Auditor Seal

Susan Montee, CPA
Missouri State Auditor


Report No. 2007-19

April 2007

Fund Likely To Become Insolvent Unless Corrective Action Taken

The Department of Labor and Industrial Relations (DOLIR) paid approximately $68 million during 2006 on Second Injury Fund (fund) claims by injured employees and for administrative costs. The department has responsibility for the fund, which supplements workers' compensation benefits paid to injured workers. On January 16, 2007, the Governor requested the State Auditor's Office (SAO) conduct an audit of the fund. We focused audit objectives on determining (1) whether fund expenditures had been properly disbursed, (2) the fiscal soundness of the fund, (3) the impact of 2005 legislative changes on the fund, (4) the potential impact of a recent Missouri Supreme Court decision on fund solvency, and (5) whether DOLIR projections of future fund performance have been accurate.









Fund insolvency likely in


Based on our review of DOLIR fund projection data, and discussions with officials at the Department of Insurance, Financial Institutions and Professional Registration, DOLIR, the Division of Workers' Compensation, and the Attorney General's Office, the fund will likely become insolvent during 2008.  (See page 9)






Legislative changes limit fund revenue and should reduce expenditures

The 2005 legislative change to the workers' compensation law capping the fund surcharge rate at 3 percent limits DOLIR's ability to generate revenues sufficient to cover fund expenditures. Based on our estimates, expenditures are projected to outpace revenues by approximately $57.5 million from 2007 through 2009, an average of $19.2 million per year. The legislative changes have also resulted in a reduced number of fund claims. However, it will take several years for the reduced number of claims to result in reduced fund expenditures.  (See page 10)








Impact of Supreme Court decision not known

In addition to legislative changes, the fund may also be impacted by a January 2007 Missouri Supreme Court decision. The decision stated permanent total disability benefits are to be paid to an employee's dependent(s) in the event the employee subsequently dies from causes not related to the work-related injury. However, the division does not obtain information regarding the existence of dependents for its case files. Without information on dependents, the potential financial impact of the decision cannot be determined at this time.  (See page 12)








No contingency plan exists in the event of insolvency

State statutes do not contain provisions allowing DOLIR to generate additional funds in the event of insolvency. If the fund becomes insolvent, benefits would be in danger of not being paid because state statutes do not guarantee payment of these benefits through any other means.  (See page 12)






Pending legislation will not address short-term solvency concerns

Several pieces of pending legislation propose to make changes to control costs of the fund. However, none of the bills currently pending make changes to address the short-term solvency of the fund, therefore additional funding sources are needed to address this short-term insolvency of the Second Injury Fund.  (See page 13)






Fund projections could be improved

DOLIR personnel have not always obtained all available information relevant to the future performance of the fund when making fund projections used to set the annual surcharge rate. As a result, fund projections have been inaccurate, leading to high fund balances in the past.  (See page 14)






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