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									                      Bureau of Workers’ Compensation Budget
                        Ohio Industrial Commission Budget


                         Testimony of J. Pari Sabety before the
                              House Insurance Committee
                               Tuesday, March 13, 2007




Mr. Chairman, Members of the House Insurance Committee. My name is Pari Sabety

and I am the Director of the Office of Budget and Management. I am pleased to appear

before you today to present Governor Ted Strickland’s budget recommendations for the

Bureau of Workers’ Compensation and the Ohio Industrial Commission for fiscal years

2008 and 2009.



Ohio Industrial Commission

The Ohio Industrial Commission conducts hearings on workers’ compensation issues,

with the goal of providing fair and impartial resolutions to disputes in workers’

compensation claims through an easily accessible hearing process completed within the

time frames mandated by law. The recommended Ohio Industrial Commission budget

for fiscal years 2008 and 2009 is $61.8 million each year, a recommendation that

Governor Strickland believes will provide a responsive, timely and impartial adjudication

process to Ohio’s injured workers, within the parameters of prudent fiscal restraint. We

have funded the Commission’s entire request in order to give the Commission the

resources it needs to manage the current spike in hearings it is experiencing.
Bureau of Workers’ Compensation

The Bureau of Workers’ Compensation (BWC) is the dominant provider of workers’

compensation in Ohio, receiving approximately 167,000 new claims each year. The

BWC underwrites insurance coverage for work-related injuries and illnesses for public

and private sector employers conducting business in Ohio and oversees the workers’

compensation programs for self-insured employers. More than 280,000 employers pay

approximately $1.9 billion in premiums to BWC’s State Insurance Fund. The Bureau of

Workers’ Compensation budget is not funded by the general revenue fund, but rather is

funded solely by employer premiums. The total recommended budget for the agency for

fiscal years 2008 and 2009 is $328.9 million and $329.2 million respectively.



In my testimony, I will address myself to three critical elements of the Governor’s

proposals to reform the Bureau of Workers’ Compensation. Other more technical issues

relating to the Bureau and the Industrial Commission will be addressed by Acting

Administrator Tina Kielmeyer, of the Bureau of Workers’ Compensation, and Patrick

Gannon, Chairman of the Industrial Commission, in testimony later this week. Such

issues include the following: (1) Requiring fully completed applications in order for

employers to obtain coverage; (2) The ability for the Bureau to lapse coverage to certain

public employers for non-payment of premiums, which will hold public employers to the

same standards as private employers; (3) The ability of the Bureau to lapse coverage for

non-premium related debt that exceeds $1,000 and for debt that has had a final

determination that such debt is owing; and (4) A return to the industry standard, which
allows the Bureau to charge medical and other costs to an employer’s experience while a

claim is under appeal.

We look forward, both today and during further committee hearings, to further

discussions of these and other budgetary proposals contained in our recommendation.



Bureau of Workers’ Compensation Governance Proposal

Governor Strickland has included in his budget proposal a governance structure for the

Bureau of Workers’ Compensation that will rebuild trust and accountability in the

Bureau. The changes proposed will focus the Bureau of Workers’ Compensation on its

primary mission: to provide readily accessible, high quality workers’ compensation and

benefits to Ohio’s injured workers and do so at the lowest possible cost to Ohio’s

businesses.



With more than $21 billion in assets, BWC is the largest exclusive state-fund workers’

compensation system in the United States and the fourth largest underwriter of workers’

compensation insurance in the country.



The workers’ compensation system is a public trust held by the state for the benefit of

Ohio’s insured employers and their injured workers. Their interests are paramount in our

approach:


   1. Accountability to the public
   2. Strong fiscal management
   3. Integrity of Operations
As we are all well aware, serious lapses with significant consequences occurred at the

Bureau that have been the subject of significant public, investment, legislative and

stakeholder attention. Governor Strickland is committed to restoring integrity,

professionalism and efficiency to the Bureau of Workers’ Compensation. To that end he

has proposed significant changes to the Bureau’s governing and oversight structure. Our

pursuit of these changes results from a review of other similar state compensation

systems across the country, and conversations with their leadership. These changes will

align Ohio’s governance practices with the “best in class” from the nation.



Governor Strickland’s proposal replaces the current Workers’ Compensation Oversight

Commission with an independent, external board of directors. The current Workers’

Compensation Oversight Commission is limited primarily to advice and consent powers

and only five of its eleven members have full voting rights.



The proposed board of directors will act as the primary fiduciary of the Bureau’s funds

and will have both the power and the responsibility to operate Ohio’s workers

compensation system for the benefit of Ohio’s businesses, and its injured workers. The

board will consist of fifteen members, with eleven voting members appointed by the

Governor and subject to the advice and consent of the Senate. The eleven voting

members will include business and labor representatives and financial experts, including

a certified public accountant, an actuary, and investment experts. Four non-voting

legislative members will also serve on the board of directors, two legislators from each

chamber.
The broad expertise and professionalism of the board of directors is intended to provide

sound judgment, proper oversight and broad perspective, without influence from special

interests. This perspective has been sorely lacking during the difficulties experienced of

late. The board’s oversight powers will span the entire BWC, insuring comprehensive

review of all practices and providing the checks and balances necessary to effectively run

a state asset of this magnitude.



