Second Injury Fund poses multi-million dollar liability
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Second Injury Fund poses multi-million dollar liability

Date: January 30, 2013
By: Marie French
State Capitol Bureau
Links: SB 1, State Auditor's Jan. 11 report, Auditor's 2007 report

JEFFERSON CITY - Missouri's troubled Second Injury Fund poses a risk for the state of several million dollars. In December, 96 individuals awarded benefits had their payments withheld because the fund is insolvent, with liabilities of $28.1 million, according to a report by the Missouri Department of Labor.

What is it?

The Second Injury Fund provides payments to workers who are injured at work and, because of the combination of that injury with a prior injury or preexisting medical condition, become partially or totally permanently disabled.

The employer at the time of the “second” injury is only responsible for the compensation due from that injury. Any additional compensation due is paid out of the fund.

Employers pay into the fund through an additional charge on workers’ compensation insurance premiums.

Why was it created?

The Second Injury Fund was set up after World War II to provide benefits to people with disabilities and work-related injuries. The intent was to encourage employers to hire people, especially military veterans, with previous injuries or disabilities by protecting them from legal responsibility for the prior injuries.

When it was established, the percentage charged to employers was determined each year by a division of the Missouri Department of Labor and Industrial Relations. The percentage was set based on the projected expenses for the next year plus a 10 percent cushion.

What’s wrong?

The fund has a shortfall of $28.1 million and no way to pay the full amount owed to injured workers, according to a recent report by the state auditor. The attorney general’s office stopped settling cases in 2009, resulting in more than 30,000 pending cases that will have to be decided in the courts with an estimated liability of more than $100 million.

To maintain a positive cash balance, the fund has delayed payments on court-ordered benefits. Some of those individuals whose benefits were delayed filed suit asking for immediate payment from the state. The Missouri Court of Appeals Western District referred this case to the state’s Supreme Court on Jan. 22, but it has not yet been scheduled for trial.

Another court case could also have implications. In a 2007 decision, the Missouri Supreme Court ruled that permanent total disability benefits must be paid to dependents in the event of the beneficiary’s death unrelated to the injury. In its detailed 2007 audit, the state auditor’s office noted the labor department did not keep dependent information of beneficiaries, meaning the potential liability from the ruling could not be calculated.

Finally, all of the delayed benefits owed to workers earn a 9 percent interest rate as established by state law.

What caused the problem?

The surcharge rate was 4 percent in 2004 and 3.5 percent in 2005, when the ending balance of the fund exceeded $33 million. In 2005, the General Assembly capped the rate at 3 percent.

In part because of increased unemployment from the recession -- the amount collected from employers is indirectly dependent on the number of employees they have -- revenues for the Second Injury Fund declined from about $70 million in 2007 to about $40 million in 2010. The cap made it impossible to compensate for the decline in employment.

Is there a solution?

Various fixes reducing eligibility and benefit amounts or lifting the cap have been proposed in the past but none have been successful.

In his January report, Auditor Tom Schweich estimated a surcharge of 7 percent would be sufficient to cover ongoing benefits, resume cash settlements and pay the unfunded $28 million. He recommended the Governor and legislature decide whether the fund should continue and, if so, adopt a plan to replenish the fund to meet short-term obligations and ensure long-term solvency.

The most recent proposal by Sen. Scott Rupp, R-St. Charles County, would allow the surcharge to be raised incrementally up to 6 percent in two years. It would also lower the interest rate paid on delayed benefits, restrict eligibility and eliminate permanent partial disability benefits.

Rupp's bill was reported out of committee on Jan. 29 and is on the Missouri Senate calendar for debate.