AIG is back in the news,

This time it’s in an analysis by New York Times financial reporter Andrew Ross Sorkin, who follows AIG in his Dealbook column.

AIG, which was bailed out to the tune of $182 billion by the U.S. taxpayer, continues to write workers’ comp coverage through its Chartis division and a web of affiliated companies.

AIG has been paying the U.S. Treasury back, and Sorkin notes that the U.S. government interest in the company is down to 77% from a high of 92%.

Many a California injured worker gets AIG/Chartis checks and benefit notices mailed from Shawnee Mission, Kansas.

How is AIG doing? The international financial and insurance behemoth recently announced a $19.8 billion profit. Sorkin notes that this was quite a feat for a company that was on its death bed several years ago. AIG had insured many arcane financial products, including credit default swaps, and got caught in the downdraft that took out Bear Stearns and Lehman. For those of you who need to find a good read, Michael Lewis’ “The Big Short” is an entertaining and astute tale of those times.

Sorkin scratched beneath the recent hi-fiving over large profits and notes that:
“But if you dug into the numbers, it quickly became clear that $17.7 billion of that profit was pure fantasy — a tax benefit, er, gift, from the United States government. The company made only $1.6 billion during the quarter from actual operations. Yet A.I.G. not only received a tax benefit, it is unlikely to pay a cent of taxes this year, nor by some estimates, for at least a decade.”

AIG benefits from a Treasury tax advantage. Here’s Sorkin on how this works:
“Here’s the back story: A.I.G.’s tax benefit comes in large part from its immense “net operating losses” during its depths of despair in 2008 before its rescue. The government had to dump $182 billion into the company after it was crippled by bad bets it had made insuring mortgage-backed securities.”

Sorkin points out that “The tax benefit comes in the form of something called net operating losses — NOLs in Wall Street parlance — that could be worth more than $25 billion, possibly more. Those losses can be very valuable, in part because companies can spread them over many years to lower or wipe out their income tax bills.”

Sorkin says :”However, according to longstanding securities laws, if a company files for bankruptcy or is taken over, it loses the ability to use its net operating losses. A.I.G. would fit that profile perfectly: on the verge of bankruptcy, the federal government took control of A.I.G., exchanging its bailout billions for shares in the company. The government — taxpayers — still own 77 percent of the company, down from 92 percent three years ago.”

According to Sorkin:”Still, the Treasury issued “Notices” exempting A.I.G. from losing its right to make use of its net operating losses. In total, the insurer estimated those losses were worth $26.2 billion as of 2009, and it claimed almost $9 billion in other “unrealized loss on investments.”

So we essentially have the U.S. Treasury owned AIG exempted from taxes.
Here is a piece by Mark Ramseyer of Harvard Law School in the Harvard Forum on Corporate Governance and Financial Regulation titled “Can The Treasury Exempt Its Own Companies From Tax?”: … -the-treas
Although the Ramseyer article focus on General Motors, it deals with the principles that apply to the AIG situation.

From a workers’ comp standpoint it’s a good thing that AIG/Chartis continued to operate. While workers’ comp was never an area of the company that was in any way responsible for the financial debacle, it would have been disastrous for the California insurance market if AIG and its affiliated companies had gone dark.

But is it a bad thing for the taxpayer if the government owned AIG is exempted from taxes?

Here is Sorkin’s analysis:
“All of this brings us to the inevitable questions: How did this happen? Why would Treasury exempt A.I.G. from the law? And if taxpayers own a majority of A.I.G., aren’t we the beneficiaries of the rule-bending?
A Treasury spokeswoman declined to comment, as did a spokesman for A.I.G. However, senior Treasury officials said privately that they had exempted A.I.G. because they did not consider the rescue to be a traditional takeover. The original law preventing companies from using the losses after a takeover were intended to prevent corporations from buying failing companies with lots of losses simply for the tax benefits.”

