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Feb 24

Workers’ comp ‘tax’ an increasing burden

A state surcharge paid by employers to fund New York’s workers’ compensation system is the highest in the nation, putting municipalities under the new tax cap between a rock and a hard place, a new study concludes.

The Workers’ Compensation Policy Institute on Wednesday announced its findings: that a surcharge paid by all employers in addition to their insurance premiums is roughly five times higher than the national average.

And, the institute says, much of that has happened in just the last two years, when the “tax” known as an assessment on insurance premiums was raised by 10.4 percent and 27 percent, respectively.

“This tax burdens all employers — and municipal employers feel this mandate especially acutely as they struggle to provide essential services and contain taxes,” Paul Jahn, executive director of the institute, said.

Workers’ compensation insurance is mandatory in New York — where there is no cap on individual claims — meaning the state system is sometimes described as a “risk pool” for businesses who don’t deal with a private insurer. All employers, however, pay the surcharge.

Thirty-two other states impose a similar “tax” with an average surcharge hovering around 4 percent.

In New York state, that percentage is 20.2 percent.

The next highest state tax can be found in Minnesota, at just 8.9 percent.

“The assessments that we pay to the state are based on our self-funded claims, and that has been going up exorbitantly,” City of Tonawanda Treasurer Joe Hogenkamp said.

But, he said, thanks to a little luck, the city’s current number of open claims is small. He said it hasn’t allowed the state payments to exceed past highs, and despite budget constraints, workers’ compensation costs aren’t currently to blame for any budget gaps.

“A lot of it is luck,” he said.

The city had 27 open claims at the end of 2010, though just eight actually occurred that year, as the number of claims is an evolving list year to year.

To get an idea of that, that means the city is self funded and pays out of pocket for comp claims up to a point, before insurance takes over. The stop loss figure varies, but is roughly a little more than $200,000,  Hogenkamp said.

Of the 27 open claims in 2010 (which simply indicate an injury not a loss of manpower) the city’s insurance carrier valued them at a net $851,000.

As an example of the budgetary impact, he said the city that year budgeted $725,000 to maintain adequate reserves to pay for current and future workers’ comp claims.

Around the same time, in 2011, the city paid a total of $30,000 in state assessments into the system — a number that today would increase along with percentage increases in the state’s assessment rate.

If the city is hit with a high number of claims, the figure could quickly come to impact year to year budgets in a big way, especially since a new state law largely bans tax levy increases of more than 2 percent to otherwise backfill the potential costs.

“New York’s municipalities now find themselves caught between a rock and a hard place,” reads a statement accompanying the latest report by the policy institute. “Their ability to raise revenues is constrained by the 2 percent cap on property tax … the additional increase of the hidden tax on workers’ compensation premiums complicates an already difficult situation and cannot be sustained long term.”

Over in the private sector, North Tonawanda’s Taylor Devices, a publicly traded firm manufacturing all manner of industrial shock absorbers, has had its run-ins with a workers’ compensation system that’s failed in recent years.

While the company, according to President and CEO Doug Taylor, has a favorable claim history, it was forced to settle for a large sum in 2008, after an Albany-based cooperative insurance carrier they had been using went belly up.

Such insurers acting in cooperation with one another had been recommended by the state to companies looking for an answer to high state premiums, but have been the subject of justifiable criticism in recent years, in some cases for  being underfunded and risky.

When the insurance cooperative went bankrupt, companies like Taylor were left to settle or hold the bag — potentially for millions in unpaid claims not even related to the company — since a “joint and several” stipulation of the policy required them to inherit liability for all of the carrier’s clients in the event they went under.

Taylor said since then, his company has secured a dedicated, private policy covering workers’ compensation, but that many new businesses without a demonstrated claim history or businesses with a large claim history may be forced to use the more expensive state system.

Such private insurers are increasingly hard to find in New York, he said. But, Taylor’s Chief Financial Officer Mark McDonough said if enough employers have since found similar dedicated, private policies, it could at least partially explain the state’s explosion in assessment surcharges.

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