will decrease from 3.3 cents per hour to 2.8 cents per hour. Due to the decrease in workers compensation insurance premiums, the WPCA has to increase in order to maintain the same level of services. The net of the fee increase and the decrease in premium costs is a decrease in total costs for employers. The Department of Administrative Services Chief Financial Office recommends acknowledging receipt of the report. Department of Administrative Services 30-i December 14, 2016

4 November 1, 2016 The Honorable Senator Peter Courtney, Co-Chair The Honorable Representative Tina Kotek, Co-Chair State Emergency Board 900 Court Street NE H-178 State Capitol Salem, OR Dear Co-Chairpersons: Nature of the Request Report to the State Emergency Board on workers compensation premium assessments. Agency Action Under the authority of ORS Chapter 656, the Department of Consumer and Business Services (DCBS) is authorized to collect assessments based on workers compensation insurance premiums from insurers, self-insured employers, and self-insured employer groups to support workers compensation-related programs administered by the department. ORS (5) requires that the assessment be developed through an administrative rule process, and ORS (6) directs DCBS to report the assessment rate to the Joint Committee on Ways and Means or, during the interim between session of the Legislative Assembly, to the Emergency Board or to the Joint Interim Committee on Ways and Means. The rate changes are: Rate Current rate Rate effective January 2017 Premium Assessment Operating Account 6.2 percent 6.8 percent Self-Insured Employers 6.4 percent 7.0 percent Self-Insured Employers Group-Public Sector 6.4 percent 7.0 percent Self-Insured Employers Group-Private Sector 7.2 percent 7.8 percent Workers Benefit Fund 3.3 cents 2.8 cents per-hour per-hour Background Workers compensation pays injured workers for lost wages and medical care for job-related injuries. The rate changes preserve the integrity of our workers compensation system. They do so by helping maintain a positive business climate for Oregon employers while also bolstering worker protections and benefits. Program supported by the workers compensation premium assessments include Oregon OSHA, the Workers Compensation Division, the Workers

5 Compensation Board, the Ombudsman for Injured Workers, and the Small Business Ombudsman. Insurers collect these assessments from each covered employer in the state. Oregon employers will see a key portion of their workers compensation costs drop by an average 6.6 percent in A steady decline in average medical care costs and stable wage replacement costs are the key factors that are driving down the pure premium. This marks the fourth decrease in the pure premium. The decrease in pure premium is based on recommendation from the Florida-based National Council on Compensation Insurance Inc. (NCCI), which analyzes industry trends and prepares rate recommendations for the majority of states. Pure premium reflects only a portion of workers compensation costs, but is the key factor behind annual cost changes. The decrease in an average, so an individual employer may see a larger decrease, no change, or even an increase depending on the employer s own industry, claims experience, and payroll. Also, pure premium does not take into account the varying expenses and profit of insurance companies. The average decrease in pure premium the portion of the premium employers pay insurers to cover claims costs for job-related injuries and deaths is part of a mixture of rate changes. The combination of the changes in pure premium rates and assessment rates is a net reduction in costs for the average employer. The average employer would pay $1.02 per $100 of payroll for claims costs and assessments, down from $1.10 in Oregon s workers compensation premium rates have ranked low nationally for many years. Only six states had average rates lower than Oregon in 2016, according to a biennial study conducted by DCBS. In contrast to changes made in some other states, Oregon has seen no meaningful reduction in worker benefits since at least the early 1990s. Action Requested DCBS respectfully requests that the State Emergency Board acknowledge receipt of this report. Legislation Affected None. Sincerely, Patrick M. Allen Director