Governor's Address to the Joint Session of the General Assembly- Special Session on Workers' Compensation
Speaker Richards, President Rose and members of the General Assembly, Justice Stephens and members of the Judiciary, Governor Henry and other members of the Executive, my fellow Kentuckians. I can report to you tonight that in general, the condition of the Commonwealth is good. In State Government, revenues are above estimates, Empower Kentucky is going well, and we're making progress on welfare reform.
Statewide, our unemployment is at 4.6%, more Kentuckians are working than ever before, manufacturing jobs are up - even as the nation's manufacturing jobs decline, personal income in Kentucky is growing faster than in 42 other states, and companies are expanding or relocating here on a regular basis.
Yes, for many businesses, Kentucky's a very good place to be. We have a central location, a good arterial transportation system, low energy costs, low business taxes, strong incentive programs, an aggressive and effective recruitment program, and a workforce with a good work ethic, 10% more productive than the national average.
We have a lot of advantages, a lot of reasons for businesses to expand in Kentucky.
As good as all this sounds, we still have problems. Our two big problems, which still keep us from growing as fast as we can, are education and workers' compensation. If we improve education and cut the cost of workers' compensation, we'll grow faster than we are now, and if we're going to bring economic opportunity and quality of life in Kentucky up to the national average in 20 years, which is my goal, we must grow faster than we are now, much faster. In time, we must address higher education. The time to address workers' compensation is at hand.
We've been committed for many years to having a mandatory program to compensate, as best we can, a worker injured on the job, for wages they lose as a result of the injury, and to pay the cost of medical treatment they need because of the injury. That's the purpose of a workers' compensation program, plain and simple. Workers' compensation isn't meant to be an unemployment program, or a retirement program, or a social welfare program.
Workers' compensation isn't an entitlement program for attorneys, or health care providers, or rehabilitation services companies.
These very worthwhile and honorable professions have, and will continue to be needed, to provide the services used by injured workers to recover from injuries, and to receive just compensation for lost earning capacity. But workers' compensation is intended to serve injured workers, not service providers.
The second concern of any workers' compensation program must be its cost to employers. And here again, the purpose of maintaining a cost-efficient program, is to protect the worker; their jobs, and their wages. Because, in the end, it's the workers who ultimately pay the cost of any workers' compensation program. They pay with lower wages, or in some cases, with lost jobs.
The cost of compensation coverage is a cost of labor, pure and simple. Compensation costs, added to social security, unemployment insurance, health care coverage, retirement programs, and wages constitute the total cost of labor for any employer.
When the cost of labor gets too high, employers leave Kentucky, or don't start new businesses here.
When an employer has to cut costs to meet competition, they cut the cost of labor. The easiest way to cut the cost of labor, is to cut wages.
Yes, the employer writes the check for workers' compensation insurance, but in the end, the worker pays the bill.
Yes, it's the employers who're screaming about the high costs, because high costs mean lost sales, which means lost profits; but lost sales also mean lost production, which means lost jobs.
So, as we attempt to do what's fair and just for the injured worker, we must also be concerned about the cost of the program to employers.
Last spring, I asked the Workers' Compensation Advisory Council, to investigate costs in Kentucky, as compared to other states with which we compete for jobs. I and my staff have also conducted extensive research. Our efforts were an attempt to answer the questions: Does the Kentucky workers' compensation program cost more than similar programs in competing states? Does it cost more than it should compared to the benefits paid to and for injured workers? I've concluded that the answer to both of these questions is yes.
Our workers' compensation system reduces our competitive advantage and if we don't do something now, it'll get worse.
We've tried to control the cost of workers' compensation in the past, including the passage of H.B. 928 in 1994. That was a step in the right direction. It reduced the cost of the program in some ways, the most significant of which were the tier down of lifetime benefits, the elimination of RIB claims for working miners, and the reduction of medical costs.
But a little noticed and probably unanticipated effect of H.B. 928 was the tremendous increase in premium costs which would occur because of the elimination of the assigned risk pool. The assigned risk pool held premiums down in Kentucky even while the actual cost of the program was going up. In 1994, insurance companies were losing money in Kentucky, big money, and so, they began to refuse to renew policies. Cheap insurance isn't worth much if no one will sell it to you. Insurance companies leaving Kentucky was the crisis that caused us to pass H.B. 928.
Even though insurance companies were losing money in 1994, employers were screaming about high costs even then. Now, even though some employers have had reductions in their compensation costs, most employers are screaming even louder.
