Kiwiblog

Michael Littlewood argues in this paper that neither ACC nor Superannuation should be pre-funded.

He argues that pre-funding of ACC should not just be delayed until 2019 (instead of 2014), but is inappropriate for a Government entity.

I suggest people read the full paper, bus his points in summary are:

• The ultimate owner of the provider, the government, will never disappear. Also, the government has the power to tax to meet future liabilities, expected or unexpected. The ACC has therefore no apparent need to maintain a pool of invested assets to pre-fund its expected, contingent future obligations.
• By maintaining the ACC Fund the government is effectively in the business of portfolio investing.. That is because, when the accounts for the ACC are consolidated as shown in Chart 1, the ACC’s investments become the government’s. The ACC does not itself
  need to address the issue (whether or not to be a portfolio investor) but the government should.
• Borrowing to buy portfolio investments (shares, bonds etc) is speculation – again, not necessarily a bad thing in itself. The borrower takes on the risk that the returns from those investments will be at least as great as the cost of the debt used to acquire them.
  Borrowing to invest magnifies the yields and the losses. It turns a good return into an excellent return; and a bad return into a potential disaster.

Interestingly both Labour and National support pre-funding of ACC.

As expected, the increase in ACC levies is less than proposed, but are enough to stop the unfunded liabilities increasing.

What I find interesting is that the average worker now pays $1,300 a year in ACC levies. That is a huge amount of money. If workers paid it directly, I suspect there would be far far more support for reducing the costs of ACC. But workers pay it in three ways – through the employee PAYE levy, petrol tax and vehicle registration levels.

On top of that is the employer levy. Ultimately workers pay for this also, through lower wage levels. Employers factor the total cost of employment into decisions on staffing and wage levels. This is another $700 a year

So the average worker has $2,000 paid to ACC. The average after tax income is around $40,000 so ACC consumes around 5% of take home pay.

Over a worker’s life, they pay a huge amount of money into ACC. Are they getting value for money? I have my doubts. Of course it is the nature of accidents that some will be injured more than others, and need more support. But I suspect for 95% of levy payers, the benefits they get from ACC are miniscule compared to their lifetime contributions.

The Government has started off in the right direction by trimming some of Labour’s expansions to the scheme. I hope they continue to trim.I’m all in favour of families not being left starving when an income earner is unable to work due to an accident. I am more sceptical about ACC funding the myriad of providers of different medical services from counselling to physio. I’d rather we fund them through Vote Health for low income families rather than have someone on $100,000 get free phsyiotherapy for their skiing injury.

NZPA report:

ACC’s higher than forcecast investment return has exposed the Government’s “scaremongering” about the corporation’s financial situation, Labour leader Phil Goff says.

Levies are going to be raised and some entitlements cut because the Government says ACC isn’t in a viable state to continue the way it is.

But Mr Goff, citing the latest Treasury figures, said today ACC’s investment funds had returned $500 million in the four months to October 31, which was higher than forecast.

I swear Labour oppose national standards for numeracy and literacy, because their election chances seem to be based on a hope residents can’t do basic maths.

I’m not sure what is scarier – taking (on paper) high returns for four months as some sort of guarantee of high returns over the long-term, or thinking that a $500 million return over four months will cover the $4.8 billion loss in the last year.

This is of course the same Labour that knew ACC lost $2.4 billion in 2007/08 and continued to increase benefits and entitlements. And then the Government broke the Public Finance Act, by not revealing the problem before the election.

Anyway let’s look again at Phil’s mathematics. Now the unfunded liabilities have increased from $9B to $24b in just four years. Part of the reasons is that the ACC Board and Minister assumed investment rates of returns that were grossly unrealistic – and Goff wants to do it all over again, on the basis on one four month period of good results.Does he really think that level of returns will persist for the next decade? If so, then I suggest he set up his own investment company.

Did you know?

• The number of ACC claims for motorcycle injuries has increased 637% since 1999 – from 684 to 5044
• The number of claims per annum per 100 motorcycles has increased 352% from 1.2 to 5.2. Yes there is an ACC claim for 1 in 19 motorcycles.
• In 2008 1314 motorcycle drivers were injured and 48 died.
• The injury rate per 1000 motorcyclists is 14.4 and fatality rate is 0.52
• For all vehicles (incl motorcyclists) the injury rate is 4.7 and fatality rate 0.11.
• Motorcycle riders (and a small no of passengers) account for around 13% of all fatalities and 9% of injuries, despite making up just 3% of the vehicle fleet
• That of the 211 drivers killed in 2008, almost 25% or 48 were motorcycle drivers.
• In 2008 there were 1,237 motorcycle drivers hospitalised with injuries for 8,571 days and only 2,764 car drivers hospitalised for 13,795 days.
• There are 2.63 million passenger cars and vans registered in NZ and only 71,648 motorcycles (plus 25,304 mopeds).

