Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Department of Industrial Relations (7350)

The mission of the Department of Industrial Relations (DIR) is to protect the workforce of California, improve working conditions, and enhance opportunities for profitable employment. These responsibilities are carried out through three major programs: the adjudication of workers' compensation disputes, the prevention of industrial injuries and deaths, and the enforcement of laws relating to wages, hours, and working conditions. In addition, the department regulates self-insured workers' compensation insurance plans, provides workers' compensation payments to injured workers of uninsured employers and other special categories of employees, offers conciliation services in labor disputes, and conducts and disseminates labor force research.

Budget Proposes Funding Switch for General Fund Savings. The Governor's budget proposes expenditures totaling $244 million for the department in 2003-04. This is 3.3 percent less than estimated expenditures for the current year. The request includes $63 million from the General Fund, 49 percent less than 2002-03 estimated expenditures. This is largely due to the proposed shift of all General Fund support for workers' compensation programs ($72 million) to employer assessments. These payments, which currently provide 20 percent of funding for workers' compensation programs, would have to be increased significantly. If the Legislature does not approve all or a portion of the Governor's proposed funding switch, a corresponding augmentation in General Fund support would be required. 

Budget Proposal for Implementation of Workers' Compensation Package

Background

Most businesses in California purchase workers' compensation insurance from private insurance companies or the State Compensation Insurance Fund (a state-created entity that also provides workers' compensation coverage). Some large businesses and government entities are self-insured. Rather than purchasing insurance to cover these costs, these entities directly pay their workers' compensation liabilities.

The DIR administers state workers' compensation programs that (1) handle cases in which injured workers and insurance companies have not agreed on compensation for injuries and (2) oversee and analyze various aspects of the workers' compensation system. Most of this activity occurs in the Division of Workers' Compensation (DWC), which includes disability rating, claims audits, and the appeals hearing process. The Commission on Health and Safety and Workers' Compensation (CHSWC) and the Industrial Medical Council are involved as well. The budget proposes a total of $109 million for state workers' compensation programs in 2003-04. This includes $105 million from assessments on employers and insurance companies.

Workers' Compensation Legislation Approved in 2002. Chapter 6, Statutes of 2002 (AB 749, T. Calderon), increased disability benefit payments effective January 1, 2003, and adopted changes intended to reduce workers' compensation system costs. Chapter 6 also imposed additional requirements on DIR. In the 2002-03 Budget Act, the Legislature augmented the department's budget by $6.9 million and 62 positions to implement these requirements. The Governor vetoed all of this augmentation except $1 million for workers' compensation insurance fraud activities. Subsequently, the Governor's Mid-Year Budget Proposal requested a one-time suspension of this funding to address the General Fund shortfall. (The department's budget includes this fraud component for 2003-04.)

Budget Request

Proposal Consistent With Chapter 6. For 2003-04, the budget proposes $9.3 million and 72 positions to implement provisions of Chapter 6. Overall, the request appears reasonable and consistent with these provisions. The positions requested mirror the legislative augmentation to a large degree. The key difference from the current-year legislative augmentation is an increase of approximately $2.4 million in consultant contracts for largely one-time activities required by Chapter 6. 

Proposal Addresses System Savings and Anticipated Workload. The proposal, as detailed in Figure 1, addresses specific items in Chapter 6 designed to identify and/or capture savings from the workers' compensation system. In addition, the budget also requests additional positions for anticipated increases in workload due to the reform legislation. Specifically, the budget includes the following: 

• Creation of a Court Administrator to ensure uniform proceedings in the DWC judicial system and supervise the judges.
• Eight additional "judge teams" to handle existing case workload.
• Additional legal staff for (1) various rulemaking proceedings to implement provisions of Chapter 6 and (2) anticipated litigation arising from development of the pharmaceutical and outpatient surgery fee schedules mandated by the new law.
• One-time expenditures for (1) an extensive study of medical treatment costs and outcomes and (2) development of education and training materials for doctors who treat injured workers.
• Programs to (1) pilot education and training for worker safety and health and (2) oversee "loss control" services (that is, identification of workplace hazards and steps to mitigate them) provided by insurance companies.
• Additional vocational rehabilitation staff for anticipated additional workload related to settlements.
• Additional disability evaluation staff for anticipated new workload from a provision that allows multiple medical assessments.
• Additional health plan certification staff for anticipated increased workload.
• Additional claims audit staff to meet the new requirement that all insurance companies be audited at least every five years.

New Activities Do Not Justify Entire Request

We recommend that the Legislature approve $510,000 and six positions for anticipated vocational rehabilitation workload on a two-year limited-term basis. For other activities required by Chapter 6, we further recommend (1) deletion of $333,000 and two positions for absorbable or uncertain workload and (2) approval of $749,000 in contract funds on a one-time basis. (Reduce Item 7350-001-3030 by $249,000 and Item 7350-001-0223 by $84,000.)

As noted above, the request generally appears reasonable and consistent with the requirements of Chapter 6. However, the extent to which some anticipated workload will materialize and/or be ongoing in nature is uncertain, as we note below.