We've documented these high and increasing costs in this publication, "The Kentucky Workers' Compensation Program: An Assessment," which I've sent to all the members of the General Assembly. I hope all of you've studied it carefully. It's the basis on which I call for comprehensive reform of our program.
The most significant and reliable data in this book is on page 76 and is reproduced on this transparency. These data show very clearly the dramatic jump in the total system cost of $200 million in the first year after the passage of H.B. 928. Unfortunately, costs continued to rise in the second year after the passage, by about $100 million. The total cost to employers in Fiscal Year 1996 was about $1.1 billion, four times more than the corporate income tax in Kentucky. The increase in compensation costs in the past two years has been the same as doubling the corporate income tax on Kentucky businesses. A measure like that wouldn't get one vote in the Kentucky General Assembly but that's exactly what's happened in the past two years.
As bad as the situation is now, it'll get worse if we don't act now.
The expiration of the freeze on the state average weekly wage, the recent increase in medical reimbursement rates, and the action of the Workers' Compensation Funding Commission to meet the mandates of the 1987 Workers' Compensation Reform Act to fully fund all liability of the Special Fund by the year 2018, will all combine to produce dramatic increases in premiums next year if we don't do something. The general cost increase of 10.2% will precipitate additional cries from non-coal businesses, but the increase of 30.4% for coal will have a rather silencing effect, because the coal industry will just fade away.
With costs already 50% higher than our primary competitor, West Virginia, and production dropping, we won't have to worry about coal in Kentucky much longer. Within ten years, it'll only be a shadow of its former self. But our problems in Kentucky will begin to accelerate. Laid-off coal miners will get huge awards from the Special Fund but there won't be many coal companies left to pay into the Special Fund. Other employers will have to pay the bill. Costs for coal companies will go up even further, more jobs will be lost. More miners will file for compensation. It'll be a vicious circle.
State tax collections will go down, the social costs of caring for people thrown out of work in coal and related industries will go up. Kentucky could be thrown into recession. Doing nothing isn't an option.
The basic problem in coal is an overly generous Black Lung program, as compared to other coal-producing states. Coal miners are the only class of Kentucky workers who can get major awards, up to a quarter of a million dollars, without proving they have any measurable disability. This situation isn't fair and it must stop.
Much has been said about what I propose to do to coal miners. What I intend to do is save their jobs. I believe that's what most of them want. It's hard to get a job anywhere that pays as good as coal mining and yet many people have already lost their jobs in the mines because of high compensation costs, and many more have had their wages cut.
The only substantial change I propose in the Kentucky Black Lung Program is for a miner to show that they have an actual physical impairment, just like every other worker in Kentucky must demonstrate, in order to draw compensation, and have that impairment determined by a neutral physician. Miners will still be a preferred class of worker.
Miners will still receive a higher award than any other worker with the same impairment. There are some positives for miners in my proposal. The miner won't have to quit his job to find out if he is eligible for a compensation. The weekly benefit for the retraining program will be twice what it is now and they can get a relocation allowance. The miner who really has Black Lung will be better off. And no other worker or company will have to pay for it. My proposal completely removes all subsidies for coal. But it allows coal to survive.
This reform is what we must have for Kentucky, for the coal fields of Kentucky, for Eastern Kentucky. I spent ten years of my life serving the people of Eastern Kentucky and as Governor I intend to continue. No one can honestly question my concern for, or devotion to, the people of the mountains. One of my goals is to be remembered as the Governor who finally lifted Eastern Kentucky out of the state of poverty which has been its historic legacy. This is one step which must be taken to start that process. I ask my friends representing the mountains to look at this situation realistically and do what's right for the future of the region, for the children of the mountains, for the miners of Kentucky.
Give our people the option to stay in our homeland, preserve our unique culture, and still have an opportunity for economic parity. Do it for our children.
And so I've called you here to Frankfort to act, and act quickly. As a starting point, I've drafted a proposal, which I ask you to consider. I'm confident it'll improve the situation.
This proposal will eliminate the major cost increases scheduled to go into effect next year, and will make significant reductions in premiums from current levels. This proposal will end all subsidies for coal and, perhaps as important as anything, this proposal will stop the accumulation of billions of dollars of unfunded liability and will absolutely payoff the Special Fund by the year 2018.
And this proposal will help the truly injured worker, doubling payments to the more seriously injured. That's been my commitment from day one and this proposal achieves that goal. For instance, the loss of a hand is a very serious injury. In this instance, the award will quadruple over the average of the past three years. The award for the loss of a finger will almost double. For the loss of a thumb, the award will be increased about 1000 percent. Death benefits will be increased by $21,000 in most cases. This is a proposal to improve the protection of seriously injured workers.