It amazes me that the same people who support banning pies from tuckshops on the basis it may extend someone’s life by a few months in 60 years years time, don’t think incentives to reduce the number of motorcycle accidents are justified.

Now don’t get me wrong. If people want to ride motorcycles, good on them. Unlike Labour/Greens, I don’t believe in banning things just because they may be bad for you.

But if you choose to drive a motorcycle, then you should at least cover the costs of the greater accident risk. At the moment car drivers massively subsidise the cost of ACC for people who choose to drive a far more risky form of transport.

We already have the rationale with employers levies. You don’t make employers with clerical staff pay the same ACC levy as employers in dangerous occupations like construction.

Now as I have said before, the exact levies proposed by ACC are open to legitimate scrutiny and criticism. You don’t want to ping owners of multiple motorcycles (or multiple vehicles of any sort). But the principle of motorcyclists paying more than car owners is sound. Not to do so, actually subsidises motorcyclists and means we end up with more people dead and injured, because safer modes of transport were subsidising the more dangerous modes.

The Herald reports:

Motorcyclists revving up for a mass rally at Parliament at noon tomorrow fear crippling accident-compensation levy rises will force some to scrimp on safety gear and courses.

Hundreds of bikers are expected to roar off from Whangarei and Auckland this morning for a two-day “Damn the Levies” protest ride to the capital.

Police expect the number to swell to 3500 as they are joined by others along the way and from the South Island.

I’ve got no problems with there being a protest. Good on them for getting involved. While I support the principle that if you choose a more dangerous form of transport, you should pay for the increased risk, there are some legitimate questions over whether the exact amounts proposed are fair.

But none of that excuses the stupidity of this statement:

But although the motorcyclists are angry about being singled out for annual levy rises of between $198 for mopeds and $493 for 600cc-plus machines, the Bikers Rights Organisation reports growing public support for their cause.

“Many of the general public are really affronted – they see it as just the thin edge of the wedge to a wholesale decimation of the ACC scheme,” Auckland branch president Les Mason said yesterday. “If they can get away with it with motorcyclists, who’s next?”

This is simply moronic. Increasing the levies is not decimating the ACC scheme – it is in fact the exact opposite – it is trying to raise the revenue to keep the scheme going,

What will decimate the scheme is not having levies increase, as Mr Mason wants.

Now as I said the motorcyclists have some valid points – especially about people who own more than one motorcycle – and I support some changes there.

But is is fundamentally dishonest to suggest their opposition to paying higher levies (I don’t like my levies going up either) is about stopping the scheme getting “decimated”.They are parroting nonsense from Labour.

This is like someone campaigning against higher bank fees on the basis increasing bank fees will decimate the banking sector.

The Herald reports:

Double-murderer Graeme Burton received a free titanium artificial leg worth $10,000 from ACC to replace the right leg lost when he went on a lethal shooting rampage two years ago.

He’ll probably use it as a weapon to bash someone to death. How about a paper mache leg? He can walk on it, but not clobber too many people with it.

But a proposed law change before Parliament would rule out compensation for anyone injured while committing a crime with a maximum penalty of two years or more in jail.

Criminals would still receive emergency treatment to maintain life, and rehabilitation to “restore function”.

ACC Minister Nick Smith said that under the bill, a decision on whether someone like Burton would receive a taxpayer-funded prosthetic leg would still be made by doctors.

“Burton is an extreme example. It will be up to doctors in individual cases to determine where that boundary is,” said Dr Smith.

“My hope would be that cases like Burton would be consigned to history. There’s not a bone in my body with compassion for him.”

Let the man hop.

The HoS report:

It was, perhaps, Phil Goff’s first Triumph in quite some time.

A thousand bikers roared their disapproval at proposed ACC levy hikes yesterday – along with Labour leader Phil Goff on a brand-new motorbike he had bought shortly before.

I’m betting that Phil didn’t tell them that the increase was due to his former Government increasing coverage and a resultant $4.6 billion liability blowout.

I’m also betting he didn’t tell them that the modest pruning of coverage done by National, he has vowed to reverse. This means that levies will increase even faster under Labour.

Labour are trying the maxim that you can’t fool all of the voters all of the time, but you can fool some of the voters. They are campaigning against both levy increases and decreasing coverage.

Most ten year olds can work out you can’t both cut revenue and increase expenditure.

I think Labour have made a huge strategic blunder on ACC. They have not just criticised the Government’s changes (which is expected) but have promised to reverse all the changes made by National.

