Schwarzenegger Signs Workers Comp Reform

Schwarzenegger Signs Workers Comp Reform
June 1, 2004

At a Boeing Co. aircraft factory on April 19, California Governor Arnold Schwarzenegger (R) signed SB 899, a bill reforming California's workers' compensation system. The measure had passed the state assembly 77-3 and the senate 33-3.

"This bill completes a process that brought together Republicans and Democrats, business and labor, and all the affected parties to produce billions of dollars in savings, protect workers, and root out fraud and waste in the system," Schwarzenegger said in a news release issued the day he signed the bill. "No longer will workers' compensation be the poison of our economy. Our message to the rest of the country and the world is that California is open for business. We are making our state once again a powerful, job-creating machine."

Schwarzenegger said the measure "would cut down on fraud and waste, and would also aim to get injured workers back on the job without having to fall back on the legal system."

"We cannot continue to force our businesses, non-profits, and government agencies to be pummeled by costs 2-1/2 times the national average," said Sen. Chuck Poochigian (R-Fresno), the bill's sponsor. "This [legislation] gives California businesses and their workers a fighting chance."

Costly Program

According to research conducted by the California Chamber of Commerce, California employers are paying the highest workers' comp rates in the nation: $6.33 for every $100 in payroll, compared to a national average of $2.46. Over the past four years, costs in the workers' compensation system had increased 136 percent, contributing to an increasingly negative business climate in the state.

Opponents of the reform measure, including attorneys and some injured workers, blamed insurance companies for the high and rising premiums.

Unlike most states, California's workers' compensation system covers all industries and all workers, including employees of small businesses and farm workers. California also covers many injuries and occupational diseases not covered by workers' comp in other states.

The reform package does not change who is covered under the system, but it does change what injuries are covered and the generosity of benefits.

Under the new law, employers will be liable only for the portion of an employee's injury that occurred at work, for example. Employees cannot collect benefits unless their injuries are scientifically measurable using such tests as X-rays or MRIs.

The reform package reduces disability payments from five years to two years. Injured workers, who have been accustomed to choosing their own doctors to treat their injuries, will be required under the new law to choose from a pool of physicians authorized to handle workers' comp matters. Supporters say that will stop injured workers from "doctor-shopping" in search of a more favorable diagnosis. Treatment would be required to meet American Medical Association guidelines.

Reform Sorely Needed

"Skyrocketing workers' comp costs resulting from changes signed into law under former Governor Gray Davis continue to poison the economic environment in a state which is already the highest taxed in the West," said political consultant Ron Nehring.

"California's workers' compensation system is a terrific economic engine--for Nevada," he remarked.

Grover Norquist, president of Americans for Tax Reform, agreed. "Workers' compensation really is a hidden tax, the cost of which is passed on to the worker in the form of lower wages. It drives businesses out of California and to states with significantly lower levels of workers' compensation cost."

Political Battle

In 2003, Davis signed a workers' comp reform bill he praised as a "complete overhaul" ... but California's workers' comp costs remained high above the national average.

Schwarzenegger, who had made reform of the state's workers' comp system a top priority during his campaign, called a special session of the legislature to address the matter. He threatened to place a reform bill on the November 2004 ballot if lawmakers refused to support his plans and failed to take action by March 1.

"If modest reform is all that lands on my desk, I am prepared to take my workers' comp solution directly to the people and I will put it on the ballot in November," Schwarzenegger said.

As the March 1 deadline passed without agreement in the legislature, the governor publicly expressed his support for the Committee for Workers' Compensation Reform and Accountability, which was sponsoring an initiative to place the "Workers' Compensation Reform and Accountability Act" on the ballot.

The legislature finally passed legislation to reform the system on April 16. The governor signed the bill three days later.

Cost-Containment Will Help

The signed legislation is less restrictive than the measure activists and the governor had threatened to take to the ballot. Nevertheless, most observers agree the signed bill will help reinvigorate California's business climate.

Joel Fox, president of the Small Business Action Committee (SBAC) and sponsor of the ballot initiative, noted, "The proposed initiative would have drawn the rules tighter, but given the political realities, we got quite a bit of what we wanted, and although the bill that was passed is not everything, it brings about great improvement for California's economy."

According to a preliminary estimate by the University of California at Berkeley's Survey Research Center, the bill will generate $4 billion in savings in 2006. The center projects an additional $9.5 billion in savings from cost-containment measures adopted last year and slower projected growth in claims. The center estimates the state's workers' comp costs would have reached $30.6 billion in 2006 without the reforms. With the reforms, cost are projected to be $17.1 billion.

Although the new legislation does not go as far as Fox and other initiative proponents would like, he said they would not pursue putting the initiative on the ballot. The group had collected 1.2 million signatures, well in excess of the required 598,105, but Fox felt momentum was waning. "Taking into account the nature of politics here, we realized that once the deal was done, and the people of California understood that the deal was done, the governor would not have been behind the initiative anymore, and there was no point in continuing to push for it to be placed on the ballot."

A Victory

"While California is still far away from the 'miracle of Sacramento' the governor was hoping to bring about, the workers' comp reform passed by the legislature constitutes a huge victory for Schwarzenegger, particularly given the political realities in the predominantly liberal state," noted ATR's Norquist.

"We will need to do more reform next year," acknowledged Assemblyman John Campbell (R-Irvine). "But, thanks to Arnold Schwarzenegger, Republican leadership, and an initiative, we have begun to lower the cost of doing business and creating jobs in California for the first time in over five years."

"Why have we waited this long to do these reforms?" asked Assemblyman Russ Bogh (R-Cherry Valley). "It's no accident, let's be honest. We are here today because of one thing--because over 1 million people answered Gov. Schwarzenegger's call for signed petitions to reform workers' compensation."


Sandra Fabry is an associate for state government affairs with Americans for Tax Reform. Her email address is sfabry@atr.org.