Washington Research Council Blog

U.S. Chamber gives WA poor marks for employment laws and regulations

At Olympia Business Watch, AWB president Don Brunell writes that the latest review of state employment laws and regulations by the U.S. Chamber of Commerce again places Washington in the "poor" category, along with 14 other states. The Chamber's study assigns each state one of three grades: Good, Fair, Poor. 

As Brunell points out, there are direct negative jobs effects from excessive regulation.

If all states were to improve their regulatory climate to the levels discussed in the report, the effect would be a one-time boost of 746,462 jobs. Moreover, the rate of new business formation would increase by 12% resulting in the creation of 51,590 new firms each year across the country. In Washington State, the Chamber says 17,847 new jobs would be added and 12,167 new businesses.

A timely reminder to legislators as they consider how to spur investment and job creation.

The Comprehensive Annual Financial Report and Workers' Comp Audit

The State Auditor's Office has released its 2011 Comprehensive Annual Financial Report (CAFR) Summary.  Total government expenses declined 7.42 percent from 2010, with the largest reductions coming from workers' compensation (-71.44 percent) and unemployment insurance (-21.97 percent). 

Unemployment compensation activity reported operating income of $171 million in fiscal year 2011 versus a loss of $985 million in fiscal year 2010.  Unemployment premium revenues collected from employers rose approximately $300 million and benefits paid decreased about $1 billion from the prior fiscal year. This billion dollar reduction in benefits reflects a decrease in the number and duration of claims, the end of a federal supplemental payment and some claimants exhausted benefits.

The Unemployment Trust Fund has a cash balance of $2.554 billion at June 30, 2011. According to Standard & Poor’s, most states do not have a positive balance in their unemployment fund and Washington state has sufficient cash to fund benefits for 15
months.

Similarly, "Workers' compensation activities reported a gain of $1.8 billion in fiscal year 2011 versus a loss of $1 billion in fiscal year 2010."  That's due to increased premium revenues as well as claims expenses being reduced $3 billion, "mainly due to the effect of workers' compensation reform legislation and the expectation of lower future claims costs." 

More information on the workers' compensation program is available in the Auditor's audit of the program during FY 2011, which was also released this week.

More points of interest from the CAFR summary:

• Tax revenues increased 8 percent over 2010: "Moderate increases in sales and business and occupation tax revenues were due to a slight increase in taxable sales largely due to an increase in the business and occupation tax rate on services and a tax penalty amnesty program."
• The state debt burden increased 1 percent.
• The Budget Stabilization Account balance as of June 30, 2011 was $564,000 (at the end of FY 2008, the balance totaled $302.7 million).
• PERS 1 and TRS 1 have significant unfunded liabilities, but the liabilities declined in 2011 thanks to the legislature's elimination of an automatic annual benefit increase.

2012 Workers' Comp and UI Taxes

Today the Department of Labor and Industries (L&I) and the Employment Security Department announced the workers' compensation and unemployment insurance tax rates for 2012. 

For workers' compensation, there will be no overall increase in premiums.  The L&I press release states:

In September, the agency proposed a 2.5 percent increase. The decision to hold overall rates flat in 2012 is due to public testimony about the impact of the recession and recent positive trends in claims duration, according to L&I Director Judy Schurke.

Also:

Schurke noted that the workers’ compensation reforms passed during the last legislative session will save $150 million in workers’ compensation premiums in 2012. This is part of the $1.1 billion in reform savings over four years.

While there will be no overall rate increase, individual employers may see their rates go up or down, depending on their recent claims history and changes in the frequency and cost of claims in their industry.

The full rate table is available here.  According to L&I, "In total, 171 risk classes will increase and 146 risk classes will decrease or stay the same."  This is the first time since 2007 that general rates are not increasing.

For unemployment insurance, "tax rates will decrease in all 40 rate classes in 2012."  Further, tax rates will be lower for 88 percent of employers, and the average tax rate will decrease by 13 percent.

In a press conference, the governor and the department directors credited reforms to both systems made earlier this year for keeping rates from rising.  For more information on the reforms, see here and here.

Taxes on table in NY, Colorado; California governor wants pension reform

As Washington lawmakers look at bleak budget options, they may find some guidance in proposals elsewhere.

