Insurance Departments Feel Pain Of Their States Budget Crunches

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The fiscal pain that governors say their states will experience in the coming year is rippling through state insurance departments throughout the country.

That pain is reflected in actions ranging from restrictions on travel to hiring freezes and is likely to be felt into the forseeable future, according to interviews with National Underwriter.

The potential impact on the ability to properly regulate insurance issues surfaced during a recent discussion of a proposed model annuity nonforfeiture regulation that is being fast tracked.

During that discussion, regulators were left wondering whether travel restrictions would leave enough regulators present for a quorum on the issue when they meet this week for the spring meeting of the National Association of Insurance Commissioners in Atlanta. The ability to have a quorum and take a vote may depend on whether one regulator is able to fly into Atlanta on time to make that particular session.

With the exception of New York, all states contacted by NU cited belt tightening.

And for good reason, according to the National Governors Association, which says states will have budget shortfalls of more than $80 billion in fiscal year 2004.

In Illinois, for example, the insurance department along with other state agencies, is awaiting word from Governor Rod Blagojevich on what budget actions need to be taken, says Arnold Dutcher, the departments acting director.

On Feb. 24, the governor called for agency and department budget cuts averaging 10% to help plug a state budget deficit of nearly $5 billion.

“We dont know how it will apply to our budget,” or if there will be changes to the departments budget submission for the coming fiscal year, Dutcher adds.

The departments current budget is $43.9 million, raised from dedicated funds from fees and charges paid by insurers and producers.

Dutcher says the department has already taken action to limit expenses and is part of a statewide governmental hiring freeze. The department is allotted 413 employees and currently there are 83 vacancies that cannot be filled, he says. Attrition and an early retirement program created 53 of those 83 vacancies.

Texas state agencies have received a similar cost-cutting directive from Gov. Rick Perry who announced 2003 reductions of agencies appropriations averaging 9%.

Although maintenance taxes are used to fund the Texas insurance department, Lee Jones, a spokesperson, says there have been cutbacks on travel and hiring. For instance, vacant positions for financial analysts and attorneys have been removed from the job board, he says.

The budget appropriation for fiscal year 2003 is $52.8 million and with cuts of $3.6 million, the department has agreed not to spend more than $49.2 million, he adds.

The Connecticut departments $21 million budget is funded through premium taxes and not through a general state fund, says a spokesperson. Even so, it lost 15 people within the last month, she says.

The reason, according to the spokesperson, is that even though the department is not funded by the states general fund, it has cut back along with other state agencies. For instance, Connecticut representatives at the NAIC used to consist of several divisional directors as well as the commissioner, but now, this spokesperson says, they comprise the commissioner, her director of financial regulation and chief attorney.

In Pennsylvania, Governor Edward Rendell ordered an immediate $120 million spending reduction for FY 2002-2003 to help balance an expected $600 million budget shortfall.

There has been no formal request for cutbacks at this time, says Rosanne Placey, a spokesperson for the Pennsylvania department. So, at present, she adds, she cannot speak to potential cuts in items such as travel. However, Placey notes, if required, the department will make cuts and can possibly offer some funds from programs like the Childrens Health Insurance Program.

The departments budget is $22.2 million. Of that, $300,000 is part of a budgetary reserve only to be used in an emergency.

Any premium taxes and enforcement fees are directed into the states general fund and from that fund the money is allocated to the department, Placey says.

In California, a looming $35 billion state budget deficit will not directly impact the departments budget. Even though its budget is funded through special funds and not the general state fund, a hiring freeze is in place because all hiring is done through the state, says spokesperson Nanci Kramer.

Additionally, she says the department, in an effort to curtail expenses, has limited travel and put a freeze on purchases of new equipment.

The New Jersey department of banking and insurance is also paring back its budget, says spokesperson Mary Caffrey. The departments proposed FY 2004 budget is $68 million with $24.85 million of that directed to the insurance division.

The budget does not come from the general fund but rather is generated from 0.1% of premium taxes, says Caffrey. The balance of expenses such as fringe benefits are assessed based on net written premiums of each company, she continues. A small portion of fraud assessment, $2.1 million, is used to cover fraud related activities the department undertakes, Caffrey says.

And, she adds, there will be cuts to the services and salary accounts in the insurance division.

Vacant department positions totaling $900,000, which had opened up because of an early retirement program and attrition, are not being filled and are not likely to be in the forseeable future, she says. This is problematic, she continues, because of the increase in consumer questions and complaints and issues such as the medical malpractice debate which precipitated a strike by doctors in the state.

Washington states department is funded through a premium tax, says Stephanie Marquis, a spokesperson. Even so, the governors budget proposal recommends a 7.5% cut in department staff, she says.

New Yorks budget concerns will not impact department hiring, according to the New York State Division of the Budget. For the fiscal year starting in 2003 and running through 2004, the departments budget is $160 million.

In fact, the New York department has been authorized to fill 17 new positions, in preparation for any future events of terrorism, the division says.

The funding, according to the budget division, comes from an industry assessment on premiums. The assessment for fiscal year 2002 which ends March 31, is 0.24% per $1,000 of premium. In the fiscal year starting April 1, the assessment will start at 0.29% per $1,000 of premium. However, the department notes that usually the assessment is lowered during the year as funds are met.


Reproduced from National Underwriter Edition, March 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.