The proposal also creates three committees designed to assist in providing independent

advice and verification of BWC financial and operational performance: an audit

committee, an investment committee, and an actuarial committee. Among other

responsibilities, the audit committee will interview and recommend to the board of

directors the accounting firm performing the annual audit and evaluate the annual audit.

They will also have a direct line to the bureau’s internal audit division, assuring that any

findings are immediately brought to the attention of the board. The investment

committee will be in charge of assuring proper fiscal management for the funds; and the

actuarial committee will work to guarantee that the Bureau’s rate-setting operations are

carried out at the highest level of integrity and sustainability along sound actuarial

principles. The independent board of directors, coupled with an active committee

structure, will help assure that the Bureau of Workers’ Compensation is run along the

lines of the most modern and sophisticated compensation insurance funds in the nation.
Among the first responsibilities charged to the new board of directors will be an

assessment of both the Healthcare Partnership Program (HPP) and the Group Rating

Program. In addition, the board is charged with recommending a policy for all

adjudicating procedures, including but not limited to specific criteria for manual rate

adjustments.



The Governor will retain the authority to hire and fire the administrator. The hiring of

the administrator shall be subject to the advice and consent of the Senate. Additionally,

the governor will meet annually with the entire board of directors for the purpose of

evaluating the performance of the administrator.



Deputy Inspector General for the Bureau of Workers’ Compensation and Ohio
Industrial Commission

Governor Strickland’s proposal creates the position of the Deputy Inspector General for

the Bureau of Workers’ Compensation and the Industrial Commission. The deputy

inspector general would be appointed by and answer directly to the Ohio Inspector

General. The Internal Security Committee, a joint committee of the Bureau of Workers’

Compensation and the Industrial Commission which pre-dates the advent of the Ohio

Inspector General, would be abolished.



The creation of a deputy inspector general, coupled with the governance proposal

outlined earlier, will provide the independent oversight needed to restore transparency

and accountability to the Bureau of Workers’ Compensation.
Now I’d like to turn to an accounting issue that has been brought to our attention as a

result of the audit in progress for the Bureau operations for 2005.



Disabled Workers Relief Fund Adjustment


I would also like to address the Disabled Workers Relief Fund (DWRF) and a proposed

adjustment in statute to align current accounting treatment for DWRF liabilities, with the

enabling statutory language for the fund. This language change will resolve a long

outstanding accounting issue stemming from differences between the Bureau’s statutory

power to account for future DWRF liabilities, and the rules of the accounting profession.

For employers, this change will allow DWRF assessments to continue to be calculated

and billed on a pay-as-you-go basis just as they are today. Importantly, for accountants,

it will result in the proper matching of assets and liabilities on the balance sheet.




Assessments to employers for DWRF are governed by the Ohio Revised Code. Under

current law, and supported by Attorney General opinions in 1981 and 1993, the current

statute governing the DWRF fund does not allow the Bureau of Workers’ Compensation

to record a reserve for existing DWRF-related claims. While our statute has remained

unchanged since establishment of the DWRF fund in 1953, the rules of the accounting

profession have continued to evolve and tighten. Recent Governmental Accounting

Standards Board (GASB) standards require accountants to go beyond the letter of the

statute to “fairly present” the assets and liabilities of the Fund on its balance sheet, based

upon the underlying economic realities of the transactions being recorded. Governmental
Accounting Standards Board Statement 10, in particular, requires that reserves should be

established for unpaid claims costs when insured events occur. However, for the

Disabled Workers Relief Fund, the Bureau does not have the statutory authority to

establish a reserve on its balance sheet.



The proposed legislation will clearly give the Bureau of Workers’ Compensation the

authority to record a reserve for future DWRF-related expenses arising from existing

claims. This asset will be offset by the identical liability, which is already recorded on

the Bureau’s financial statements. The result is a matching of future liability payments

with a reserve for these expenses. This language change will allow DWRF to continue to

be calculated on a pay-as-you-go basis. There will be no change in the way in which

assessments are charged to employers. It will simply result in the proper recording of

assets and liabilities on the balance sheet



Our proposed language change will resolve the longstanding tension between the lack of

legislative authority granted to the Bureau to record a reserve for DWRF expenses, and

the need to do so in order to align our operations with modern accounting standards. The

unintentional result of failing to address this issue is a balance sheet that is unbalanced—

it records a liability, but not its associated asset. Thus, the balance sheet will not show

the true financial health of the Bureau. This change rectifies this situation.



Conclusion
Governor Strickland is committed to working with the legislature to restore transparency

and accountability to the Bureau of Workers’ Compensation. We believe the plan

submitted today will help rebuild the trust relationship that must exist between business,

labor and the workers’ compensation delivery system and assure that the system operates

to serve their interests.



I appreciate the opportunity to appear before you today. Thank you for your time and

consideration. I would be happy to answer any questions you may have.

								
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