Sorkin notes: “Moreover, the officials said A.I.G.’s tax benefit would help taxpayers because it would raise the insurer’s share price. That may be true, but that assumes the government is able to sell its shares and exit its investment. That’s still a big “if.” (Though I do bet it will eventually happen.)”

Stay tuned.

Julius Young

The millennials get a lot of attention in our culture.

Advertisers crave their eyeballs. Social media companies build software and business empires around their habits. Publishing and entertainment companies buckle under the weight of change wrought by their predilections. Sociologists debate whether they are the most apathy-prone generation, or on the verge of becoming one of the most activist.

Will masses who grew up on Beavis and Butthead and The Simpsons turn to Occupy in droves? Will they even continue to vote? Will they care to join unions? Will they marry? How many will be obese? Will they save? Will they even have a safety net for themselves?

I’m not aware of any studies about millennials in the workers’ comp system.
How do they view workers’ comp? How do they view the tort system?

If there’s any research on those issues, I’ve yet to see it.

But in the process of nosing around, I found a couple of studies that are worthwhile for background understanding of millennials and their current situation.

One is a survey undertaken by the Pew Research Center. The title says it all, “Young, Underemployed and Optimistic”: … mistic.pdf

As might be imagined, the recession of the last few years has hit millennials very hard, making it difficult for many of them to gain any traction in their economic status and professional lives. Yet, many remain optimistic over their longterm prospects.

Filled with charts and graphs, it’s a fascinating read.

But tied to the millennial story is a sense that there must be a change in the long term politics of the country. What would a budget designed by millennials look like?

Check out the Budget for a Millennial America, a project of the Roosevelt Campus Network: … al-America

The millennial budget claims that:
“Millennials nationwide have the potential to dramatically reshape the conversation about America’s future. In 2010, the Roosevelt Campus Network leveraged the visionary talent of its Network to launch Think 2040–a program that empowers the Millennial generation to reframe the challenges and opportunities facing America and its communities and build toward a progressive future. Using Think 2040 participant contributions, the Roosevelt Institute Campus Network created a Blueprint for the Millennial America that identifies the policy structures and reforms necessary to realize the Millennial vision for America in 2040. The proposals move us toward an “equal, accessible, empowered, and community-minded 2040 America.” The Blueprint addresses six critical areas: Education, Energy and the Environment, The Economy, Health Care, Social Justice and Democratic Participation, and Defense and Diplomacy.”

Many of the issues raised in the millennial budget go far beyond the scope of this blog, but it is a start for a debate that is long overdue.

The critical point is that many of us in the “comp community” have millennial kids. Their expectations and interests may be very different from our expectations and interests. In time they will need to decide what kind of social net they want and how much they want to tax themselves to pay for
it. They will need to decide how much they want to continue to subsidize a boomer generational wave that will be long in the tooth in the coming decades.

They’ll probably need to come to grips with the very definition of work itself, as technology shifts continue to wreak havoc on old models of productivity and job stability.

Workers’ comp will probably change over time in response to some of these forces. Just how and when that will happen we don’t know.

Julius Young

The California Department of Industrial Relations and Division of Workers’ Compensation has announced plans for a series of 6 forums in April to solicit opinions about the direction of reforms to the California workers’ compensation system.

The short press release notes the following schedule:

Tuesday, April 10, 2012—West Sacramento, CA 95605
Monday, April 16, 2012—Los Angeles, CA 90013
Wednesday, April 18, 2012—Fresno, CA 93721
Tuesday, April 24, 2012—San Bernardino, CA 92401
Wednesday, April 25, 2012—La Mesa, CA 91942 (
Monday April 30, 2012—Oakland, CA 94612

According to the press release, space is limited and participants will be limited to 3 minutes of oral comment, though they can submit written commentary.

