An Overview of the Arthurs Report, Part II: The Proposed New Funding Strategy for the WSIB
In our last entry we reviewed the origins of the Arthurs Report, the WSIB Funding Review which led to it and the current state of the WSIB’s unfunded liability (UFL), which is to the tune of $14.5 billion.
As we noted, the UFL is a serious and pressing problem because it carries with it a risk that at some point in the next 20 years the WSIB will be unable to meet its obligations to injured workers as they come due. As a result of this problem, the Arthurs Report recommends a new funding strategy for the WSIB, which, along with a few related sub-topics, is the subject of this blog entry.
The key recommendations Arthurs makes in respect of the new funding strategy are found in Recommendation 3-1 of the Report, which are set out in the column to the left. We will look at these in more detail below.
Objectives of the Proposed New Funding Strategy for the WSIB
The Arthurs Report lays the foundation for a new funding strategy by setting out a number of objectives.
These include, among others: ensuring that the WSIB can meet its obligations, ensuring that premium rates charged to employers are spent prudently and the WSIB’s being accountable for the "faithful and financially responsible discharge of its statutory mandate". It’s pretty hard to argue with all that.
Related to these goals, Arthurs wishes to see faith restored in the WSIB system by eliminating any actual or perceived risk of its insolvency. A further goal is granting the WSIB "the necessary financial capacity to meet increased costs, whether attributable to legislation, to changes in administration and programs, or to changed external circumstances". Arthurs also sees as an objective diminishing the WSIB's reliance on premium rate revenue and increasing its investment revenue.
Targeted Funding Ratios and Desired “Technical Characteristics”
We saw in our last entry that current WSIB insurance funding ratios (assets to liabilities) are conservatively estimated as being around 50%.
An immediate goal of the suggested new funding strategy is achieving a funding ratio in excess of 60%, beyond which the risk of "tipping" (i.e. insolvency) becomes minimal.
Over the longer term, Arthur's envisages progressing to a "recovery zone" with the funding ratio of 60 to 80% and thereafter moving into a "comfort zone" of 80% and more funding, which he sees as the "functional equivalent of full funding". However, Arthur also wishes to see full funding in the long haul.
Arthurs’ proposed new funding strategy is designed to take the WSIB out of the tipping zone into the recovery zone in about 5 to 7 years, seven years later into the comfort zone and, after 20 years, if the funding strategy is adhered to and not overwhelmed by external economic forces, the WSIB should be fully funded.
The new funding policy, according to the Arthurs Report, should have a number of technical characteristics. These include:
- Realism, prudence and comprehensiveness;
- Discipline and consistency;
- Adaptability and innovation;
- Affordability and fairness;
- Premium rate stability and predictability; and,
- Transparency and accountability.
Expressed at such a high level of generality, almost no one would argue with these aspects of the proposed new funding strategy.
The Corridor System and Premium Rates
To move the WSIB along the path to full funding, Arthurs, along with actuarial firm Morneau Shepell, modeled 1000 different scenarios per year over a 20 year span and developed a "corridor system", which maps the upper and lower limits of average funding ratios over the next 20 years and the average premium rates which will be required to keep the funding strategy on course.
Two such models which are set out in the Arthurs Report, Model A and Model B, respectively assume an average premium rate of $2.52 and $2.76 per $100 of payroll over the next two decades. For perspective, currently the average premium rate is $2.40 and within the last 20 years it has gone as high as $3.00. (Incidentally, both models also assume that benefits for partially disabled workers will be indexed, a point we will come back to in a later blog entry).
The premium rates envisaged under the new funding strategy are to be composed of two principal elements. The first of these is new claims costs. The second is the UFL Charge. Taking Model A as an example, the $2.52 premium rate would be composed of $1.73 in new claims costs and $0.79 in UFL charge. The UFL charge is akin to the “Debt Retirement Charge” on your monthly Hydro bill.
Arthurs notes that both components could be modified depending on circumstances. For example, if the WSIB erred in estimating new claims costs for one year, it could adjust the premium rate in subsequent years to keep in the new funding strategy on course. Further, as we will see in our next blog entry in this series, Arthurs envisages some employer groups bearing more of the UFL charge than others.
