DIR Undertakes Long-Overdue Review of Discount Rate

By Jason Weinstock on August 20, 2015

The following is an article from WorkCompCentral, an online workers’ compensation news reporting service and resource center for the work comp industry and injured workers.   I haven’t received a response from DIR to the Petition to Amend Regulation that I filed on July 29.  DIR has 30 days to respond to that Petition.  I am posting the below article, because the reporter spoke to DIR about the Petition, and I thought you would be interested in what DIR had to say.  Virginia

Monday, August 10, 2015

DIR Undertakes Long-Overdue Review of Discount Rate

by Sherri Okamoto (Legal Editor)

State: Nevada

Topic: Top

Nevada’s Division of Industrial Relations last week said it is in the process of updating an often overlooked formula that can add or subtract tens of thousands of dollars from lump-sum awards to permanently disabled workers.

The division admits that the task of updating the “discount rate,” which is used to convert partial disability awards into lump sums, is 15 years overdue. Even though a state statute requires the division to review the discount annually, the division hasn’t done that since 2000 and hasn’t changed the rate since 1997.

In September 1997, the federal funds rate was about 5.5%. On Friday, it was 0.14%.

Las Vegas claimants’ attorney Virginia Hunt brought the long-overdue adjustment to the attention of state regulators. She filed a petition on July 29 asking the DIR to comply with the statute and update the discount rate.

Hunt said the DIR’s oversight has harmed injured workers, and she expects insurance carriers to oppose her request.

“These opponents may state it more eloquently, but their real complaint will be that they were counting on DIR staying asleep at the wheel regarding the compensation injured workers are paid for their permanent impairments when they elect to be paid in a lump sum,” Hunt said in her petition. “That argument is insulting to DIR, of course, as it questions whether DIR’s oversight should be ignored now to intentionally benefit insurers at the expense of injured workers.”

Under current law, an injured worker may take up to a 25% whole person permanent partial disability award in a lump sum, which is reduced to present value. Earlier this year, the state Legislature amended the statute to allow lump sums for claimants who were injured before July 1, 1995, of up to 30% for whole person impairment, according to Hunt’s petition.

Reducing to present value is basically a reversal of the idea of compounding interest. If a worker elects to take a lump sum and leaves that money untouched in an interest-bearing account, then he is supposed to wind up getting the same amount of money as he would if he had continued to collect installment payments.

Tinkering with the discount rates leads to enormous difference in the amount of PD awards paid to injured workers who elect to take a lump rather than accept installments over time. For example, a $100,000 award that would be paid out over 20 years has a present value of only $31,180.47 at the 6% rate, but is worth $55,367.58 at a 3% rate.

Nevada Revised Statute 616C.495(5) requires that the DIR review its discount rate annually. DIR Chief Administrative Officer Chuck Verre on Friday candidly acknowledged that the agency hasn’t undertaken the task in over a decade.

“We did not do what we should have done,” he said. “It’s as simple as that.”

He said he was in the process of asking the Division of Insurance to assign actuaries to evaluate whether the 6% discount rate needs to be adjusted to more accurately reflect the time value of money, and the DIR staff is researching the rates other states are using.

Hunt contends that the 6% discount rate is too high, so it’s leaving workers with far less than they would get if they didn’t take the lump-sum payout.

For instance, she said she had a 33-year-old client who accepted a lump-sum payment of $55,767 for a back injury, but he would have gotten $139,564 if he had gotten his award in weekly installments. Another client, who was 38, received a lump sum of $34,765, Hunt said, when he could have gotten $78,336.

On her blog, Hunt has suggested that a rate of 2.75% to 3% would be more appropriate.

California and Connecticut commute permanent disability awards at a 3% rate, Hawaii and Colorado use 4%, while  New Jersey and Delaware use a 5% rate.

Alabama and Kentucky join Nevada in using a 6% rate.

Utah and Kansas are at the higher end of the spectrum, using an 8% rate, and Arkansas is the highest, at 10%.

Other states have discount rates that can be adjusted on a case-by-case basis. For instance,Minnesota law provides that PPD awards can be commuted to a lump sum using a discount rate of up to 5%. Louisiana also allows a lump-sum payment to be discounted by no more than 8%.

Another popular approach among the states is to tie the discount rate to the interest rates for U.S. Treasury bills.

Arizona uses the mean average of the three-month Treasury bill rate on Dec. 31 of each of the five years prior to July 1 of the current year, while Texas uses the maturity rate for one-year Treasury bills.

South Carolina sets its discount rate on awards of 100 weeks or more to the interest rate on the five-year Treasury bill, although it provides that the discount rate cannot drop lower than 2% or exceed 6%.

Hunt’s blog says she believes workers know they “are getting a rotten deal” if they take a lump-sum payment, but many of the more seriously injured workers wind up going into debt while they are unable to work.

Hunt said she is advising her clients with PPD awards to continue receiving their benefits in installments until the DIR figures out what the appropriate discount rate should be.

“There might be a possibility of converting installment PPDs to higher lump sum awards once the present value discount rate is changed, but I cannot predict exactly what will happen, when something will happen, and which claimants will benefit from the overdue change,” she wrote. “Let’s hope DIR does the right thing and proposes an amendment to the regulation so that a nationally accepted discount rate can be used each year to get an accurate present value for lump-sum PPD awards.”

A copy of Hunt’s request for the DIR to take action is available here.

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