Mo. auditor confirms insolvency of disability fund

JEFFERSON CITY, Mo. -- A state fund for disabled workers is about $25 million in the hole with no means to dig out of its troubles unless lawmakers raise fees on businesses, pare benefits or put an end to future claims, State Auditor Tom Schweich said Friday.

Schweich's report marks the latest in a series of recent warnings about the financial health of Missouri's Second Injury Fund, created 70 years ago to compensate disabled workers who suffer additional job-related injuries.

Put bluntly: "It needs a lot of money," Schweich said. "Either find a way to fund it at these very high levels or just eliminate it."

So far, lawmakers have done nothing to address the fund's financial woes. But Republican legislative leaders have made it a priority for the annual session, which began Wednesday.

Schweich said the fund had a balance of $3.2 million at the end of 2012 with unpaid obligations of $28.1 million.

Created in 1943, the Second Injury Fund was intended as an incentive for businesses to hire people with disabilities. If someone with an existing disability suffers a new work-related injury, the fund pays the additional benefits due to that person instead of billing the entire cost to the employers' workers' compensation insurance.

The fund is financed by businesses through a surcharge on their workers' compensation insurance premiums. Auditors have traced the fund's financial problems to a 2005 law passed by the Republican-led Legislature that capped the surcharges at 3 percent of employers' workers' compensation premiums, instead of allowing the rate to fluctuate based on the fund's annual expenses.

In 2005, the fund had $25 million in reserves. Since the surcharge was capped, the fund's annual expenses almost always have exceeded revenue.

Last year, Attorney General Chris Koster, whose staff defends claims against the fund, warned it was on financial life support. He suggested lawmakers should either abolish or replenish it with higher surcharges on businesses. Lawmakers could not agree on which option to pursue.

In a speech opening this year's legislative session, Senate President Pro Tem Tom Dempsey, R-St. Charles, acknowledged the fund "is woefully underfunded," and said the Senate would move quickly on a bill that attempts to salvage it by allowing higher surcharges on businesses and reducing the types of injuries covered by the fund.

House Speaker Tim Jones left open the possibility of scrapping the fund, which might still require some additional revenue to pay off existing judgments.

"If the insolvent Second Injury Fund cannot be salvaged without unfairly penalizing job creators with excessive taxation, we must follow the lead of many other states and begin the task of winding down this fund, which has been mismanaged for decades," Jones, R-Eureka, said.

The attorney general's office already has taken several steps to try to stretch the fund's limited money. In 2009, it stopped offering cash settlements to workers with certain types of injuries, forcing them to go through a lengthier hearing process that decreased the immediate pressure for payments. In 2011, the state began delaying payments to people awarded judgments. That has led to lawsuits from injured workers demanding their money.

The auditor's office on Friday estimated the surcharge would need to be raised to 7 percent -- generating $98 million -- for one year, then be set at 5 percent to pay the outstanding obligations, meet ongoing benefit payments and resume making cash settlements. A 5 percent rate would generate about $70 million annually, Schweich said.

The attorney general's office estimates there are more than 30,000 pending cases with a potential liability against the fund of more than $100 million.

Koster said the fund's insolvency must be addressed.

"Every day that the General Assembly waits to address this problem increases the cost of the ultimate cleanup," Koster said. "There is no avoiding finding a solution to the Second Injury Fund issue."