The press release notes that:

“DIR Director Christine Baker and DWC Administrative Director Rosa Moran will host the forums and topics of discussion will include:

Provision of appropriate medical treatment without unnecessary delay, the medical provider network (MPN), utilization review (UR) or other issues
Enabling injured workers to return to work as quickly as medically feasible
Adequate compensation for permanent disabilities
Reducing the burden of liens on the system
Identification of appropriate fee schedules
Reducing unnecessary litigation costs
Assessing appropriate use of opiates and other care
Any other improvements needed”

This is fascinating, of course.

Earlier, Rosa Moran of the DWC had indicated plans to create advisory groups to look at some of these issues. It’s not clear whether these public hearing will replace or merely supplement advisory groups, which to my knowledge have not yet been formed.

Of course, some of these topics have already been studied by CHSWC or other groups. In some instances there are already extensive policy fixes that have been advanced. Some fixes would require legislation while others could be done through the regulatory process.

Most of the “stakeholder groups” have ideas on the topics, but in many instances have kept their policy preferences under wraps.Many stakeholder groups may still do so, anticipating that they will be invited to the legislative table as any reforms are brought into bill language.

So will this turn out to be a useful exercise, or a circus? Not clear.

A piece by Greg Jones in Workcompcentral quotes one source as fearing that
“the events could actually be polarizing, with labor and management groups
presenting worst-case scenarios that don’t reflect how the system is actually working.”

In several posts earlier this year I had mused that despite the rumors swirling about possible 2012 comp reform efforts, it would be surprising that Governor Brown would want to see this potentially divisive issue come to the forefront this year.

Workers’ comp has been a thorn in the side of many a California politician, and has a reputation as a tar pit. With comp largely low on the public’s radar, comp would appear to be a low priority.

Looks like I may be wrong. Anyway, at a minimum this gives Brown a chance to claim that stakeholders and the public had their say, even if the action is in back room deal making.

But hearings like these tend to raise the profile of workers’ comp, and there may be stakeholders who would love to create the perception of a workers’ comp crisis even though the market has been quite steady. Labor groups, employer groups, applicant attorneys and doctor groups are all quite capable of packing the hearings with unhappy campers.

So the spin arising from these hearings may have significant effect, weakening some stakeholder positions and strengthening others.

Stay tuned.

Julius Young

In November 2011 California reached a memorandum of understanding with the U.S. Department of Labor on the issue of employee misclassification.

According to the U.S Department of Labor:
“The Department’s Misclassification Initiative, launched under the auspices of Vice President Biden’s Middle Class Task Force, is making great strides in combating this pervasive issue and to restoring these rights to those denied them. In September 2011, Secretary of Labor Hilda L. Solis announced a major step forward with the signing of a Memorandum of Understanding (MOU) between the Department and the Internal Revenue Service (IRS). Under this agreement, the agencies will work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.”
“Additionally, labor commissioners and other agency leaders representing twelve states have signed MOUs with the Department’s Wage and Hour Division, and in some cases, with its Employee Benefits Security Administration (EBSA), Occupational Safety and Health Administration (OSHA), Office of Federal Contract Compliance Programs (OFCCP), and the Office of the Solicitor. (See interactive map of participating states). The Department is actively pursuing MOUs with additional states as well.
These MOUs will enable the Department to share information and to coordinate enforcement efforts with participating states in order to level the playing field for law-abiding employers and to ensure that employees receive the protections to which they are entitled under federal and state law. Employers that misclassify their employees may not be paying the proper overtime compensation, FICA and Unemployment Insurances taxes, or workers’ compensation premiums.”

I’ve written many posts about the problem of misclassification and how the problem plagues our comp system. Honest employers are forced to compete against cheating employers who misclassify employees, often skirting workers’ comp coverage.

So it’s worth posting a link to the MOU between California and the Department of Labor that deals with this issue:

Christine Baker of the DIR has noted in several speeches that dealing with employee misclassification will be an important feature of the Brown Administration’s labor policy. The MOU appears to further cooperation between federal and state agencies in dealing with the problem.

Thumbs up.

Julius Young