No existing award to any injured worker will be reduced. Let me repeat that again so that those people who're erroneously telling people that I'm trying to take their award away from them will quit scaring old people who may not know differently; no existing award to any injured worker will be reduced!
Now, it's also fair to say that people who can't prove any disability won't get an award under our system and people won't get retirement benefits from workers' compensation but workers' compensation was never meant to do these things.
The emphasis of our proposal is to reduce overhead, legal costs and unnecessary medical costs, and eliminate awards to people who don't actually have a disabling injury or are trying to defraud the system.
There's nothing in our plan which denies a worker the right to use an attorney at any stage of the process. However, the need to have an attorney is greatly reduced. In most cases, the employee can avoid all attorney fees, increasing the amount of money they actually get to help support their family by as much as 20%.
The worker also has no need to pay for extra medical examinations or court costs to prove their claim, again increasing their take home award.
But I repeat again, if the employee wants to spend the extra money to do these things, they're free to do so. The choice is theirs.
We believe that most employees can get their cases resolved in 90 days instead of the 9 to 18 months that the present system takes. And we've built in safeguards for the employee who is unfairly deprived of temporary benefits while they're recovering from their injuries. This system will be more fair; employees with similar injuries will receive similar awards. The award won't be dependent on getting the best lawyer or most liberal doctor or most sympathetic judge. The public will see that it'll be a lot harder to cheat the system. We'll make sure self-insured companies establish guarantee funds so there won't be any more Southeast Coals where injured workers lose benefits because a company goes bankrupt. As important as all of these things are, it's also important to understand that our existing workers' jobs will be more secure.
This is comprehensive reform, a fundamental change in the way we operate our workers' compensation system. The principle used in this system isn't new. It's based on principles which have already been adopted by several states to bring their runaway workers' compensation programs under control. But this proposal isn't copied from any other state. This is a unique Kentucky solution to a unique Kentucky problem.
This proposal is the product of months of research and work. It's had input from experts in the private sector and from state government, and from representatives of labor and business. I want to pay special tribute to the members of my staff who've worked long and hard, late at night and on weekends to produce this proposal. Thank you, you've served the people of Kentucky well. An equal tribute goes to the LRC staff who showed strong devotion to this task. Thank you for your service, above and beyond the call of duty.
We don't claim this draft is perfect. No such change can be refined to its maximum potential until it's exposed to free and open public debate through the legislative process.
So, tonight I turn the proposal over to you, the General Assembly. I'll continue to be involved to make sure you fully understand the proposal and what it's intended to do. But the ultimate decision is up to you, you represent the people, all the people.
I believe this is one of the most important issues that I'll be addressing during my tenure as Governor. I believe this is one of the fundamental issues we must address if we're to move Kentucky successfully into the 21st century. And I believe in you. I know you care just as much about the Kentucky worker as I do. I believe you're just as wise as I am. I believe you'll work just as hard as I have to bring us this far. I trust the legislative process.
I want to thank the leaders of the General Assembly, Democrat and Republican, for your steadfast support for substantial change. I respect your withholding your specific endorsement until you've seen the final product. If this proposal passes, it'll be with bipartisan support. I hope this can be the beginning of a more cooperative era of government in Kentucky. An era where politics can be reserved for elections and policy can be developed based on what's good for the people, not what'll play well in a 30-second commercial.
Today we face a situation not unlike the situation we faced when considering the Kentucky Education Reform Act. Major change, outcome somewhat uncertain, a time for courage, a time for statesmanship, like exhibited by Mike Bowling today. KERA was, in my judgement, this legislature's finest hour.
I remember vividly Representative Greg Stumbo's eloquent charge to the House of Representatives. At that time, Representative Stumbo reminded us of what Harry Truman said, "that you have to live with your conscience a lot longer than you live with your constituents." That kind of courage and vision from a mountain legislator made me proud of my heritage.
We've now come to another milestone in our history, where leaders have to lead. This is another time when leaders like Roger Noe need to do what's right, regardless of the political consequences. This chance will not come our way again.
So, as we approach this task during the next two weeks, let's do it in the spirit of bipartisanship, of trust, of mutual respect, and with the understanding that we hold the future of hundreds of thousands of Kentucky workers in our hands.
Only under those conditions can we fulfill the sacred trust given to us by the people of this great Commonwealth. They are a great people, too often betrayed by their leaders, too often dominated by the special interests, too often left behind because of the lack of vision. Let us not fail them.