Pepsi or Coke? The Latest on COLA in California

Pepsi or Coke? The Latest on COLA in California

When a workers’ compensation practitioner talks about the appropriate COLA, he is usually not discussing his favorite soft drink! Rather, Labor Code Section 4659(c) indicates that certain awards of permanent disability shall be increased annually by something called the State Average Weekly Wage (SAWW). The SAWW is a figure published by the State of California to reflect how much wages increased during the prior year. This SAWW figure in turn serves as a cost of living adjustment (COLA) when paying these permanent disability awards.

There has been a great deal of uncertainty over the last several years as to how to determine the present value of the future SAWW adjustments. The difficulty of determining a present value for these future SAWW increases is that the actual amount of the future SAWW increases is simply unknown.

If we assume that these future increases will be at a 5% annual rate, and the SAWW increases only by a 3% rate in a given year, the practical effect of using too high of an SAWW is that the attorney’s fee will be based on a present value that is too high. In other words, applicant’s stream of benefits will be reduced more than they should be. The problem becomes even more significant when the compounding nature of the SAWW is taken into consideration. Once the 5% is assumed to be the SAWW for a given year, the following year’s SAWW is calculated based on the prior year’s increase. Thus, if that prior year’s actual SAWW is lower than that assumed, the error is carried forward.

A recent panel of commissioners with the Workers’ Compensation Appeals Board addressed the question of what average future SAWW increase should be assumed when reducing future COLA payments to a present value. In Anderson v. Jaguar/Land Rover of Ventura, 2012 Cal. Wrk. Comp. P.D. LEXIS --, the Workers’ Compensation Administrative Law Judge (WCJ) assumed a 4.6% COLA in calculating the present value of the permanent disability when calculating the attorney’s fees. Defendant filed a petition for reconsideration arguing that a 4.6 SAWW is “speculative, too high and not in applicant’s best interests”.

In addressing defendant’s petition, the commissioners first acknowledged that since Labor Code Section 4659(c) became effective, the Disability Evaluation Unit (DEU) has assumed a COLA of 4.6%. This assumed 4.6% was based on the prior DEU manager’s analysis of the SAWW over the prior 50 years. In the absence of a specific request by a WCJ or one of the parties, the commissioners noted, that would be the COLA that would be assumed by the DEU in calculating the present value of these awards. The commissioners further acknowledged the numerous prior decisions of the WCAB where the use of the 4.6% COLA has been endorsed.

This is where the Anderson case gets very interesting. The panel then stated that despite these prior cases finding the 4.6% to be “rational and reasonable”, no regulation or statute has actually established that figure. That figure, the panel emphasized, only came into existence “as a result of an effort by the DEU to informally establish a reasonable estimated average of future COLA that can be used state-wide in permanent total disability and life pension cases without delaying resolution of those cases, and without flooding the WCAB with litigation over the issue”.

While, the commissioners noted, these goals are “laudable”, they should not be the only factors considered when determining anticipated future increases in the SAWW. The commissioners then stated:

The 4.6% average future COLA used in this case is predicated on the assumption that the average annual increase in the SAWW over the preceding 50 years fairly reflects the rate of future increases. However, the percentage increase in the SAWW has almost uniformly been less than 4.6% during the seven years from 2004 to 2011. The only year during that span in which the SAWW increased by more than 4.6% was 2007, which saw a 4.96% increase. However, the percentage increases of the SAWW for the years 2005, 2006, 2008, 2009, and 2010 were, respectively, 1.97%, 4.01%, 3.93%, 4.55%, and 2.99%. Moreover, the years 2004 and 2011 had no increase in the SAWW. Thus, the average increase over that span of time is less than 4.6%.

The commissioners concluded that based on what has occurred over these recent years, and in light of the current economic conditions, the average future SAWW will likely be less than 4.6%. Consequently, the commissioners refused to adopt the 4.6% figure. In fact, after considering the issue, the panel in Anderson concluded that an assumed future SAWW of 3% placed more of the economic risk of hyperinflation on the attorney, instead of the injured worker, and should instead be used.

If you missed it, what the commissioners said in Anderson is that they no longer think that an assumed 4.6% average future SAWW reflects current economic conditions. The panel explicitly indicated that it was more comfortable, as a result of its own economic analysis, of using a 3% COLA. Many in the workers’ compensation community had assumed that the dispute over the appropriate COLA would involve economists battling it out in the courtrooms of the local district offices. Leaving aside the question of whether the commissioners should be engaged in dime store economics, the workers’ compensation practitioner would be well advised to assume that some of the present commissioners, particularly the newest commissioner, do not feel that the previously assumed 4.6% is reasonable.

© Copyright 2012 LexisNexis. All rights reserved. This case summary will appear in a forthcoming issue of the California WCAB Noteworthy Panel Decisions Reporter (LexisNexis).

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