California: Economists Wanted

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Since Senate Bill 899 was passed, there has been a great deal of uncertainty surrounding the proper calculation and evaluation of the COLAs provided for under Labor Code Section 4659(c).


In the years immediately following the enactment of section 4659, the parties would submit a request to Blair McGowan, the manager of the Disability Evaluation Unit at the time, and ask him to provide the parties with a present value calculation assuming a given permanent and stationary date. As the Duncan case (subsequently becoming Baker) proceeded through the appellate process, the parties would ask Mr. McGowan to assume different commencement dates depending on the possible outcomes of the Baker case. What was most interesting about these commutations was not the large present value sums that were being determined, but rather the assumption that was made supporting the calculations. Specifically, Mr. McGowan would assume a 4% increase in the State Average Weekly Wage (SAWW) based on information that he used to average the SAWW over the prior 50 years.

Initially, it seemed that the parties were willing to accept Mr. McGowan’s assumption. At some point, however, the parties, particularly the defendants, began to ask, “wait a second, how do we know that over the next fifty years that SAWW is going to average 4%?” There were hearings held where the applicant and defendant would hire their respective experts to testify what the SAWW was likely going to be going forward. The inherent problem with all of this statistical analysis is that nobody really knows what the SAWW is going to be in the year 2020. This was the issue recently addressed by a Workers’ Compensation Administrative Law Judge (WCJ). His analysis was subsequently adopted and incorporated by a panel of commissioners with the Workers’ Compensation Appeals Board (WCAB) in Miramontes v. Lions Raisins and Acclamation Insurance Services, 2012 Cal. Wrk. Comp. P.D. LEXIS 91.

In Miramontes, the applicant’s attorney filed a timely Petition for Reconsideration taking issue with the finding of fact that $49,900.00 is a reasonable attorney’s fee for efforts through December 31, 2011 as well as the finding of fact that twelve percent (12%) of any future weekly payments made due to the COLA increases is a reasonable attorney’s fee. In the underlying case, applicant was found to be one hundred percent (100%) permanently and totally disabled. In response to the petition for reconsideration, the WCJ awarded a $60,000.00 attorney’s fee. The WCJ noted the uncertainties (at the time of the decision) concerning the upcoming Duncan decision, and deemed $60,000.00 to be a reasonable attorney’s fee.

Applicant’s attorney then filed a subsequent Petition for Reconsideration, taking issue with the $60,000.00 attorney’s fee awarded. In response, the WCJ deferred the attorney fee award pending the decision in Duncan v. WCAB. The defendant was then ordered to withhold twelve percent (12%) of any future life pension payment pending further order of this Board.

Subsequent to that decision, the WCJ filed a Supplemental Finding of Fact and an Order of Commutation that took into account the California Supreme Court’s holding in Baker v. WCAB (2011) 52 Cal.4th 434 [76 Cal. Comp. Cases 701]. Since the uncertainties concerning the Baker decision were no longer applicable, the WCJ found that $49,900.00 was a reasonable attorney’s fee, as it was approximately twelve percent (12%) of the estimated present value of the life pension award ($412,091.91). Said sum took into account subsequent COLA increases through December 31, 2011. After taking into account the commutation of $49,900.00, applicant’s life pension rate was reduced to $314.50 per week on December 1, 2011. The WCJ also found that twelve percent (12%) of any weekly life pension payments after January 1, 2012 above the sum of $314.50 was reasonable.

In the petition for reconsideration contesting the WCJ’s Supplemental Finding of Fact and Order of Commutation, applicant’s attorney argued, “The case at bar should be remanded back to the WCAB for a decision that the $60,000.00 attorneys (sic) fee… shall stand or be recalculated based on a fifteen percent (15%) fee and appropriate calculation dates, etc.”

Though the WCJ’s spends some time analyzing the legal consequences of the applicant’s counsel’s depositing the $60,000 attorney fee that he was paid but had asked to be deferred, the WCJ’s analysis of whether the attorney’s fee should be based on or reflective of the future COLA increases is very interesting. In his Report and Recommendation, the WCJ made the following observation:

"While this Court is not recommending that the fee awarded on November 10, 2011 be amended, this Court has reached the conclusion that when an attorney’s fee has been commuted in a life pension case that it is unfair and unreasonable to an injured worker to allow for an additional attorney fee based on unknown COLA’s which may be paid at some future point(s). Since the California workers’ compensation system does not take into account deflation in adjusting compensation rates (only inflation for life pension and 100% cases), a dollar awarded as of the date this Report is signed will have the greatest purchasing power of goods and services that any dollar will ever have during the course of an injured worker’s life. Likewise, the purchasing power of an attorney’s fee, which is ordered via a commutation, will also have its greatest ability to purchase goods and services from the date of issuance forward. Based upon this Court’s life experience as well as knowledge obtained while attaining a B.A. degree in Economics, it is apparent that the purchasing power of the dollar, as time passes, decreases due to inflation. The object of a COLA is to overcome the effects of a weakened dollar due to inflation with the goal that the original dollar as abetted by the COLA will allow a recipient to have the same purchasing power in later years that the recipient had in earlier years." (Emphasis in original)

Thus, in real dollar terms, the WCJ concluded, a COLA does not increase the value of applicant’s life pension. The WCJ argued that the COLA is an attempt to maintain the value of the life pension and allow for a correction of the loss of future purchasing power due to the weakened dollar, which will happen due to inflation. Since there is no increase in terms of real dollars or purchasing power when a COLA is received, the WCJ contended that the applicant, in terms of real dollars, does not receive any increase in compensation.

This fact, and that there should be no commutation of attorney’s fee as it would not be in applicant’s best interest as no one has any idea what the COLA will be in the years to come, led the WCJ to conclude that a commutation of the attorney fee, based on any future COLA’s, would not be based on substantial evidence.

In addressing these COLA issues, there are often significant sums of money at stake. If, as the WCJ here pointed out, there is no real increase in benefits being obtained by the COLA, the attorney fee should not include what can at best be described as an illusory increase. One thing can be certain: Given the significant sums of money involved, the appropriate calculation of the COLA as well as the COLA’s role in determining an attorney fee will be the focus of significant litigation going forward.

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

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