Missouri's Second Injury Fund runs dry as claims go unpaid

The state of Missouri owes Franklin Neece more than $300,000 in worker’s disability payments. But it’s unlikely he’ll see that money any time soon.

The 64-year-old Lee’s Summit man has been treated for post-traumatic stress disorder since 1995, a result of his military service in Vietnam. Twenty-nine years as a firefighter in Independence only made his condition worse, Neece said.

“What I saw on duty really compounded my disorder,” he said. “It impacts every aspect of your life.”

Neece isn’t alone. There are 260 Missourians who were left permanently disabled after a workplace injury and are owed money from the state’s so-called Second Injury Fund. If the state were to pay those awards, it would cost nearly $20 million — plus interest.

What’s more, there are 28,000 other claims pending, Attorney General Chris Koster said.

“Even if half of those claims have no merit whatsoever, those 14,000 claims would cost $140 million,” he said.

The problem is that, as of Aug. 1, the Second Injury Fund had only $12.3 million in its account.

Koster has unsuccessfully lobbied lawmakers to resolve the shortfall for more than three years. But with legislative reform proving elusive, he was forced last year to stop paying new permanent total disability awards in order to keep the fund from becoming insolvent.

Neece is among those waiting in line. In 2003, the U.S. Department of Veterans Affairs declared him permanently disabled, forcing his retirement as a firefighter.

After nearly a decade of litigation, a judge ruled that Neece should receive $300,000 in a lump sum payment and $649 a week from the Second Injury Fund, created by state lawmakers in 1943 to pay for certain workplace injuries that aggravate pre-existing disabilities.

But instead of his money, he received a letter from the attorney general’s office saying Missouri couldn’t afford pay him.

“I’ve done everything I’m supposed to,” Neece said. “Now the state refuses to pay me. It feels like a slap in the face.”

The courts could ultimately get the final say in ending the impasse.

In June, a Cole County judge ordered the state to pay four individuals who sued to get the money they were owed. As a result of the ruling, which the state is appealing, Koster expects many similar lawsuits to be filed.

There are 29 attorneys in Koster’s office assigned to defend the fund.

“Under these conditions, there’s a genuine probability that the fund won’t even have the money to pay for the attorneys to defend the fund, leading to a flood of frivolous default judgments that will exponentially increase liabilities,” Koster said.

“Once the run on the bank begins, there will be no mechanism to stop it and no amount of lawyering or legislative self-denial will be able to save the fund from complete collapse.”

Troubled history

The Second Injury Fund was created to benefit the physically disabled, veterans and individuals with previous work-related injuries. Lawmakers established the fund to encourage the employment of previously injured or disabled individuals without exposing employers to liability.

In the early 1990s, the fund gained notoriety when former Attorney General William Webster ended up in prison after a federal investigation found lawyers who contributed to his campaign obtained substantially larger settlements for their clients than those who did not.

Revenue for the fund is generated by a surcharge on businesses’ workers’ compensation insurance. The surcharge would fluctuate from year to year to cover the fund’s expenses, similar to an insurance premium. In 2005, however, lawmakers permanently capped the surcharge at 3 percent.

The intent of the change was to lower workers’ compensation rates for businesses, said Richard Moore, director of regulatory affairs for the Missouri Chamber of Commerce and Industry.

Problems arose, however, when unemployment rates surged, Moore said. Fewer employees meant lower workers’ compensation premiums, and lower premiums meant the 3 percent surcharge wasn’t bringing in as much revenue as the Second Injury Fund needed. Adding to the problems, Moore said, was an expansion of the types of claims that can be made against the fund.

“I think at the time, lawmakers looked at the history of the fund and thought a 3 percent surcharge would be able to cover costs,” Moore said. “That clearly hasn’t worked out.”

Koster pointed out that the original legislation included a fiscal note that predicted that capping the surcharge at 3 percent would lead to the fund’s insolvency. Since then, two actuarial studies confirmed the 3 percent surcharge does not cover the fund’s expenses.

By 2008, the fund’s annual expenditures had increased to $74 million while revenue had dropped to $56 million. As unemployment increased, revenue fell even further. Last year, the fund collected only $43 million, even as its obligations grew to $77 million.

“This year is likely to be even worse,” Koster said.

Legislative fix

Lawmakers came close to passing reforms last year, said state Rep. Todd Richardson, a Poplar Bluff Republican.

The legislation would have eliminated the fund and shifted all claims to the workers’ compensation system. The cap on the 3 percent surcharge would have been temporarily lifted and allowed to fluctuate as needed each year to cover existing expenses, eventually shrinking to zero.

The Missouri Chamber championed the bill and it was supported by a diverse coalition of groups, including organized labor and the Missouri Association of Trial Attorneys.

But disagreements within the business community stalled the legislation. Some groups, led by the Associated Industries of Missouri, protested that the change would have led to increased workers’ compensation premiums in addition to the temporary increase in the surcharge.

“This plan would have resulted in the largest tax and government-imposed cost increase on Missouri employers in state history,” Associated Industries President Ray McCarty said at the time.

Moore disagreed that the proposed changes were a tax increase, but the legislature adjourned for the year without taking action on them.

This year, lawmakers focused on a plan that would have kept the fund in place, raised the surcharge and limited the kind of claims that could be paid. But differences emerged over excluding some claims from the fund. Additionally, the reforms were connected to legislation dealing with other, more controversial changes to the workers’ compensation system, and the bill once again died.

“Every day that goes by, we get closer to that cliff, and nobody really knows where that is,” said Richardson, who has sponsored Second Injury Fund reform legislation for two years. “But what we do know is that the longer policy makers go without finding a solution, the more likely a court will decide the issue.”

Because lawmakers decided to limit the amount businesses have to pay to cover the fund’s expenses, a judge could determine that the state has to make up any difference, said John Boyd, a Kansas City attorney who represents Neece and several others who were denied payments.

“This basically would shift the costs from businesses to the taxpayer, and that’s just wrong,” Boyd said. “Taxpayers would be on the hook for millions of dollars of disability payments.”

Still waiting

As for Neece, he continues to wait patiently. “What can you do?” he said, laughing. “It’s taken nine years, what’s a little while longer?”

Things are tight financially, he admitted. His wife was laid off last year, and since then they’ve been living on his Social Security payments and a pension. But he remains optimistic.

“We’re doing OK,” he said. “Lots of people are worse off than us.”

Neece’s attorney, however, isn’t as conciliatory.

“This is a guy who fought for his country and served his community for 30 years,” Boyd said. “He litigates the case and is vindicated, and now the state of Missouri — to add the final insult — is saying, ‘Well, we’re not appealing the award. You’re entitled to the money. But we’re not going to pay you.’

“That’s not a state that I’m proud of.”