Kentucky Court Curbs State Borrowing from Workers’ Compensation Fund

In a case involving two workers’ compensation funds, the Kentucky Supreme Court has ruled that lawmakers and the governor cannot replenish the state’s general fund using monies from accounts with commingled public and private monies.

However, the state can suspend the payment of funds to other accounts so that they never become commingled with private funds and divert those payments to the general treasury.

Only government accounts with strictly public funds, or public funds that can be clearly separated from private monies, may be tapped for transfers, according to the decision. Also, the state can’t take money out of accounts after it has put funds into them because the public funds have then become commingled with private dollars.

The ruling in Commonwealth v. Haydon Bridge Co., et al, written by Deputy Chief Justice Will T. Scott came in a case involving the Kentucky Workers’ Compensation Funding Commission (KWCFC) and the Workers’ Compensation Benefit Reserve Fund (BRF).

KWCFC – a second injury fund– pays employees for pre-existing partial disabilities when they suffer subsequent work-related injuries. The fund is supported by a state tax paid by coal mining firms and by an assessment on workers’ compensation premiums paid by employers. It also receives money from the BRF, which invests whatever funds KWCFC has that are not needed to cover immediate liabilities.

The General Assembly in 1996 enacted a law to close the KWCFC to new claims in 2006 and terminate all of its liabilities by 2018. That same year, the General Assembly also increased funding by adding $19 million a year from the coal severance tax paid by coal operators in the state. The lawmakers also mandated a 9 percent assessment on workers’ compensation premiums for 1997 and authorized the KWCFC to adjust the assessment in future years in order to cover unmet liabilities.

In subsequent years in which the General Assembly failed to approve state budgets on time, governors took credit in the state general fund for the $19 million from the coal tax but did not turn the coal tax monies over to the workers’ compensation funds.

In the 2002-2004 budget, the General Assembly also transferred $1.7 million from the BRF to finance a portion of the state Mines and Minerals budget and took an additional $5 million from BRF to put back into the general fund. In a previous budget, the state had also transferred $1.6 million from BRF to the Mines and Minerals budget. In 2002, the KWCFC increased the premium assessment to 11.5 percent.

Lawmakers retroactively approved the governors’ budgets with the KWCFC payment suspensions, the BRF transfers and the 11.5 percent assessment.

The businesses that sued argued that these various emergency budgetary moves violated state law and the Kentucky Constitution because they took, or diverted, private funds. They also argued that the General Assembly had no authority to retroactively ratify emergency spending orders suspending the $19 million in coal severance funds due the KWCFC and BRF. They also protested the 11 .5 percent levy.

The court sided with the state on the suspension of the $19 million payments, the retroactive General Assembly approval of the budgets and the assessment but it struck down the various transfers from the workers’ compensation accounts to the general treasury.

The court said state law prohibits funds in “in the possession of the KWCFC (or the BRF) from being transferred or loaned to the Commonwealth, or expended for other purposes. It does not prohibit the diversion of such funds prior to their receipt by the KWCFC or BRF.”

The suspension of the $19 million in coal tax payments to the workers’ compensation accounts was legal because the funds were redirected before they were commingled with the private monies, according to the court. Also, the law imposing the coal tax allows for these revenues to go to the general fund, the court noted.

However, the amounts taken directly from the workers’ compensation funds and transferred to Mines and Minerals on two occasions, as well as the $5 million transferred back to the general fund from the KWCFC and BRF accounts in the 2002-2004 biennial budget, were ruled improper because these transfers took monies that were already held by the workers’ compensation funds.

“There is simply no authority to transfer private agency funds such as these to other funds in our budget,” the court said. “[I]n this instance, we are compelled to conclude the funds in question — those actually taken from the hands of the KWCFC and BRF — have not been sufficiently differentiated and the transfers therefore are improper,” the court ruled.

In addition to Haydon Bridge Co, the plaintiffs bringing the suit included the Greater Louisville Auto Dealers Association, the Kentucky Automobile Dealers Association, M8vM Cartage Co., Springfield Laundry and Dry Cleaning and Usher Transport Inc. They were represented by Mark Guilfoyle, of Deter, Benzinger & Lavelle PLLC in Crestview Hills, and Springfield attorney Edward O’Daniel.