The recession is driving some state governments to raid workers compensation funds to combat budget deficits, but employers, risk-sharing pools and insurers are fighting back.

Employers, pools and insurers have gone to court seeking to stop the practice that is tapping money collected through assessments on insured premiums and self-insured entities. They argue that “sweeping,” or transferring employer assessments, is an unconstitutional confiscation of private money amounting to unauthorized taxation.

In the battle, Kentucky's Supreme Court has handed employers a partial victory in one such lawsuit that sought to stop lawmakers from funneling employer workers comp assessments to the state's general fund.

Additional lawsuits have been filed in Arizona and Kansas.

The plaintiffs say they face additional assessments to restore the money states have taken from workers comp programs, such as the Special Fund of the Industrial Commission of Arizona. The Special Fund provides benefits to employees of insolvent insurers, uninsured employers, bankrupt self-insured employers and other workers comp-related claims.

Similarly, self-insurance groups in Kansas sued Jan. 21 to stop the sweep of money into the state's general fund from a workers comp account that pays second injury and insolvent employer claims.

Observers say they expect more states will try to tap workers comp funds for revenue as the recession continues to take its toll on government coffers.

“This happens every time there is a recession (or) an economic downturn and states are looking everywhere for money, including money that is not legitimately theirs,” said Bruce C. Wood, associate general counsel and director of workers compensation for the American Insurance Assn. in Washington.

“That is what we are saying is occurring in Arizona,” where the AIA has joined the Arizona Self-Insurers Assn., the National Federation of Independent Businesses and workers comp insurer SCF Arizona in a lawsuit filed June 11, 2009, in Maricopa County.

The suit against state officials argues that the Special Fund is a trust and not public money intended as a revenue source.

During a 2009 special legislative session called to address a budget deficit, Arizona lawmakers approved sweeping $4.7 million of Special Fund money into the state's general fund, court records show.

But employers and insurers say they are on the hook through added assessments should the Special Fund not meet its obligations.

The transfer imposes “a double burden on the private assets of insurers and employers who contribute to the Special Fund and to whom the (Industrial Commission) must look in order to ensure the solvency...of the Special Fund,” the employers and insurers allege in the pending case.

In the Kentucky suit, the state Supreme Court ruled Jan. 21 that the governor and legislators are barred from transferring $5 million to the state's general fund from the Kentucky Workers' Compensation Funding Commission and its investment account, the Benefit Reserve Fund.

The KWCFC collects assessments imposed on workers comp premiums paid by employers through their insurers and paid directly by self-insured entities to finance workers comp programs. It also invests the assessments, which are credited to the investment account.

The Kentucky Supreme Court ruling in Steve Beshear vs. Haydon Bridge Co. Inc. et al. stems from the 2001 recession when the state faced a budget deficit and began taking KWCFC money, said Edward H. O'Daniel Jr., an attorney in Springfield, Ky., who represents employers in the case.

For its 2002-2004 biennial budget, Kentucky's General Assembly transferred $1.7 million of KWCFC funds to a state mining agency and $5 million to the general fund from the Benefit Reserve Fund. The transfers have continued since then, Mr. O'Daniel said.

“There is always pressure on the government to provide more revenue for government programs,” Mr. O'Daniel said. “Even in good times, there are pressures on state legislatures and governors to find more money. Trying to get to the (Kentucky Workers' Compensation) Funding Commission investments is a pretty easy way to fill holes in the budget.”

Kentucky employers, with the support of insurers, sued to recover the money and “secure from future raids” about $340 million in assets held by KWCFC that employers and insurers paid in assessments, Mr. O'Daniel said.

Employers feared the Benefit Reserve Fund transfers would continue indefinitely rather than using their assessments to pay down the KWCFC's approximately $1.6 billion in liabilities, essentially forcing them to pay the debt over and over, Mr. O'Daniel said.

Kentucky employers argued that the transfers violated Kentucky's constitution; that money held by the Benefit Reserve Fund is private, not public, and held in trust for workers comp beneficiaries; and that the General Assembly did not have the authority to transfer the money.

The Supreme Court sided with employers on those issues, remanding the case. When the plaintiffs return to court, they will seek a return of about $26 million to the KWCFC.

But the state high court also ruled against employers, saying that a $19.8 million transfer of coal tax revenues from the Benefit Reserve Fund was proper because it was public money that was not comingled with private funds.

In Kansas, the lawsuit filed in Shawnee County District Court on behalf of several self-insurance pools seeks to stop the transfer of money to the general fund from the Kansas Workers' Compensation Fund administered by the state Insurance Department.

The transfers stem from former Gov. Kathleen Sebelius' effort, with legislative approval, to alleviate revenue gaps in the 2009 and 2010 state budgets with “cash sweeps” from several industry-supported fee accounts, including the workers comp fund, the lawsuit states.

“Instead of cutting expenses or raising revenue, the governor looked for fee funds that have balances...despite the fact that it's not the state's money,” said Kansas House Speaker Mike O'Neal, R-Hutchinson.

Rep. O'Neal also is an insurance defense attorney at Gilliland & Hayes P.A. in Hutchinson and filed the lawsuit on behalf of insurance groups.

To make up for sweeping $2.35 million from the workers comp fund, the Kansas Insurance Department levied a 1% assessment on all workers comp payers for 2010 that otherwise would not have been necessary, the lawsuit states.