The final option open to the Michigan legislature is to end the pretense of state control of the Accident Fund and support a move to make the Fund a private insurer.

1. The logic for a private fund

There is no strong argument for maintaining a state fund. Michigan has another mechanism—the Placement Facility—to serve as insurer of last resort. The other arguments commonly advanced in support of a state fund simply fail to hold up under close examination. A state fund does not lead to lower rates, either in a competitive market such as Michigan's or in a monopolistic market such as Ohio's. It does not increase the availability of insurance, and efforts to use its assets for political goals are likely to do more harm than good.

There is some evidence to suggest that in a setting of open competition the presence of a state workers' compensation fund has negative effects. Only three states—Michigan, Minnesota, and Oregon—have both open rating and state funds. In both Oregon and Michigan the presence of a state fund has been cited as causing a decline in the availability of insurance. Michigan's Accident Fund has never been under effective state control, but the state's efforts to control the Fund—unsuccessful though they may have been to date—appear to have chased insurers from the market.

In addition, political rate-setting can be detrimental because it interferes with a flow of information needed to make sound business and policy decisions. For example, the cost of workers' compensation, perhaps more than in any other insurance line, can be partially contained by loss control efforts. Each year, private insurers, employers, and the state spend millions to improve workplace safety and to educate and train employees in safe procedures. When prices for workers' compensation insurance are determined in the market, rising losses will increase prices and spur insurers and employees to spend more on safety. However, if prices are held artificially low due to political manipulation of rates, employers are sent the wrong signal. Their low costs tell them no further expenditures for safety are necessary. The bottom line is that political rate setting, by interfering with the market and the signals sent by rising or falling prices, can lead to less money spent on workplace safety at the times when higher spending is most needed. This misallocation of resources does not benefit employers in the long run, and it certainly does not benefit workers.

Assistant Attorney General Iwasko and Deputy Insurance Commissioner D'Annunzio[46], among others, have said that privatization would make the Fund liable for federal income taxes in every year since its inception. It is claimed that the Accident Fund's accrued federal tax liability would wipe out its entire surplus. The resolution of this question may have to come from the courts; it is important to note, however, that this view does not appear to have much support in the legal community at this time.

None of the currently existing 19 state workers' compensation insurance funds (including Michigan's) has ever been deemed subject to federal corporate income tax by either Congress or the Internal Revenue Service. Although no state fund has ever been turned over to the private sector, privatization of other government enterprises has not created federal tax liabilities for the period prior to privatization. Likewise, nonprofit organizations that have converted to for-profit organizations have not created tax liabilities for previous years by the act of conversion.

Although legislation to privatize the Accident Fund has been introduced in and passed the State Senate as early as 1979, the federal tax liability argument has been raised only recently. The argument cannot be disproved without privatization and a court battle, but if the attorney general convinces the legislature that privatization is too risky to attempt he will have achieved his apparent goal of defeating privatization, regardless of the validity of his argument. State policy makers themselves must weigh both the attorney general's views and the opposing opinions of several attorneys and legal scholars.

The Accident Fund has seen 75 remarkably successful years. The Fund's position as a quasi-state agency has given it three advantages.

First, by law it is the manager of the state's self-insured workers' compensation program for state employees, providing a steady base of revenue. Nothing, however, would preclude a private Accident Fund from continuing to service the state account. The Fund would, however, be required to compete for that account, perhaps saving the state money in the process. On the whole, it is doubtful that this advantage has offset the Fund's inability to compete for other large accounts with employees in other states: In this respect, privatization could improve the Accident Fund's efficiency.

Second, the Accident Fund is currently not subject to federal income tax, but would become so if privatized. There is, however, little reason to believe the Accident Fund's success would be significantly diminished by its liability for federal income taxes.

Third, any licensed insurance agent in Michigan can place insurance with the Accident Fund, without an agency appointment from the Fund. Other insurers are required by law to incur the expense of appointing and "disappointing" agents. Again, however, there is no reason to discontinue this arrangement if the Accident Fund were fully privatized. In fact, all private insurers could and should be granted that privilege, and the state should allow insurers to accept business from any licensed agent in the state.

Since the Accident Fund has always operated free from state control, it simply cannot be argued that its success—and appeal to employers in the market—has been a result of its status as a "state" agency. Since the attorney general's 1976 opinion, Accident Fund policy holders have regularly rallied to support the Fund's independence.

Privatization also appears to be the best mechanism by which to stop the ongoing financial hemorrhage in both the Accident Fund and the attorney general's office, resulting from a court battle with no end in sight. To those who believe the Accident Fund should be under state authority, such an argument may appear to place too little value on state sovereignty. However, since exerting state control over the Accident Fund is more likely to frustrate than achieve the government's aim of assuring affordable, available workers' compensation coverage, it seems the state would be wise to get on with the serious business of improving the state economy.

Privatization of the Accident Fund would:

  • end a significant waste of state government resources,

  • allow Michigan to realize the full benefits of open competition,

  • be an important signal to the insurance industry that Michigan is serious about becoming a good place to do business,

  • have the support of current Accident Fund policy holders, and

  • cost state government nothing.

2. Privatization options

It should be recognized that the Accident Fund could be made independent without being fully privatized. The current statute could be revised to clarify the Fund's status and establish the Fund as a quasi-state agency indisputably governed by the Advisory Board and beyond the reach of state politicians. Section 24 of the Workers' Compensation Act could be amended to eliminate the commissioner's authority to use the Fund to "create competition."

This would be an improvement over the present uncertainty, but a significantly less than ideal solution. There appears to be no advantage to keeping the illusion of state control, and the possibility of renewed warfare over the Fund would remain so long as that illusion exists. The benefits of an independent Fund can best be achieved through complete privatization.[47]

Several proposals have been introduced to privatize the Accident Fund. The most recent is a package introduced in March 1987 by Senator Rudy Nichols. The Nichols bill would establish the Accident Fund as a private insurance carrier governed by its Advisory Board. The Fund would be subject to all laws applicable to mutual insurers. The Nichols bill would also repeal the existing law requiring that the state's self-insured workers' compensation plan be managed through the Accident Fund.

The Nichols bill, however, would not eliminate an important flaw in the current legislative environment. Rather than simply eliminate any reference to "creating competition," the Nichols bill provides that the Workers' Compensation Placement Facility should be the vehicle for such an exercise of the commissioner's authority. As has been discussed, this authority serves no purpose in a competitive, open rating system. This authority is, in fact, counterproductive, because it provokes private insurers' fears that the state will force actuarially unsound rates on the market or create a monopolistic fund—fears that keep insurers out of Michigan's market.

In any event, it is unlikely that the Placement Facility could ever successfully "create" competition, as it writes business almost entirely for poor risks, and its operations are subsidized by the very private companies with which it would compete.