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Montana Schools Groupworkers Compensation Riskretention Program v. Department of Labor and Industry Employment Relations Division

Court of Workers Compensation of Montana

June 16, 1995

MONTANA SCHOOLS GROUPWORKERS COMPENSATION RISKRETENTION PROGRAM Petitioner
v.
DEPARTMENT OF LABOR AND INDUSTRY EMPLOYMENT RELATIONS DIVISION Respondent.

          ORDER ON APPEAL

          MIKE MCCARTER, JUDGE

         Summary: School district self-insurance association (a Plan 1 insurer) challenged the assessments and fees levied against it by the Department of Labor and Industry, pursuant to section 39-71-201, MCA (1991), to fund state government costs of administering the Workers' Compensation and Occupational Disease Acts. The Plan 1 insurer argued (1) the Department's method of assessment violated equal protection principles by failing to distribute costs proportionately among Plan 1 insurers in accordance with governmental costs attributable to the individual employers; and (2) the Department's method of assessing costs constituted a de facto agency rule promulgated without following statutorily mandated rulemaking procedures (Montana Administrative Procedures Act), that is, without considering the input of impacted persons and entities.

         Held: The assessments and fees levied against Plan 1 insurers do not violate equal protection principles. Distribution of the assessment among self-insurers in accordance with their gross payrolls may not be the most precise measure of governmental costs attributable to each individual employer, but equal protection does not require mathematical precision and perfect equality, only a rational measure, which is provided by gross payroll. However, the assessment criteria used by the Department amount to a de facto agency rule where section 39-71-201, MCA (1991) has left significant regulatory details to agency discretion and that discretion could be exercised in different manners, each impacting segments of the public differently. The assessment methodology for implementing section 39-71-201, MCA (1991) must be adopted by rule. Once a rule is adopted, the petitioner is entitled to have its 1992 assessment recomputed and to receive either a refund or credit if appropriate.

         Topics:

Constitutions, Statutes, Regulations and Rules: Montana Code Annotated: section 39-71-201, MCA. The assessments and fees levied against school district group self-insurance association to fund state government costs of administering the Workers' Compensation and Occupational Disease Acts pursuant to section 39-71-201, MCA, do not violate equal protection principles. Distribution of the assessment among self-insurers in accordance with their gross payrolls may not be the most precise measure of governmental costs attributable to each individual employer, but equal protection does not require mathematical precision and perfect equality, only a rational measure, which is provided by gross payroll.
Constitutions, Statutes, Regulations and Rules: Montana Code Annotated: section 39-71-201, MCA. The assessment methodology used by the Department of Labor and Industry in 1992 and 1993 under section 39-71-201, MCA, amounted to a de facto rule which, pursuant to section 2-4-102(11)(a), MCA, is deemed void for the Department's failure to follow rulemaking procedures.
Constitutions, Statutes, Regulations and Rules: Montana Code Annotated: section 2-4-102(11)(a), MCA. The assessment methodology used by the Department of Labor and Industry in 1992 and 1993 under section 39-71-201, MCA, amounted to a de facto rule which, pursuant to section 2-4-102(11)(a), MCA, is deemed void for the Department's failure to follow rulemaking procedures.
Constitutional Law: Equal Protection. The assessments and fees levied against school district group self-insurance association to fund state government costs of administering the Workers' Compensation and Occupational Disease Acts pursuant to section 39-71-201, MCA, do not violate equal protection principles. Distribution of the assessment among self-insurers in accordance with their gross payrolls may not be the most precise measure of governmental costs attributable to each individual employer, but equal protection does not require mathematical precision and perfect equality, only a rational measure, which is provided by gross payroll.
Administrative Agencies: Rules: Rulemaking. The method used by the Department of Labor and Industry to assess fees against insurers and self-insurers to fund government costs of administering the Workers' Compensation and Occupational Disease Acts amounts to a de facto agency rule. Where section 39-71-201, MCA (1991) has left significant regulatory details to agency discretion and that discretion could be exercised in different manners, each impacting segments of the public differently, the assessment methodology must be adopted by rule following statutory rulemaking requirements (Montana Administrative Procedures Act). Once a rule is adopted, school district self-insurance association is entitled to have its 1992 assessment recomputed and to receive either a refund or credit if appropriate.
Insurers: Assessments for WC Regulation. The method used by the Department of Labor and Industry to assess fees against insurers and self-insurers to fund government costs of administering the Workers' Compensation and Occupational Disease Acts amounts to a de facto agency rule. Where section 39-71-201, MCA (1991) has left significant regulatory details to agency discretion and that discretion could be exercised in different manners, each impacting segments of the public differently, the assessment methodology must be adopted by rule following statutory rulemaking requirements (Montana Administrative Procedures Act). Once a rule is adopted, school district self-insurance association is entitled to have its 1992 assessment recomputed and to receive either a refund or credit if appropriate.

