The 5th meeting of the Interim Joint Committee on Labor and Industry was held on Thursday, November 19, 2009, at 10:00 AM, in Room 131 of the Capitol Annex. Representative Rick G. Nelson, Chair, called the meeting to order, and the committee assistant called the roll.
Present were:
Members: Representative Rick G. Nelson, Co-Chair; Senators Julian M. Carroll, Ray S. Jones II, Katie Kratz Stine, Gary Tapp, and Jack Westwood; Representatives Will Coursey, C. B. Embry Jr., Tim Firkins, Richard Henderson, Dennis Horlander, Joni L. Jenkins, Adam Koenig, Mary Lou Marzian, Charles Miller, Tom Riner, Charles Siler, Jim Stewart III, and Brent Yonts.
Guests: Helen W. Mountjoy, Secretary, Education and Workforce Development Cabinet; J.R. Wilhite, Executive Director, Kentucky Workers’ Compensation Funding Commission; Steve Lattanzio, President, Actuarial and Technical Solutions, Inc; Christine Fitzgerald, Actuary, Actuary and Technical Solutions, Inc.
LRC Staff: Linda Bussell, Carla Montgomery, Adanna Hydes, and Betsy Bailey
Representative Nelson introduced Secretary Mountjoy and thanked her for her service to the committee during her tenure as Secretary of the Education and Workforce Development Cabinet and as chair of the Unemployment Insurance Task Force.
As part of her report on the Unemployment Insurance Task Force, Secretary Mountjoy included a brief historical overview of the problems with the unemployment insurance trust fund. She said the current financial problems of the program are similar to those experienced in 1982. Kentucky’s highest unemployment rate occurred in 1982 and federal loans were necessary to continue payment of unemployment benefits. Like now, a task force representing a partnership between management and labor was created to restore solvency to the unemployment insurance trust fund. The task force crafted a set of recommendations that were subsequently enacted by the General Assembly. The 1982 legislation was sufficient to keep the unemployment insurance program solvent for 27 years.
Secretary Mountjoy referred to charts provided to the members that included statistics on Kentucky’s unemployment rate, trust fund balances, benefit payouts, average weekly benefit amounts, and similar statistics from surrounding states. The information illustrated the fact that Kentucky’s unemployment insurance trust fund was on its way to depletion before the current recession began at the end of 2008. She attributed most of the financial instability to the structural imbalance discussed in previous meetings. The structural imbalance is the result of a fixed taxable wage base of $8,000 and weekly benefits that increase annually with inflation. She said the key to the problem is creating more jobs. During periods of low unemployment, the trust fund builds up reserves. In 2001, the unemployment rate began increasing in Kentucky, leveled off in 2004 through 2007, and increased significantly in 2008 and 2009. Since at least 2002, the trust fund has been paying out more in benefits than it has collected from employers in payroll taxes or contributions. She reported that this year, the state has borrowed $500 million from the federal government to pay unemployment benefits and that the unemployment rate for October was expected to be higher than the 10.9% rate for September. Kentucky’s unemployment rate is higher than it is in surrounding states.
Secretary Mountjoy informed the committee that the task force had not completed its work and would probably meet during the first week of December to finalize its recommendations. Responding to questions and comments from Representative Siler and Representative Yonts, she said she believed the task force will produce recommendations, but the recommendations might not include everything that has been discussed or suggested by the consultants, and that discussions are ongoing in Congress about extending the waiver of interest on the federal loans.
The final item on the agenda was a report from the Kentucky Workers’ Compensation Funding Commission. J.R. Wilhite, the Executive Director for the Kentucky Workers’ Compensation Funding Commission, introduced Steve Lattanzio and Christine Fitzgerald from Actuarial and Technical Solutions, Inc. Mr. Wilhite said the Workers’ Compensation Funding Commission is required to update the committee annually on the assessments on employers that fund workers’ compensation programs. He provided a brief overview of the duties of the commission since its creation in 1987 with particular emphasis on the history of the Workers’ Compensation Special Fund. He said the liability of the Special Fund in 1987 was estimated to be $1.6 billion. In 1996, the liability had increased to about $2.5 billion. Consequently, the General Assembly enacted legislation to close off future liabilities of the Special Fund and revised the funding mechanism with the objective of paying off the liability by 2018. In addition, the Coal Workers’ Pneumoconiosis Fund (CWP) was created with its own payment and assessment mechanism to pay black lung liabilities arising after December, 1996.
Mr. Wilhite said actuaries have determined the current liability of the Special Fund is down to $1.6 billion which indicates progress since 1996. He reviewed statistics included in members’ folders on the history of assessment collections and payouts from the Special Fund. He noted the additional assessment on the coal industry that was in place from 1987 to 1996 that reflected the majority liability that was attributable to the coal industry. In 1996, the additional coal assessment was replaced with an annual allocation of $19 million from the coal severance tax which was subsequently suspended by the General Assembly.
Mr. Wilhite reported that for 18 out of past 22 years, money was made on the investments of the Special Fund assessments, but not during the past 4 years. The drop in investment income, the suspended severance tax allocations, and the decline in workers’ compensation premiums presents a challenge for paying off the liability by 2010. Because of these factors, actuaries were asked to calculate an assessment rate that would be sufficient to pay off the liabilities by 2018 as required by statute. In addition, the actuaries were asked to determine the date at which the liabilities could be fully funded if the current assessment rate of 6.5%, which has been in place for the past 4 years, was maintained.
The actuaries determined that to achieve full funding by 2018, the current assessment rate would have to be increased to about 10% or 10.09% on employers’ workers’ compensation premiums. The alternative calculation based on keeping the assessment rate at 6.5% and going forward would provide sufficient funding by 2029. Mr. Wilhite said the Funding Commission recommended continuing the Special Fund assessment at 6.5% for 2010 and requests a statutory change that would extend the payoff date from 2018 to 2029.
The Funding Commission’s recommendation for the CWP Fund assessment for 2010 was 0.5% on coal industry workers’ compensation premiums and 0.435 cents on each ton of severed coal.
Steve Lattanzio and Christine Fitzgerald, actuaries with Actuarial and Technical Solutions, Inc. presented overviews of their analyses of the liabilities of the Special Fund and the CWP Fund on which the Funding Commission based its recommendations for 2010. Mr. Lattanzio reiterated the fact that the actuarial analysis determined the liability of the Special Fund, as of June 20, 2009, to be approximately $1.6 billion and that recent revenue impacts will prevent the Special Fund liabilities from being fully funded by 2018, as required by the workers’ compensation statute.
The actuarial analysis of the Coal Workers’ Pneumoconiosis Fund, projected that by December 31, 2010, with no liabilities discounted, the CWP fund could reflect a $3.9 million deficit. Based on that finding, the Funding Commission recommended assessment rates for the CWP Fund for 2010 to be 0.50% on a coal employer’s workers’ compensation premiums and 0.435 cents on each ton of severed coal.
The meeting adjourned.