Colorado voters decide the fate of Proposition 103 next Tuesday. Stateline.org describes it this way:

Proposition 103, a measure that would increase sales and income taxes to provide money for public education. The controversial measure, which would generate $2.9 billion over the five years the tax increase would be in effect, is lauded by supporters as “standing up for better schools” and vilified by opponents as a “job killer.” 

The arguments don't change much from state to state. 

The most recent poll, taken in August by the group Public Policy Polling, showed opposition to the measure leading by a margin of 47 percent to 45 percent — well within the four percent margin of error. 

While that looks close, any tax hike polling that low this close to the election has to be considered a long shot.

In New York, a millionaire's tax is scheduled to expire at the end of the year. Gov. Cuomo wants to let it go; predictably, a lot of folks disagree with him. Here's a link to the story at NPR.

The competitiveness of this state is hurt when you're one of the highest tax states in the nation, and businesses and people are more mobile than ever before," Cuomo said. "I also believe that point is all but inarguable."

True. But he's getting an argument anyway from the OWS crowd, liberal activists, and union leaders. (That's not entirely redundant, though there's obvious overlap.)

Tackling the spending side of the ledger, California Gov. Jerry Brown wants pension reform. Calculated Risk says if he's successful, it's a model for other states.

A big "if" ...

The San Francisco Chronicle outlines the plan:

Gov. Jerry Brown unveiled a 12-point proposal on Thursday aimed at shrinking the costs of public employee pension benefits in California, in part by raising the retirement age for most new employees from 55 to 67.

The plan would affect state, city, county and other public workers, including teachers, police and firefighters. Public safety workers would be allowed to retire with full benefits before the age of 67 depending on their ability to perform their jobs.

Brown also called for workers to increase contributions toward their benefits, and wants to institute a "hybrid" pension model that would combine traditional pensions with a 401(k)-style plan. The Democratic governor's plan would require that all public workers pay as much into their retirement savings as the government does, and is forecast to save from $4 billion to $11 billion in public funds over the next three decades.

While Washington faces a more manageable problem than California, Brown's plan represents the kind of thing we need to see more often. And, with a nod to the pro-tax movement in Colorado, New York, and elsewhere - including Washington - structural spending reforms like this will have to occur before voters embrace widespread tax increases.

Economic Assumption Changes for WA's Retirement Systems

Yesterday the Pension Funding Council met and agreed to make changes to the economic assumptions of state retirement systems, including lowering the investment return assumption from 8 percent to 7.9 percent for the 2013–15 biennium.  Additional reductions in later biennia were not agreed to at this time.

At the end of August, the Office of the State Actuary had released reports on the financial condition and long-term economic assumptions of the state's retirement systems.  The actuary is required to make these reports to the Pension Funding Council every two years. 

Overpayment of Unemployment Benefits in WA

In a blog post yesterday, the Wall Street Journal (WSJ) reported that the U.S. Department of Labor (DoL) has released data on overpayment of unemployment benefits.  As part of a plan to lower these overpayments, DoL will target certain states with high overpayment rates--including Washington.  

Nearly $19 billion in state unemployment benefits were paid in error during the three years that ended in June, new Labor Department data show.

The amount represents more than 10% of the $180 billion in jobless benefits paid nationwide during the period. . . .

Improper payments most often occur when recipients claim benefits even though they have returned to work; employers or their administrators don’t submit timely or accurate information about worker separations; or recipients don’t correctly register with a state’s employment-service organization.

The Labor Department launched a plan to crack down on the improper payments, targeting Virginia, Indiana, Colorado, Washington, Louisiana and Arizona in particular for their high error rates. Those states will undergo additional monitoring and technical assistance until their error rates dip below 10% and remain there for at least six months, according to the Labor Department. . . .

The data is available at the DoL website here (and here for Washington specifically).  Washington is one of 13 states with an improper payment rate of over 14 percent.  The DoL data shows that over a three-year period, Washington's improper payment rate was 14.13 percent and improper payments totaled over $775 million.  DoL estimates that 72 percent of the overpayment was due to "work search issues" (meaning that there was an "inability to validate that the individual has met the state's work search requirements, which disqualifies the claimant from being eligible for benefits.")

The WSJ post includes a handy sortable chart showing the total unemployment benefits paid, the estimated overpayment and the percent paid in error, by state.  Per the post, though, DoL cautions:

it may be misleading to compare one state’s payment accuracy rates with another state’s rates… States with stringent or complex provisions tend to have higher improper payment rates than those with simpler, more straightforward provisions.