Models A and B, as set out in the Arthurs Report, provide us with the following pictures of how the corridor system will lead to an eventual fully funded state:
As Arthurs points out, his Report does not propose that the WSIB adopt any particular model or specific funding policy. Rather, what he does is to map out a number of possible scenarios to illustrate that the funding strategy proposed can deliver results with a high degree of reliability if implemented with discipline.
However, although Arthur's does not claim to advocate any particular model, as I read the Report, the overall thrust of the models which he does propose involve an increase in the average premium paid by employers, notably over the next decade and longer.
The underlying premises of this funding strategy is really quite simple: The higher the premiums that are charged and the more favorable the economic conditions, the quicker the UFL will be paid off.
This sounds a lot like the marketing that banks have engaged in over the last few years related to the payment of home mortgages: Increase your monthly payments and the frequency of your payments and you will be mortgage-free in less time.
Incidentally, following the Arthurs report, Ontario Regulation 141/12 under the Workplace Safety and Insurance Act, 1997 (WSIA) was made on May 30, 2012, which will come into force on January 1, 2013. This Regulation provides that the WSIB shall ensure that the insurance fund under the WSIA meets the following sufficiency (of funding) ratios by the indicated dates:
- 60 per cent on or before December 31, 2017;
- 80 per cent on or before December 31, 2022; and,
- 100 per cent on or before December 31, 2027.
Regulation 141/12 appears to signal that the government has opted for a more aggressive approach to achieving full funding in line with Model B above.
Should the Government share the WSIB’s Burden?
In reviewing the issue of a possible funding strategy, Arthurs considered this question and came up with Recommendation 3-2.
Arthurs notes that historically the WSIB has always been self-sustaining. More accurately, the WSIB has always been funded entirely by employers with no government help. Arthurs suggests that no government would accept the argument that its action or inaction contributed to the growth of the UFL such that the government should share part of the burden of retiring it. Arthurs thinks this is so because of, firstly, the cost implications and, secondly, because "doing so might compromise the position of the WSIB as an arm’s length public trust".
Arthurs does state, however, that "governments should not on the one hand demand fiscal rectitude from the WSIB and on the other require it to spend money it does not have".
It is anticipated that Recommendation 3-2 will rarely if ever lead to governments enacting new benefits beyond the premium rate setting process and then kicking in for them. More likely, governments will be disciplined enough to enact new benefits, if any, such that the full cost of them is passed on to employers in the rate setting process.
What of the WSIB reimbursing OHIP for Routine Medical Services and paying the Cost of Safety Education and OHS enforcement?
Arthurs remarks that although it makes sense for the WSIB to pay for medical services for which it specifically contracted, it is not clear why it should have to pay for routine services when the 30% of Ontario's workforce that is not covered by the WSIB system can obtain such services and the cost of providing for them is met by Ontario's universal public health care system. He adds that since employers have already paid once for medical services for workers by way of health care levy payroll tax, having to pay a second time through the WSIB is difficult to justify.
Further considered by the Arthurs Report are the costs associated with safety promotion organizations and enforcement of occupational health and safety legislation. At the present time, roughly $227 million are paid annually by the WSIB to these ends. Arthurs notes that given the shifting of these responsibilities towards the Ministry of Labour, under the Chief Prevention Officer (as mandated by Bill 160) it would be odd for the WSIB to continue to have to shoulder this burden.
Arthurs further notes that these activities benefit all workers in the province yet the full cost of existing arrangements is being covered by Schedule 1 employers, who employ only 60% of the province's workforce. Arthur says that this means that these employers are effectively subsidizing other employers through their premium rates. Secondly, the Ministry of Labour's other activities are funded entirely from the consolidated revenue fund. Arthurs implies that the costs of OHS enforcement activities should therefore also be paid for in that way, citing the example of the Ontario Labour Relations Board, which is not paid for only by unionized employers but rather by taxpayers as a whole.
