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April 15, 2010

L&I makes Inter-fund transfer to Supplemental Pension Fund

Job losses in this deep recession have caused a rapid drop in worker hours reported to L&I. As a result, the Supplemental Pension Fund (SPF), a pay-as-you-go fund without reserves, expects a temporary shortfall of $15 million. To cover this shortfall, L&I made a short-term, inter-fund transfer from the $3.2 billion Pension Fund, and then will fully repay the fund within 45 days with interest. This action will ensure that all injured workers receive their full total-disability payments without delay.

Q: Is there an alternative to an inter-fund transfer?

A: A mid-year SPF rate increase would have been another way to deal with this shortfall. But this could have a detrimental effect on businesses and workers who pay this insurance premium.

Q: Was this fund transfer expected?

A: Yes: The Supplemental Pension Fund is particularly sensitive to a drop in hours because, by law, it cannot build a reserve for future liabilities. Due to the nature of the pay-as-you-go SPF and quarterly swings in the fund’s cash balance, the Legislature also anticipated that temporary shortfalls were possible.  Periodic inter-fund transfers are authorized in RCW 51.44.160. Historically, L&I has maintained an asset balance that is merely a cushion of one quarter’s worth of payments in the SPF – about $80-$100 million. The asset balance was depleted when worker hours decreased 6.4% from the third quarter of 2008 to the third quarter of 2009. With growing liabilities and reduced premiums, the balance has declined to less than $20 million. Similar transfers and repayment may be needed over the course of the next year.

In funds where the legislation permits us to carry a reserve, approximately $600 million is contained in the contingency reserve.

Q: Who receives benefits from the Supplemental Pension Fund?

A: The funds are used to pay cost-of-living adjustments to State Fund and self-insured injured workers and beneficiaries receiving long-term time-loss and pension benefits. SPF premiums are collected from all self-insured and State Fund employers, and half of the premium can be deducted from employees’ wages. The premiums are paid quarterly.

Q: Did L&I raise premiums in the Supplemental Pension Fund in 2010?

A: The SPF premium rate was increased 16% in 2010, based on projected work hours and liabilities. This increase will help maintain the balance as money comes into the fund and is paid out. However, we expect to see other quarterly shortfalls in the SPF this year and in the first quarter of 2011 due to the depleted asset balance, depending on when reported hours begin to increase as the state comes out of the recession.

Q: How will the transfer be done?

A: L&I worked with the State Treasurer’s Office and the State Investment Board to develop a process for transferring the money and repaying it. The money will be repaid, with interest, as soon as the next quarter’s premiums are received – within 45 days. The amount of interest paid to the Pension Fund will be the same as the money would have earned had it not been transferred. The Pension Fund currently has assets of $3.2 billion.

Q: Why is the SPF operated on a pay-as-you-go basis?

A: Before the SPF was established, the state’s General Fund paid cost-of-living-adjustments for injured workers. The Legislature transferred this obligation to the SPF in 1971 and, at that time, the fund started off with no assets from the General Fund but with liabilities. The law that was passed to set up the SPF required it to operate on a current-payment basis and to not accumulate reserves to use for future payments. When premiums are collected each quarter, the fund is replenished. The Legislature understood the volatility of a cash fund and provided for this type of transfer to ensure all injured workers receive their full total disability payments without delay.

For additional information: Elaine Fischer, NELE235@lni.wa.gov 360 902-5413

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