That said, according to the WSJ chart, Washington paid the 11th highest total amount of unemployment benefits from July 2010 to June 2011 and had the 9th highest overpayment over that period, making our percent paid in error 15.1 percent.

WA has Highest Workers' Comp Benefits per Covered Worker

Last week the National Academy of Social Insurance released its report on workers' compensation for the year 2009.  Based on the state-specific data in the report, 2009 benefits paid per covered worker in Washington were the highest in the nation at $857.32.  The state with the second highest benefits per covered worker was West Virginia at $754.79, followed by Alaska at $719.04.

Additionally, the report includes significant revisions to benefits data from 2005-2008.  Last year's report (the original 2008 data) put Washington at second highest in benefits per covered worker ($778.36) behind West Virginia ($902.13).  Incorporating the revisions, Washington actually paid the highest benefits per covered worker in the country in 2008.  Although Washington's number didn't change, West Virginia's was reduced to $730.01.  

When you look at benefits as a percent of covered wages, Washington was the third highest in 2009 at 1.82 percent, following West Virginia at 2.10 percent and Montana at 1.89 percent.  Washington was also third highest the past few years.  Washington's benefits as a percent of wages were 1.69 percent in 2008 and 1.57 percent in 2007.

Workers' Compensation Reforms in Other States

Apparently Washington wasn't the only state to make significant changes to its workers' compensation system this year.  An article in Stateline today discusses cost-cutting measures that were enacted in several states.  The article also includes a handy sidebar with the key changes made in Montana, Illinois, Oklahoma, Washington, Kansas, and North Carolina.

Like Washington, Montana has a highly costly workers' compensation system. In 2008, Washington ranked 2nd in benefits paid per covered worker ($778.36); Montana ranked 5th ($595.88).  Washington ranked 3rd in benefits paid as a percent of covered wages (1.69 percent); Montana ranked 2nd (1.83 percent).

The article notes that this year's reforms in Montana have already been effective:

Insurers in the state have lowered premiums by 20 percent, and a further reduction of 10 to 15 percent is expected within the next five years. The new law shortens the period in which workers can receive medical benefits, and specifies which doctors they can see and how well those doctors are compensated. If an employee is injured on a break while away from the workplace, the employer is no longer likely to be on the hook for lost wages and medical expenses.

In Washington, changes made by the legislature included allowing a settlement agreement option for certain workers and creating a medical provider network.  (For more on this year's reforms in Washington, see here; and for other briefs on workers' compensation, see here, here, and here.)  It remains to be seen how the changes made in Washington will play out, but we expect that they will help reduce the costliness of our system.

A business perspective on recent legislative session

That's what I try offer in this commentary in Crosscut. Here's how I frame it.

Legislative post mortems generally report that business interests had a good session. That’s a fair but incomplete conclusion. The progress made this year in Olympia will improve Washington’s economic competitiveness. However, much more remains to be done.

Let’s look first at the accomplishments: Unemployment insurance tax relief, workers’ compensation changes to reduce costs, adjustments in employee compensation and pension reform to create a more sustainable budget, and expanded use of competitive contracting to increase productivity and create private sector jobs.

While collectively significant, in most cases these changes were incremental and modest.

The piece goes on to review some national competitiveness studies that assess how Washington fares against other states.

Please take a look at it and give me your thoughts.

Protecting state pension funds

Following up on Jay Inslee's proposal for the state to invest a small part of pension funds in start-up companies, Erik Smith examines the issue at Washington State Wire. We've been skeptical of the idea in the past. The simple, singular goal of the investment board is, well, Smith has a good quote from the board's executive director:

“I think oftentimes people confuse economic development with investing,” said director Theresa Whitmarsh. “Our primary duty is to invest at a prudent amount of risk, maximizing return at a prudent level, and so we are not in a position to take into consideration collateral benefits like economic development in our investment decision-making process.”

Makes sense. I'm quoted in the story. And while we're talking about pensions,Harvard economist Edward Glaeser has a great column on how to make state systems solvent in Bloomberg today. No, he doesn't recommend using them as venture capital.

Moving forward, the natural solution is to switch to defined-contribution 401(k)-style plans. The biggest virtue of these plans is that their cost is immediately obvious, which eliminates the hidden cost bias that pushes toward excessive pensions.

Washington, as we've noted previously, is in relatively good shape compared with many states. But the shift to DC plans makes sense here as well.