The Early Numbers Are In

By: Mark Webb

Friday, January 20th, was the last day for California legislators to submit bill drafts to Legislative Counsel. They have until February 17th to introduce bills. This generally leads to a budget-dominated January as the Governor and legislators hash through the details of the almost $300 billion spending plan.


That plan includes expending $70 billion in “special” funds – those not part of California’s General Fund. We know painfully well that part of those special funds are assessments of employers for a wide range of functions of the Department of Industrial Relations. And, as reported earlier, those assessments continue to increase.


Unlike last year, however, California is facing a Budget crisis. This is in large part due to the ongoing drop in revenue generated by the personal income tax – the largest source of General Fund revenue for California.


As noted earlier by the Legislative Analyst’s Office (LAO), one of its recommendations was that “the Legislature plan for a larger budget problem by identifying more spending reductions due to downside revenue risk.” As we have seen from the past 2021/22 session, the unprecedented influx of cash was allocated to a very wide range of priorities. Scaling some of those back will not be a simple task.


In the meantime, we are seeing wage increases across the spectrum. This wage increase is in part due to automatic inflation-adjusted changes in the minimum wage across various California cities and counties. These increases do not offset the broader decline of income tax revenue.


The uneven economic disruption caused by COVID-19 has resulted in accelerated hiring – with higher wages – in sectors most affected by the pandemic. It also has resulted in a significant increase in the statewide average weekly wage for 2023, which affects the maximum temporary disability payments for injured workers.


In the larger economy, there remains the specter of a recession. We are already seeing significant disruption in the Tech sector. It is happening not only in layoffs but in stock price volatility– part of the same stock prices that generate billions in capital gains (income) tax revenues for California.


The Governor’s Budget projects a $2 billion dollar drop in capital gains tax revenues from the current fiscal year to the one beginning in July.  While California’s tax revenue issues go beyond the Tech sector, it is also worth noting the outsized contribution from that sector to the windfalls fueling the 2021/22 Budget. A similar note should be made when the winds blow in the opposite direction.


So, what does this all mean for workers’ compensation?


The past biennial session of the Legislature showed remarkable constraint in dealing with workers’ compensation. Other labor-related issues, not so much.  Indeed, it can be fairly said the Legislature and, to a lesser degree, Governor Newsom, have been fairly consistent in their support of labor over management regardless of intended and unintended consequences. That includes a certain amount of deafness to issues such as cost of compliance and the regulatory fatigue now perennially vexing employers of all sizes.


Just as is the case with broader economic issues, we enter 2023 with a great deal of uncertainty when it comes to how Sacramento will deal with workers’ compensation issues. Do not expect any clarity in the next few months. In fact, I am thinking maybe not until August. Stay tuned.


Note: The opinions expressed herein may or may not be those of Workers’ Comp Executive. Mark Webb is a former Arizona insurance regulator, insurance company chief compliance officer, and is an expert in corporate governance, risk and compliance. He is the owner of Prop 23 Advisors.