Ongoing Nature of Vocational Rehabilitation Workload Uncertain. The budget requests approximately $510,000 and six vocational rehabilitation positions for additional anticipated workload. Specifically, due to relaxed requirements for settling vocational rehabilitation claims with a lump-sum payment, the department expects an increase in (1) settlements of inactive cases and (2) challenges to eligibility for vocational rehabilitation services. In our estimation, settlement of inactive cases should constitute one-time workload, and it is unclear how many eligibility challenges will occur. Furthermore, the easier ability to settle vocational rehabilitation claims could, in fact, reduce ongoing workload in this unit by removing cases from the system more quickly. Consequently, we recommend approval of the request on a two-year limited-term basis.

Cost of Revising Claim Form and Notices Should Be Absorbed. The budget includes a one-time $54,000 request for consultants to revise (1) the benefits eligibility notice and claims form and (2) notices posted in the workplace and given to new employees, as required by Chapter 6. Specifically, these notices and forms must include particular information regarding workers' compensation in an easily understandable format available in English and Spanish. This authority to determine the content of notices and claims forms is part of the department's ongoing regulation of the workers' compensation system. Furthermore, it is relatively minor workload. As a result, we recommend that this one-time request be absorbed and, therefore, deleted from the proposal.

Worker Safety and Health Program. The budget proposes $1.1 million and two positions for CHSWC to develop and implement an education and training program for worker safety and health. This includes $186,000 for two administrative positions and $874,000 in consultant contracts for program development. The request proposes a pilot phase for the first year of the program. The proposal for consultant funds includes:

• Program design.
• Evaluation of the pilot program.
• Research to (1) identify high-risk industries for program targeting and (2) estimate business costs of injuries and potential savings from training.

We have two concerns with this portion of the request. First, one of the proposed positions (at a cost of $78,000) would spend more than half of his/her time on an annual report, even though the contract would include an evaluation. Second, research funding is proposed to determine future industry targeting ($125,000), although existing data that identify high-risk industries are available from the department's Division of Occupational Safety and Health and the U.S. Department of Labor. Consequently, we recommend deletion of $203,000 and one position for these purposes. Further, because the request is for a pilot phase in 2003-04, we recommend that the Legislature approve the remaining $749,000 request for contract funds on a one-time basis so that the need for continued funding can be reviewed next year.

Oversight of Loss Control Services. The budget also includes $137,000 and two positions for CHSWC to administer a loss control oversight program. Chapter 6 eliminated previous requirements that DIR (1) certify loss control consultation services provided by insurance companies to their clients and (2) audit insurers for compliance. Instead, Chapter 6 requires the department to (1) inform employers that insurers provide loss control consultation services and (2) respond to questions and complaints about services provided. The department has provided minimal justification for the two proposed positions. Its request relies on the expectation of a sizeable number of complaints and questions. It is unclear whether this workload will materialize. At this time, we recommend approval of one of the two positions, for a savings of $46,000. The need for additional resources could be reassessed once actual workload is known.

CHSWC Consultation to DWC. The budget proposes $30,000 for CHSWC to assist DWC in meeting particular requirements. Specifically, DWC must determine the form and content of workers' compensation information given to new employees as well as the benefits eligibility notice and claim form (discussed above). Chapter 6 also requires DWC to prepare a July 1, 2004 report on injured workers' access to disability funds (especially migratory and seasonal farm workers). The DWC is to consult with CHSWC in performing these functions, but DWC has primary responsibility for fulfilling these requirements. Since DWC is responsible for these items, we recommend deletion of the proposed $30,000 funding for CHSWC.

Summary of Recommended Approach. Figure 1 shows the net effect of our recommendations compared with the budget proposal. Specifically, we recommend:

• Deletion of $333,000 and two positions for CHSWC activities and revision of notices and forms by DWC.
• Approval of $749,000 in contract funds for worker safety and health on a one-time basis.
• Approval of $510,000 and six positions for vocational rehabilitation on a two-year limited-term basis.

Option to Defer Some Requests

If the Legislature would like to further limit the cost of this proposal in response to the state's fiscal condition, there are $3 million in additional savings (beyond the above recommendations) that could be achieved by deferring some requests to see if anticipated workload materializes and by relying on existing fraud and workplace safety programs.

As discussed previously, the overall request appears reasonable and consistent with the requirements of Chapter 6. If the Legislature, however, would like to limit the cost of this proposal in response to the state's fiscal condition, some items could be deferred to see if anticipated workload materializes. These items include the proposals for vocational rehabilitation, disability evaluations, and certification of health plans to provide workers' compensation-related treatment. This would save $1.1 million and 14 positions.

By deferring implementation of fraud initiatives and the education and training program, an additional $1.9 million in savings (and one position) is possible. The department has existing business inspection programs that cover labor law enforcement and workplace safety. Our review of these inspection programs in the 2002-03 Analysis showed that over the last several years, workplace injuries have declined and the department has found fewer labor law and safety violations. Given this improved compliance record for the existing inspection programs, we think the specific fraud and worker-focused safety and health activities mandated by Chapter 6 could reasonably be deferred.

As described above, the Governor proposes to shift the costs of workers' compensation programs from the General Fund to the employer assessment. If this proposal is approved, the additional savings described above would accrue to employer, insurance company, and health plan fee/assessment funds. These assessments could be reduced accordingly. If, however, the fund shift proposal is rejected, these savings would accrue both to the General Fund and the fee/assessment funds—$2.2 million and $0.8 million, respectively.