The Times Union recently reported how the Workers' Compensation Board is mitigating the group trust default problem. What the board has done to help group trust employers ultimately resolve this issue seemed all but impossible in January 2011, but today it's working.
Starting in the early 1990s, a small percentage of employers chose to join self-insured group trusts instead of buying workers' compensation insurance. Trust payments were cheaper than traditional insurance but coverage wasn't guaranteed. Under law and by their agreements, all members were equally responsible for all the trust's claims.
While each trust was different, in general, unscrupulous trustees, financial consultants, brokers, administrators and adjusters conspired to defraud the trusts and the state by understating trust reserves in audited annual financial statements. This generated significant profit for themselves and lower immediate costs to trust members, but created large, long-term unfunded liabilities.
By 2007, the result of under-funding was apparent. Trust members began abandoning their injured workers' claims. Twenty-three trusts "defaulted" by 2011, leaving their administration, payment of their claims, and more than $1 billion in unfunded liabilities to the board.
The Cuomo administration immediately confronted the problem and the mountain of litigation we inherited. The board is filing and prosecuting hundreds of millions of dollars of third-party lawsuits against the bad actors responsible for the defaults. In the 2011 budget, Gov. Andrew Cuomo closed the group trust program, leaving only the healthiest trusts. Today, three fully funded trusts that post assets against future default remain. That legislation also reduced the trusts' liability up to 25 percent by forgiving future workers' compensation assessments.
The board assumed 7,515 claims; only 3,027 claims remain open.
Defaulted trusts face liabilities that won't be reimbursed by recoveries in third-party lawsuits, and, unfortunately, their members cannot afford large lump sums to cover these obligations. Nonetheless, injured workers are due weekly lost wage and medical payments. If members refuse to pay their obligations, other employers that had nothing to do with these trusts must fund those claims.
To mitigate this problem, in March 2013, the governor, working with the Legislature, signed the Business Relief Act, which among other things authorized bonding up to $900 million to purchase insurance policies to pay group trusts' claims. On Dec. 4, the Dormitory Authority raised $370 million in the first offering. By year's end, the board will purchase insurance for the two largest trusts; additional purchases are planned.
These actions permit the board to offer individual employers immediate settlements, repaying their debt over extended periods at low interest.
We must credit the many defaulted trust members who worked with us to settle their obligations. The board has contracted trust recoveries of $217 million; more settlements are finalized every day.
However, pursuant to legislation, if defaulted trust employers don't cover their claims, innocent, responsible employers would therefore pay for businesses that enjoyed many years of lower costs.
Unfortunately, some uncooperative trust members refuse to acknowledge their responsibility to injured workers, so the board uses legislatively granted powers to collect from them. The board does this only to ensure employers who agreed to pay their injured workers' claims actually pay those claims. So if you own a small business and hear trust members complain the board is attempting to collect from them, ask yourself: Do you want to pay higher premiums so other employers can abandon their obligations?
The writer is executive director of the state's Workers Compensation Board.