Having these observations in mind, Arthurs suggests in Recommendation 3-3 that these issues should be examined more closely and alternative funding arrangements considered. However, noting the financial constraints that the government and Ministry of Labour are also facing at the present time, Arthurs stops short of recommending that these legislated obligations of the WSIB be repealed “notwithstanding their anomalous nature and despite the fact that doing so would improve the WSIB’s financial prospects”.
Should Schedule 2 Employers contribute more to the WSIB’s funding?
On this question Arthurs does not come right out and say that Schedule 2 employers should do so. However, in Recommendation 3-4 he suggests that the WSIB should look more closely at this issue.
Arthurs recognizes that Schedule 2 employers are self- insured, paying claims costs as they arise plus an administrative fee to the WSIB. However, he writes that “it is unclear whether they are paying an excessive, insufficient or fair share of the WSIB’s non benefit costs”. Further, Arthurs states that apart from this issue, “there is the further question of whether those employers have spread the burden equitable among themselves”.
Arthurs claims that one way to resolve both issues “would be for all Schedule 2 employers to pay a small annual fee to cover their fair share of all the WSIB’s non-benefit costs, as well as reimbursing the WSIB for specific benefit costs paid to their injured workers.” However, in the absence of more fulsome information he does not formally recommend this, instead suggesting that these matters should be considered further.
Funding Models Considered and Rejected
Arthurs notes that three alternative funding models were considered and rejected during the Funding Review:
- The status quo model reinforced by greater government control;
- The Canada Pension Plan “steady-state” model; and,
- The segregation or "ring fencing" of the UFL and/or its financing by means of an annuitization or a bond issue.
The status quo model was advocated by a significant number of employers, who proposed that the WSIB governance structure be modified and subject to more intrusive control by the Ministry of Finance and made more accountable, notably to the employer community.
Arthurs responds by noting that this was the approach adopted by the WCB in 1984, which failed. According to Arthurs, this approach is faulty in that it fails to take into account the government's own contribution to the growth of the UFL. Accordingly, more government oversight would not work, according to Arthurs. Other reasons for rejecting this model are that a radical increase in government control is likely to be counterproductive. Government micromanagement of rate setting risks politicization of the process and jeopardizes the WSIB’s status as an independent arm’s length trust agency.
Arthurs also rejected the Canada Pension Plan approach, which was almost unanimously endorsed by unions and organizations representing injured workers. He notes that the types and levels of risk addressed in the two systems are very different such that he was unable to recommend adoption of this type of funding model.
Finally, the notion of ring fencing was introduced in the Eckler Ltd. Concept Design Paper for the Funding of the Workplace Safety and Insurance Board, commissioned by the President of the WSIB. This approach suggested setting up a separate legal entity to deal with the UFL and a financial reporting entity to handle the WSIB’s finances from 2011 onward. Arthurs concludes that although this approach may be useful for “accounting more accurately for the UFL, planning more carefully for its reduction and keeping the UFL in focus as an important issue” after exploring ring fencing as a possible funding model, Arthurs concludes that it is too complicated, possibly counterproductive and could ultimately impair the WSIB’s ability to discharge its responsibilities.
Arthurs concludes that although these alternative models helped to crystallize his thinking on the issue of an appropriate funding model, they ultimately all “fail to indicate to what extent implementation would assist or inhibit the WSIB in the pursuit of its multiple objectives.”
Although it is hard to argue with much of what the Arthurs Report says about a new funding model for the WSIB, the overall thrust of it seems to be simply that employers should be paying more than they have in the past to pay down the UFL.
Where the Report has highlighted some serious anomalies as to the current funding model, which arguably should be removed to lighten the burden for the employers who finance the WSIB entirely, the Report has been unable to make concrete recommendations and instead has favored a more cautious approach of recommending further study of the issues.
As we will see in subsequent entries, this theme, that rougher times are ahead for employers who fund the WSIB scheme, is developed further in the Arthurs Report, notably in its chapters dealing with premium rate setting and experience rating, which we will look at next.