Since 1966, New York has permitted employers within a given industry to cooperate in forming group self-insured trusts to provide workers' compensation benefits. Under the statute that authorized the formation of GSITs, and by contract, each member of the GSIT is jointly liable for the workers' compensation obligations of other members. GSITs made agreements with private entities to administer the trusts, and one such entity-Compensation Risk Managers-entered into agreements with numerous GSITs.
In 2008, the state asserted that CRM had depleted the reserves of the trusts it administered, causing insolvency, by deliberately understating liabilities and employing excessive premium discounts to induce members to participate in the trusts. The state also alleged that CRM failed to pay claims in a timely manner.
The Workers' Compensation Board sued CRM in 2009, seeking the recovery of $405 million. After the suit was filed, the attorney general's office stated that the funding shortfalls attributable to CRM caused "hundreds of millions of dollars of unfunded liabilities" and subjected the members of CRM's trusts and unrelated GSITs "to assessments to cover those shortfalls." CRM surrendered its license to manage GSITs in 2009 without admitting liability. A proposed $41 million settlement of the lawsuit has still not been consummated.
The state has been aggressive in using legislation that permits losses caused by insolvent trusts to be recovered through assessments, and those assessments have spawned litigation that continues to this date. In one case, Held v. State of New York, 12 solvent GSITs sued to challenge assessments levied to recoup losses caused by unrelated insolvent GSITs. The 12 GSITs had aggregate assessments of $155,000 in 2007; in 2008, the state increased those assessments to $12 million.
The court ruled that the assessments were unconstitutional as violations of the "takings" clause of the U.S. and New York constitutions. However, that decision was reversed on appeal. The Appellate Division concluded that the "amounts of the assessments may have been unanticipated, but it cannot be said that their economic effect on plaintiffs rises to a level of a taking." The state Court of Appeals and the U.S. Supreme Court refused to hear the case.
Despite the state's success with the Held appeal, the financial condition of the program only worsened. A state task force on group self-insurance issued a report in June 2010 that projected that the total program deficit would eventually exceed $600 million. While the program had created savings in prior years, the task force concluded that "the inherent risk of group self-insurance, combined with the financial risks posed by insolvent groups, far outweigh the potential benefits."
The task force went on to recommend that legislation be prepared to terminate the self-insurance program effective Dec. 31, 2010. Legislation adopting that recommendation was passed in 2011. Nevertheless, the state continues to issue assessments against GSIT members, which include small and midsize employers that employ a large percentage of the employees covered by the program.
One can argue that the power of government should never be used to correct funding shortfalls by collecting funds from parties who had no role in causing those losses. The state would argue that it is merely enforcing a statute created by the Legislature. Yet at a time when New York's small and midsize employers struggle to survive, the staggering deficits of the GSIT program are being shifted to those least able to pay.
Under the guise of helping employees, the state's assessments threaten the financial health of many of the very businesses that employ them.
Edward P. Yankelunas is a Buffalo-based partner in the law firm of Underberg & Kessler LLP.1/11/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.