Financial problems with the state’s paid family and medical leave (PFML) program surfaced at the beginning of this year. (For more information, read our analysis of the situation, including background information and a review of legislative changes this year.)

Consequently, the Legislature required the Office of Financial Management (OFM) to contract with an entity for actuarial services and report to the Legislature by Oct. 1, 2022, on:

• The financial condition of the family and medical leave insurance account,
• “Any recommendations for options to modify the provisions of chapter 50A.10 RCW to maintain the long-term stability and solvency of the family and medical leave insurance account,” and
• A comparison of how PFML premium rates are set in Washington and other states.

The report (prepared by Milliman) was published this week, and the legislative task force on paid family and medical leave insurance premiums discussed it this morning. (Milliman’s presentation to the task force is available here.)

For the first two years of the program, the premium rate was statutorily set at 0.4% of wages. Thereafter, the statute specifies that the rate must be set based on the family and medical leave insurance (FMLI) account balance ratio of the prior year, which is the account balance (on Sept. 30) divided by the prior year’s total covered wages. Then the statute prescribes a range of rates (from 0.1%–0.6%) that correspond to various account balance ratios. The Employment Security Department (ESD) has no discretion in setting the rate.

If the account balance is particularly low, a solvency surcharge must be assessed, “at the lowest rate necessary to provide revenue to pay for the administrative and benefit costs of family and medical leave, for the calendar year, as determined by the commissioner.” The maximum solvency surcharge is 0.6%. (So the total rate could potentially be as high as 1.2%.)

According to the rate calculation that was performed last year, the premium rate for CY 2022 is 0.6% (the maximum base rate).

As of the Sept. 15 meeting of the PFML advisory committee, ESD was estimating that the account balance would be negative around the end of September/beginning of October. Based on these projections, they estimated that the 2023 rate will need to be 0.9%–1.0% (including a solvency surcharge).

Milliman recommends increasing the premium rate to 0.79% on Jan. 1, 2023. Milliman estimates that the FMLI account balance will be negative $8.7 million at the end of CY 2022. If the 2023 rate is set at 0.79%, according to Milliman, it “is expected to cover benefit payments and expenses, and return the fund to a surplus position by December 31, 2023.” Milliman estimates that the 2023 ending fund balance would be $236.4 million. (The report does not say if the account would still dip below zero during the year. ESD has permission from OFM to run deficits in the account until June 30, 2023, and the operating budget set aside $350.0 million from the general fund–state to cover any deficit that exists on June 30, 2023.)

Importantly, however, the Milliman estimates assume that ESD would collect premiums at the 0.79% rate for the full calendar year. This does not reflect what would actually happen. Premiums assessed for the first quarter of the year are not actually collected until the second quarter. Thus, ESD only collects premiums at a given rate for three-quarters of the year. This could mean that 0.79% would be too low to break even for 2023, but it’s possible the $236.4 million surplus in the scenario would be enough of a buffer.

Meanwhile, ESD said during the meeting today that they still expect next year’s rate to be in the 0.9% range. That accounts for the one-quarter delay in collections (unlike Milliman). ESD also has access to the most recent quarter of benefits data (which Milliman did not have)—they are expecting benefits to be higher. Finally, ESD has more recent data from the Economic and Revenue Forecast Council on wage growth. ESD said they will make a 2023 rate decision next week.

Additionally, Milliman recommends “establishing a target for the PFML fund equal to three months of expected benefit payments, and closely monitoring the experience to ensure that the fund remains within these target levels.” (The three-month target is based on how “insurance companies for determining target surplus for short-term disability benefits.”)

Milliman modeled a few rate options that would maintain balances close to the three-month target. The rate would begin at 0.79% next year and drop to 0.75% or 0.735% by 2027. (See the blue bars in the chart.) Again, these figures assume collections for the entire year at the specified rate.

Unfortunately, the Milliman report doesn’t make any recommendations about the program’s statutory rate structure. Indeed, the Milliman actuary said during the meeting that he doesn’t have a strong opinion about whether the formula is appropriate. He said that, ultimately, the maximum base rate in statute (0.6%) is just “too low” for the program.

ESD said that, based on their projections, the current formula “seems to function in a stable, mature program.” The trouble is that the program is still in the initial growth phase. (Milliman “assumes claim incidence rates will increase in 2023 and 2024, then stabilize in 2025 and beyond.”)

The task force will meet again on Nov. 22, when it will discuss proposals from task force members on potential statutory changes.