POLICY HIGHLIGHTER

Volume 14, Number 6
April 1, 2004

L&I: Failing audits, increasing rates

Officials in the state Department of Labor & Industries (L&I) increased workers' compensation rates by 9.8 percent this year, adding to a 29 percent increase last year. In a recent exchange with the department, the Evergreen Freedom Foundation (EFF) offered the following wager:

"Should the State Auditor's report . . . give L&I a clean bill of health (i.e. no findings) we'll concede that L&I is operating efficiently. On the flip side, should L&I yet again have audit findings, it should back off its rate increase . . ."

A staffer in L&I's public affairs office, Robert Nelson, responded:

"Each year, 150,000 workplace injury and illness claims are filed with Labor and Industries. I have no doubt that some of those aren't managed as well as they should be, and that any audit of an insurance system our size would find shortcomings. We welcome the State Auditor's findings and will use them to improve our system."

The results from the state auditor's (SAO) 2003 Statewide Accountability Report released on March 23, 2004, show why L&I did not accept EFF's wager. They reveal that the department could not account for millions of dollars last year due to problems already identified in previous audits that were not resolved by management.

Here are this year's findings (SAO comments italicized):

1. L&I could not account for why there were no recorded deposits for more than $5.8 million in employer premiums received by the department (3-38). Repeat finding.

[SAO] noted the same weakness in [its] 2002 Statewide Accountability Report when a difference of $4.7 million could not be resolved.

[L&I] does not perform a daily reconciliation between cash deposited and the records of the day's transactions.

2. L&I failed to report equipment losses of at least $261,000 as required by law (3-34).

72 items, including laptop computers, digital cameras and camcorders, which cost more than $133,000 were removed from [L&I's] inventory system.

[SAO] could not determine the dollar value of the missing equipment since [L&I] destroyed inventory records prior to January 2001 before their scheduled destruction date.

If the losses had been initially reported in the year 2001, recommendations from SAO could have minimized subsequent equipment losses.

3. L&I destroyed inventory records before authorized destruction dates (3-51).

Destroying inventory records in advance of the approved destruction date creates the potential for the misappropriation of public assets.

4. L&I failed to show compliance with state bid laws for services totaling $14 million (3-23).

[L&I] cannot be assured that it received the best possible price and quality of services.

5. L&I does not allocate indirect costs equitably among its programs and funds (3-50). Repeat finding.

[L&I] charges 99 percent of its central administration costs to the Workers' Compensation accounts . . . [L&I] did develop an indirect cost allocation methodology, but has not begun to use it yet.

When [L&I] does not use a reasonable indirect cost allocation plan, certain funds are supporting other funds, while others are not paying their share of these expenditures.

6. L&I does not have adequate internal controls over cash receipts and disbursements in its Self Insurance program (3-39).

[L&I] was not aware of the internal control weaknesses in the area of Self Insurance disbursements.

Inadequate internal controls increase the risk of loss of public funds. In addition, these conditions impair [L&I's] ability to prevent or detect errors and irregularities in a timely manner, if at all.

7. L&I does not perform timely reconciliations between its disbursement systems and the financial system (3-40).

When [L&I] does not perform reconciliations between its unique systems and the financial system, it does not have assurance that the amounts reported in any of the systems are accurate and free of errors or irregularities.

EFF recommendation
L&I should address and resolve these clearly identified problems before increasing workers' compensation rates. Businesses should not be forced to subsidize the costs of chronic mismanagement. Introducing competition in the workers' compensation system may be an effective way to ensure accountability, and the legislature should consider allowing private insurers to offer coverage.

Prepared by: Jason Mercier | Budget Research Analyst | 360-956-3482

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org