         This case was initiated by the Montana Schools Group Workers' Compensation Risk Retention Program (MSG) to contest the amount it was assessed under section 39-71-201, MCA, for the 1992 fiscal year. It paid the full amount of the assessment --$162, 477.61 -- under protest and requested a contested case hearing before the Department of Labor and Industry (Department). A hearing was held. MSG's challenge was rejected and this appeal followed.

         Montana Schools Group Workers' Compensation Risk Retention Program

         Insurance coverage for workers' compensation injuries is provided through three different statutory plans. Plan 1, which is found in Title 39, part 71, chapter 21, permits employers to self-insure provided certain conditions are met. Self-insured employers are referred to as Plan 1 employers. § 39-71-2101, MCA. Alternatively, they may be referred to as self-insurers or self-insured employers. Plan 2, found in Title 39, part 71, chapter 22, regulates commercial insurance companies writing workers' compensation insurance. Those companies are referred to as Plan 2 insurers. § 39-71-2201, MCA. Plan 3, found in Title 39, part 71, chapter 23, establishes and regulates a State Compensation Insurance Fund (State Fund), which is a "nonprofit, independent public corporation" established solely for the purpose of writing workers' compensation insurance. § 39-71-2313, MCA.

         MSG was organized on November 15, 1989. (Tr. at 65.) It is an association of 230 school districts which collectively self-insure under the MSG umbrella. (Tr. at 65; Finding 1.[1]) MSG is authorized by the Department to operate under Plan 1. (Id.)

         The Assessment Statute

         Section 39-71-201, MCA, provides a method of funding state government costs of administering the Workers' Compensation Act (WCA) and the Occupational Disease Act (ODA). It provides that those costs be paid from (a) fees and penalties assessed and collected pursuant to sections 39-71-205 and 39-71-304, MCA; (b) fees levied in connection with inspection of boilers and the issuance of licenses to operating engineers; and (c) fees assessed workers' compensation insurers and self-insured employers. At the time of the 1992 assessment, the section provided:

Administration fund. (1) A workers' compensation administration fund is established out of which all costs of administering the Workers' Compensation and Occupational Disease Acts and the various occupational safety acts the department must administer are to be paid upon lawful appropriation. The following money collected by the department must be deposited in the state treasury to the credit of the workers' compensation administrative fund and must be used for the administrative expenses of the department:
(a) all fees and penalties provided in 39-71-205 and 39-71-304;
(b) all fees paid for inspection of boilers and issuance of licenses to operating engineers as required by law;
(c) all fees paid from an assessment on each plan No. 1 employer, plan No. 2 insurer, and plan No. 3, the state fund. The assessments must be levied against the preceding calendar year's gross annual payroll of the plan No. 1 employers and the gross annual direct premiums collected in Montana on the policies of the plan No. 2 insurers, insuring employers covered under the chapter, during the preceding calendar year. However, no assessment of the plan No. 1 employer or plan No. 2 insurer may be less than $200. The assessments must be sufficient to fund the direct costs identified to the three plans and an equitable portion of the indirect costs based on the ratio of the preceding fiscal year's indirect costs distributed to the plans, using proper accounting and cost allocation procedures. Plan No. 3 must be assessed an amount sufficient to fund the direct costs and an equitable portion of the indirect costs of regulating plan No. 3. Other sources of revenue, including unexpended funds from the preceding fiscal year, must be used to reduce the costs before levying the assessments.
(2) The administration fund must be debited with expenses incurred by the department in the general administration of the provisions of this chapter, including the salaries of its members, officers, and employees and the travel expenses of the members, officers, and employees, as provided for in 2-18-501 through 2-18-503, as amended, incurred while on the business of the department either within or without the state.
(3) Disbursements from the administration money must be made after being approved by the department upon claim therefor.

§ 39-71-201, MCA (1991). The section was amended in 1993 (1993 Mont. Laws, ch. 555, § 2) but the amendments were technical in nature and do not change the basic assessment scheme.

         State Government Regulation of WCA and ODA

         With the exception of the Workers' Compensation Court and certain rehabilitation services provided by the Department of Social and Rehabilitation Services (SRS), state government operations under the WCA and ODA are located in the Department of Labor and Industry. The Workers' Compensation Court is attached to the Department for administrative purposes, § 2-15-1707 (1), MCA, but is otherwise autonomous. Section 39-71-2902, MCA, provides that the expenses of the Workers' Compensation Court are payable out of the workers' compensation administration fund.

