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Unionized construction companies in New York lost a legislative battle to enact a bill that would have reduced their workers compensation premiums, but they intend to raise the issue again in the future.

Under pressure from the insurance industry, Gov. George E. Pataki vetoed a bill this summer that would have changed the method used to calculate construction companies' workers comp premiums. The governor said he supported the main concept in the bill, however, leaving the door open for similar legislation in the future.

The measure would have lowered the premiums paid by high-wage contractors and was supported by them and construction unions.

Aligned against the measure, however, were insurance companies and agents concerned that other states would follow New York's lead and enact similar laws. Insurance lobbyists said they consider the bill's defeat one of their top priorities, both this year and in the future.

The issue has become very important, said Dick Poppa, executive vp of the Independent Insurance Agents Assn. of New York in Syracuse.

Under the vetoed bill, A.B. 6543, the method of calculating workers comp premiums for New York construction companies would have changed to an "hours worked" method from the current "total payroll" basis. Every state but Washington uses the total payroll method (BI, Aug. 25).

If the bill were enacted, it would have been "a monumental change in the way workers comp rates are set," said Mary Griffin, assistant vp of the American Insurance Assn. in Albany, N.Y.

Under the total payroll method, premiums are calculated based on the employer's payroll, regardless of the number of hours worked, and the company's risk classification factor.

Under this method, employers with high-wage employees pay higher premiums than low-wage companies whose employees work the same number of hours. In general, high-wage employers use union workers.

Total wages are not an accurate indicator of workers comp risk, said William McSpedon, secretary/treasurer of New York State Conference of Operating Engineers in Albany, a construction union. "An hour on the job is a more accurate measure of this risk," he said.

Contractors that employ union workers also favored the legislation as a more accurate way to calculate rates.

"Whether or not someone works for $10 an hour or $30 an hour, the risk they are exposed to is the number of hours worked," said Frank McArdle, managing director of the General Contractors Assn. of New York, a trade group for the heavy construction industry.

Contractors assert that the bill would lower their workers comp rates, making them more competitive than non-union shops. They also said most union workers don't receive additional benefits if injured because they earn more than the statutory maximum for benefits. A pay increase for a union worker means the employer pays more workers comp premium without workers receiving any additional benefits, they said.

"Insurers love the payroll method because every time payroll goes up, they take in more premiums," said James Ellenberger, assistant director of occupational safety and health for the AFL-CIO in Washington.

Despite the bill's near-unanimous passage in both houses of the New York Legislature, the insurance industry's arguments persuaded Gov. Pataki to reject it.

The bill's opponents said it would have imposed record-keeping burdens on contractors to track hours worked by employees.

The hours-worked method "creates a whole new set of problems with regard to verification and recordkeeping," said the IIANY's Mr. Poppa.

Insurers said their main concern, however, is fraud.

A company's total payroll is verifiable through state and federal tax records, but hours worked can be fraudulently stated, they argued.

"It would create a new opportunity for insurance fraud," said Bob Zeman, vp-legislative affairs of the National Assn. of Independent Insurers in Des Plaines, Ill.

Basing premiums on hours worked "almost creates an incentive for people to put down fewer hours than actually worked," said the AIA's Ms. Griffin.

The bill's supporters, however, dismiss these concerns. Construction companies already maintain records of hours worked and use that information for bidding on jobs, said Mr. McArdle of the contractors' trade group. "The industry is built on estimating how many hours it takes to do tasks."

Supporters also dismiss the notion that fraud will increase, stating that the federal and state governments verify the number of hours employees work.

One observer said both sides have valid points.

David Mohrman, a principal with Tillinghast-Towers Perrin in Hartford, Conn., said the new method would increase the potential for fraud but noted that high-payroll contractors do pay more in workers comp premiums without receiving additional benefits.

Insurers and agents pressed Gov. Pataki from the time the bill hit his desk in early August. Their lobbying efforts included calls from heads of insurance companies and agents voicing displeasure at the bill, the lobbyists said.

The insurance industry "reached him," said Ed Donnelly, director of legislation for the New York State AFL-CIO in New York.

In his veto message, the governor said that even though he supported the concept of the hours-worked method, he opposed raising workers comp rates for upstate New York construction firms, which generally are lower-paying. Gov. Pataki added that the six-month implementation period was too short and the bill might jeopardize the solvency of the State Insurance Fund because higher rates would drive more employers into it.

Many insurer lobbyists were startled when the bill passed the Senate, in the early hours of the session's final day.

"We were surprised by it," said Mr. Poppa. "Our understanding was that it was not going to pass."

The bill also put Gov. Pataki in a difficult position, they said, because he didn't want to touch the issue. "He would have preferred to not deal with the issue in 1997, especially with the flaws it had," said John Cucci, vp in New York with the Alliance of American Insurers.

As an alternative to the bill, the insurance industry has pushed for expanded use of the premium adjustment program. Under the program, employers receive rebates when their payroll exceeds a certain amount, helping to level the amounts paid by high- and low-wage companies. Insurers say the program resolves the concerns of high-wage employers without the drawbacks of changing to the hours-worked method.

But the bill's opponents dismiss PAP as insufficient. "It gives them somewhat of a rebate, but it's still not fair," said Mr. McSpedon of the engineer's union.

In negotiations over the bill, its proponents refused to compromise and look for a way of expanding the under-utilized PAP program.

"Unless it's labeled hours-worked, they were opposed to it," said Mr. Cucci.

Washington currently is the only state to utilize the hours-worked method.

Insurance lobbyists said that the state's exclusive fund is not working, but employer groups disagreed, saying their system's problems are unrelated to the hours-worked method.

Margie Weinberg, executive director of the Washington Self-Insurers Assn. in Olympia, said that fraud in reporting hours worked has not been a problem.

Clif Finch, government affairs director for human resources for the Assn. of Washington Business in Olympia, added that poor claims management and the state monopoly are bigger problems than the hours-worked method.

One drawback to the hours-worked method, he explained, is that it prevents eliminating the state's monopoly. Insurance companies don't have comparable data for Washington as for other states and are reluctant to enter that market.

Despite the veto, the New York bill's proponents take heart in Gov. Pataki's statement of support for the hours-worked concept and they plan to take up the issue next year.

"It will be a big issue as long as workers comp is an issue," said the AFL-CIO's Mr. Donnelly.

The insurance industry also is gearing up for a struggle in New York and anywhere else the issue might arise.

"It's not going to go away entirely, but we're hoping it won't be coming back with the same force as this year," said Nancy Schroeder, director of workers compensation at the NAII.

Mr. Ellenberger of the AFL-CIO in Washington said the labor organization has raised the issue in other states and in each instance the insurance industry "is up for the battle," he said.