Friday, April 6, 2012

Privatization of State Funds Won't Avoid the Long Arm of the Tax Man

Hard times for state budgets make for consistent headlines in workers' compensation news as state insurance funds become targets for raids against surplus prompting attempts to privatize them, which provokes other revenue issues.

Top headlines in WorkCompCentral News this morning involve two such stories - Maryland's Injured Workers Insurance Fund (IWIF) and the Missouri Employers Mutual Insurance Co. (MEM).

The provocation for privatization of both state's carriers is the same - continuous attempts in the past (and present) to siphon money out of the carrier's reserves in order to supplement general fund revenues. Since I'm from the workers' compensation industry my bias is obvious - state legislators have no business tinkering with money that is intended to ensure a healthy insurance environment where the system around which the carriers exist requires mandatory participation by the state's employers and workers.

But state legislators pull out all the tricks in challenging the resistance to the raids - for instance, now that both IWIF and MEM have support for some privatization, legislators are seeking either back taxes from which these entities were previously exempt, or current taxes on certain assets.

In Maryland, the debate is what IWIF may owe the government in taxes if it goes private. The Maryland House of Representatives agreed by a voice vote on Thursday to send Senate Bill 745 back to the state Senate, where members voted later in the day to reject a House amendment that would prevent IWIF from paying premium taxes dating back to 1941, when the state first imposed the tax.

IWIF was exempt from the 2% premium tax until last year and could owe as much $100 million in back taxes, according to one state estimate.

Last year IWIF beat back efforts by Gov. Martin O'Malley to take $20 million of IWIF's surplus.

This year it is fighting the Budget Reconciliation and Financing Act of 2012, which would require O'Malley to take $50 million of IWIF's estimated $322 million in surplus by July 1, 2013. That bill is pending in a House-Senate conference committee.

In the meantime both versions of SB 745 require the Maryland Insurance Administration to hire an outside consultant and report back on the "real value" of all benefits IWIF has received since it was created.

In Missouri, legislation is pending requiring a study to decide whether the state has a claim to part of MEM’s $161 million surplus.

SB 856 by Sen. Scott Rupp, R-Wentzville, would establish the "Senate Interim Committee on the Structure of the Missouri Employers Mutual Insurance Co." The bill passed on a 26 to 7 vote.

The bill still requires approval by the House of Representatives.

The Missouri Legislature created MEM in 1993 to promote competition in the marketplace and lower workers’ compensation premiums for employers – especially small businesses. Because the governor appoints three of the five MEM directors, the insurer is exempted from federal taxes as an “independent public corporation.”

SB 624 by Sen. Jim Lembke, R-St. Louis, and SB 660 by Sen. Eric Schmitt, R-Glendale, would require MEM, by 2014, to convert to a private mutual company operating under the same state laws and regulations as other workers’ compensation carriers. SB 660 also would require that MEM transfer $127 million from the company's surplus funds to the state treasurer for deposit into the state's general revenue fund.

In the meantime, the interim committee would be required to meet at least twice between August and December of this year, and to study whether MEM should be sold, privatized, or have its current structure modified. It would also be required to calculate the value of MEM in case the committee recommends selling the company to another insurer.

In my opinion a mandatory participation insurance system, like workers' compensation, can not operate without either a state fund, or (in my opinion less desirable) or a residual market. These are the only alternatives to small business, which comprise the majority of insureds in any state - and are particularly subject to volatility in smaller states.

If a state is going to privatize a state fund, then it needs to implement a residual market. But the problem with residual markets is that the size of the market is divided among all participating carriers, diluting the overall capacity for the high risk small businesses meaning that their premiums are out-sized in comparison to their payroll ratio.

This in my opinion is a short sighted view of a state's economy, and could end up further exacerbating an already delicate situation by making small business activity even less attractive thus impairing further taxation revenue down the road.

But when it comes to meeting government's obligations, the immediate future takes precedence - the money will be found!

There's an old saying in tax law circles - what the government giveth, the government taketh away.

In the world of workers' compensation insurance though, the government should leaveth alone!

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