         Workers' compensation operations are separated into functions that are administered by administrative units within the Department's divisions and bureaus. Hearings are conducted by the Hearings Unit, which is part of the Department's Legal Services Division. See Organizational Chart in ARM 24.1.101. In 1992 the following units within the Dispute Resolution Bureau of the Department's Employment Relations Division (ERD) were involved in WCA and ODA matters: Claims Management Unit, Files Management Unit, Accident Cataloging Unit, Rehabilitation Unit and Mediation Unit. (Ex. 16.) The Medical Regulations Unit and Policy Compliance Unit were under the Standards Bureau of ERD. (Id.) Mining Inspection, Boiler/Crane Inspection and Loss Control were under the Safety Bureau of ERD. (Id.) In addition, administrative and clerical support were provided for all ERD functions by the Division Administrative Support Unit. (Ex. 16.) Therefore, a portion of Administrative Support Unit's work was included in workers' compensation costs assessed to the three plans. (Id. and Tr. at 44-45.) The allocation of functions to the units described herein was for 1992 and may not reflect current ERD organization.

         1992 Assessment

         For fiscal year 1992, the Department determined that the net amount needed to fund governmental operations related to workers' compensation and occupational disease was $2, 588, 500.63. That amount was determined by adding together the amounts required in 1992 to fund each cost center and subtracting unspent fees from the previous fiscal year. Those amounts were as follows:

Agency, Unit or Function
Budget
1. Workers' Compensation Court[2]
374, 422.00
2. Hearings Unit
258, 191.00
3. Administration/Clerical Support
484, 140.00
4. Claims Management
215, 541.00
5. Files Management
282, 588.00
6. Accident Cataloging
62, 855.00
7. Rehabilitation DLI
134, 088.00
8. Rehabilitation Panels SRS
68, 303.00
9. Medical Regulation
64, 378.00
10. Policy Compliance
180, 072.00
11. Mediation
139, 301.00
12. Subsequent Injury Fund Admin.
25, 548.00
13. Administration (Safety Functions)
27, 495.00
14. Occupational Safety Statistics
59, 026.00
15. Supplemental Data System
31, 000.00
16. Loss Control
251, 815.00
17. Mining Inspection
240, 337.00
18. Boiler Inspection
214, 147.00
(Less Estimated Fees)
(32, 000.00)
TOTAL NEEDED ASSESSMENT
$3, 081, 247.00
Unspent carry over from
1991 492, 746.37
NET AMOUNT NEEDED
$2, 588, 500.63

(Ex. 19.) Two areas, Administration/Clerical Support and Administration for safety functions (Items 3 and 13), were part of overall administrative services provided by the Department. The amounts allocated to the WCA/ODA assessment for these two areas were therefore "based on the relative percentages that those functions [WCA and ODA] were utilized." (Tr. at 45.)

         As can be seen from the estimated offset of fees for boiler inspection, the amounts generated by the first two sources of fees, section 39-71-201(1)(a) & (b), MCA, are minimal. Thus, government regulation of workers' compensation is substantially funded by the assessments levied against the three plans.

         Methodology for Allocating Fees to the Three Plans

         Brian McCullough (McCullough), administrator of the Budget and Planning Unit of the Department, testified regarding allocation of the assessment among the three plans. The basic methodology has been used for a number of years. It has never been formalized by rule and no rulemaking proceeding has ever taken place.

         For each cost center, the Department determines what percentage of work is performed by the cost center with respect to each plan. The budget for the cost center is then multiplied by the resulting percentages, yielding the amount due from each plan in order to fund the cost center.

         The percentages for the Workers' Compensation Court, the Hearings Unit, Claims Management, Files Management, Accident Cataloging, the three Rehabilitation areas, Mediation, and Supplemental Data System are based on the raw numbers of filings, cases processed, reports, and files reviewed. For example, costs of the Workers' Compensation Court are allocated by determining how many petitions were filed with respect to each plan. For fiscal year 1991, 323 petitions were filed, forty-six (46) for Plan 1 employers (14.24%), 109 for Plan 2 insurers (33.75%), and 168 for the State Fund (52.01%). The percentages are then multiplied by the total budget of the Court to arrive at the amount due from each plan to fund the Court.

         The percentages for other cost centers are determined by different methods. The percentages for Policy Compliance are based on the number of carriers; Occupational Safety Statistics on the actual number of employers insured by the plan; and Loss Control, Mining Inspection, and Boiler/Crane Inspection on employee hours attributable to inspections for each plan. How the percentages for Administration/Clerical Support, Medical Regulation, and Administration are determined is unclear from the record below.

         For 1992, the following chart summarizes the manner in which percentages were determined, the actual percentages allocated to each plan, and the actual amounts allocated for each cost center:

         SCHEDULE OF FISCAL YEAR 1992 ESTIMATED BUDGETS PER OPERATIONAL PLAN ALLOCATED TO PLANS I, II AND III

FUNCTION

TOTAL BUDGET

PLAN I

PLAN II

PLAN III

LEGAL FUNCTIONS:

1. WORKERS' COMPENSATION COURT Allocation

100.00%

$374, 422.00

14.24%

$53, 317.69

33.75%

$126, 367 .43

52.01%

$194, 736.88

2. HEARINGS Allocation

100.00%

$258, 191.00

12.65%

$32, 661.16

20.48%

$52, 877. 52

66.87%

$172, 652.32

INSURANCE COMPLIANCE:

3. ADMIN/CLERICAL SUPPORT Allocation

100.00%

$484, 140.00

21.12%

$102, 250.37

39.44%

$190, 944.82

39.44%

$190, 944.82

4. CLAIMS MANAGEMENT Allocation

100.00%

$215, 541.00

11.03%

$23, 774.17

24.94%

$53, 755.93

64.03%

$138, 010.90

5. FILES MANAGEMENT Allocation

100.00%

$282, 588.00

39.47%

$111, 537.48

60.53%

$171, 050.52

0.00%

$0.00

6. ACCIDENT CATALOGING Allocation

100.00%

$62, 855.00

50.52%

$31, 754.35

49.48%

$31, 100.65

0.00%

$0.00

7. REHABILITATION DLI Allocation

100.00%

$134, 088.00

7.16%

$9, 600.70

12.41%

$16, 640.32

80.43%

$107, 846.98

8. REHABILITATION PANELS SRS Allocation

100.00%

$68, 303.00

7.16%

$4, 890.49

12.41%

$8, 476.40

80.43%

$54, 936.10

9. MEDICAL REGULATION Allocation

100.00%

$64, 378.00

11.03%

$7, 100.89

24.94%

$16, 055.87

64.03%

$41, 221.23

10. POLICY COMPLIANCE Allocation

100.00%

$180, 072.00

16.55%

$29, 801.92

83.45%

$150, 270.08

0.00%

$0.00

11. MEDIATION Allocation

100.00%

$139, 301.00

12.09%

$16, 841.49

20.35%

$28, 347.75

67.56%

$94, 111.76

12. SUBSEQUENT INJURY FUND ADMIN. Allocation

100.00%

$25, 548.00

9.11%

$2, 327.42

27.45%

$7, 012.93

63.44%

$16, 207.65

SAFETY FUNCTIONS:

13. ADMINISTRATION Allocation

100.00%

$27, 495.00

27.00%

$7, 423.65

11.00%

$3, 024.45

62.00%

$17, 046.90

14. OCCUPATIONAL SAFETY STATISTICS Allocation

100.00%

$59, 026.00

0.15%

$88.54

14.27%

$8, 423.01

85.58%

$50, 514.45

15. SUPPLEMENTAL DATA SYSTEM Allocation

100.00%

$31, 000.00

40.04%

$12, 412.40

38.64%

$11, 978.40

21.32%

$6, 609.20

16. LOSS CONTROL Allocation

100.00%

$251, 815.00

49.71%

$125, 177.24

2.22%

$5, 590.29

48.07%

$121, 047.47

17. MINING INSPECTION Allocation

100.00%

$240, 337.00

18.88%

$45, 375.63

22.83%

$54, 868.94

58.29%

$140, 092.44

18. BOILER INSPECTION Estimated Budget Less Estimated Fees Allocation

100.00%

$214, 147.00

($32, 000.00)

$182, 147.00

18.30%

$33, 332.90

4.65%

$8, 469.84

77.05%

$140, 344.26

TOTAL NEEDED ASSESSMENT

$3, 081, 247. 00

$649, 668.5 0

$945, 255 .14

$1, 486, 323. 37

COLLECTION ADJUSTMENT

$492, 746.37

($29, 462.1 3)

$303, 809 .74

$218, 398.77

NET NEEDED ASSESSMENT

$2, 588, 500. 63

$679, 130.63

$641, 445 .40

$1, 267, 924. 60

(Ex. 19.)

         Based on the foregoing, the amount of fees assessed for fiscal 1992 to each of the three plans was as follows:

Plan 1

$ 679, 130.63

Plan 2

$ 641, 445.40

Plan 3

$1, 267, 924.60

(Ex. 19.)

         Allocation of Assessed Fees within Plan 1

         After the fees are determined for each plan, they are then distributed among the participants of the plans. The methodology for distribution among plan members differs with each plan. Since it is the sole participant in Plan 3, the State Fund is assessed the entire amount due from Plan 3. § 39-71-201(1)(c), MCA. In the case of Plan 2, the fees are allocated to individual insurers based on gross annual directed premiums collected in Montana for workers' compensation insurance policies. Id. For Plan 1 employers, the assessed fees are distributed on the basis of gross annual payroll. Id.

         The gross annual payroll for all Plan 1 employers was $977, 590, 700.42. (Ex. 19.) Thus, to raise the $679, 130.63 allocated to Plan 1 for fiscal 1992, an assessment of .0695% of gross payroll was imposed on each Plan 1 employer. ($977, 590, 700.42 x .000695 = $679, 425.50.) (Id.) The gross payroll of MSG (calendar year 1990) was $-233, 780, 734.42, or 23.85% of the gross payroll of all Plan 1 employers. Thus, MSG's share of Plan 1 fees was $162, 477.61. ($233, 780, 734.42 x .000695 = $162, 477.61.)

         The final assessment for fiscal 1992 is contained in the ADMINISTRATIVE ASSESSMENT REPORT, which was introduced as Exhibit 19. That report sets forth the basic information concerning the methodology used by the Department. The chart on the preceding pages is from that report.

         Proceedings Below

         The first assessment levied against MSG was for fiscal year 1991 (July 1, 1990 to June 30, 1991). It paid that assessment. In early 1992, following receipt of an estimated assessment for fiscal year 1992, MSG requested a meeting with Department officials. (Finding 23.) In a meeting with Department representatives on March 30, 1992, it expressed concern with the method used to distribute costs among the Plan 1 employers. (Id.) The Department then organized a task force to look into alternative methods of assessment but that task force ultimately concluded that no changes should be made in the Department's methodology. (Findings 25 and 26; Exs. 12-14.) No rulemaking proceeding was ever commenced.

         Upon receiving final notice of the 1992 assessment, MSG initially refused to pay. (Finding 20.) However, when the Department threatened to decertify it as a Plan 1 employer and turn the assessment over to the State Auditor's Office for collection, MSG paid the full amount on June 16, 1992. (Findings 20-22.) It made its payment under protest and requested a contested case hearing regarding the assessment. (Finding 22.)

         A hearing was held on January 21 and 22, 1994. The first three issues presented by MSG were as follows:

1) whether the Department of Labor and Industry, Employment Relations Division (hereinafter referred to as DOLI) properly assessed MSG pursuant to § 39-71-201, Montana Code Annotated (MCA);
2) whether the assessment against MSG is void in that the procedures used to determine and assess the amount are in fact rules, within the meaning of the Administrative Procedures Act; and
3) whether the assessment is invalid and void in that the administrative costs are not allocated based on actual use using proper accounting and cost allocation procedures.

(FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER at 2.)

         Citing Jarussi v. Board of Trustees, 204 Mont. 131, 664 P.2d 316 (1983), the hearing examiner ruled that two other issues were constitutional challenges outside the jurisdiction of the Department. (FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER at 2.) Thus, MSG's constitu-tional challenges were deferred for consideration by this Court.

         The hearing examiner considered MSG's contention that the methodology used by the Department amounted to a rule and was void because it had been promulgated without a rulemaking proceeding. (Id. at 13-17.) He found the Montana Supreme Court decisions cited by MSG to be inapposite. (Id. at 15.) He concluded that the assessment methodology utilized by the Department merely "interpret[ed]" the assessment statute and construed section 2-4-102(11), MCA, as permitting but not requiring "interpretive" rulemaking. (Id. at 17.) He concluded that the Department properly implemented the methodology without a formal rule. (Id.)

         The hearing examiner also rejected MSG's contention that the methodology does not employ proper cost and allocation procedures. He noted MSG's dissatisfaction with the allocation procedure because it fails to identify and allocate costs within the various plans. He pointed out that the statute requires only that costs be allocated as between plans. (Id. at 20-21.) In reply to MSG's evidence and argument that the Department could utilize more accurate methods of measuring work load, the hearing examiner said, "The consensus ...


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