This means ACC will be an election issue in 2011.

Labour in 2011 will be trying to distance itself from the Labour Government kicked out of office in 2008. It will be trying to appear as fiscally competent. And they have now made into an election issue, what Labour did to ACC in Government.

Matthew Hooton is only slightly exaggerating when he says there should have been prosecutions. The breach of the Public Finance Act is bad enough, as is the $4.8 billion blowout in liabilities. But what most damns Labour is the timeline of decisions which show in election year they time and time again voted to increase benefits and coverage, while also voting to reduce or not increase levies.

National will be able to slay Labour, reminding them of this. There is simply no defence.  Labour just had the Board assume a rate of return on investments that professional advisors said was “heroic” and they don’t mean that in a good way.

I fully expect Labour to oppose National’s changes – that is the job of the Opposition. But to have promised to repeal them all, if they win the next election, is the blunder as it will put them in the dock for what they did in 2007 and 2008. The public won’t get into the details – they will just hear National time and time again repeat “broke the Public Finance Act, $4.8 billion blowout, costs of new coverage areas were ten times what Labour projected, dropped levies while increasing costs etc etc”. It will be a slaughter.

The other thing Labour have not caught on to, is that the public do not want levies to go up. They will be campaigning on a policy of making employees, and motorists pay even more for ACC. Dumb, dumb, dumb.

The Herald editorial:

An excess charge of $50 or $100 a claim, as recommended by the corporation, could reduce its costs by about $1.6 billion over 10 years, a considerable saving for any service in the economy. The value would lie not only in the money raised from charges but also in the effect on claimants’ behaviour.

Insurance policies typically contain excess charges to discourage needless or frivolous claims. Accident compensation needs to do the same. The scheme may have been conceived as a form of social welfare rather than insurance, according to its venerable “father”, Sir Owen Woodhouse, in the Herald yesterday, but he was speaking of an era of closed, welfare-state economies with high taxation rates and universal benefits.

And I don’t think anyone can deem acceptable a household paying $45 a week in ACC levies alone.

Any excess charges introduced for accident compensation claims will have to provide exemptions for the bearers of community service cards. None must be denied treatment for injury because they cannot afford the excess, as ACC Minister Nick Smith has acknowledged.

That would be a sensible way to balance up the costs and benefits.

But it cannot be denied that the scheme is vulnerable to needless claims for minor injury. Most people have had the experience of visiting their doctor with a niggling ache and the first question asked is whether it might result from a known event. The ACC forms are always at hand and many a patient who is willing and capable of paying for treatment is invited to put in a claim.

It is human nature to make excessive use of any service that comes free. And for that reason it is usually in the interest of the service providers to oppose a charge. Even a token charge – much lower than the sums suggested for ACC – would cause many claimants to reassess their need. It would also force providers to satisfy paying clients that continuing treatment was worthwhile.

A charge would be unpopular and the Key Government has not yet shown a willingness to be unpopular when it needs to be. It did not adopt the corporation’s charging suggestion in the changes announced for the scheme last week. If it is suggested again when an independent panel completes an ACC “stocktake” next year, it should be accepted. The years of plenty have passed.

I agree.

The Herald reports:

The Government has confirmed that accident victims may have to pay the first $50 or $100 of their costs.

The move is under consideration as part of a second round of changes to the accident compensation scheme next year.

Accident Compensation Corporation chairman John Judge says requiring victims to pay an insurance-style “excess” of $50 or $100 for each claim would cut ACC costs by about $1.6 billion over the next 10 years, reducing the need for further levy increases.

ACC Minister Nick Smith said he had been briefed on the proposal, but no decision would be made on it until a wide-ranging “stocktake” of the scheme, led by former Labour Finance Minister David Caygill, was completed next July.

“It’s true that there is a very large transaction cost in ACC, with more than 1 million claims a year,” he said.

“The concept [of a $50 or $100 excess] would need to be carefully balanced with regard to low income earners for whom a $50 or $100 excess might prevent them getting medical attention.”

I understand the cost of processing those minor sub $100 claims is greater than the actual claims themselves, so the problem is quite clear.

However it is worth considering more generally the issue of part fees. As a starting point, I consider almost all Govt funded services should have part fees, as you get distorted decision making in their absence.

The prime example of this is the scam tertiary courses which have diverted so much tertiary funding. When the Govt pays 100% of the course costs, then the institution will simply target signing up as many people as possible, and they will sign up if there is no cost.

Now part fees should not be high enough to discourage people who would genuinely benefit from a Government service, and this is a valid concern.

And there are some situations where there should be no part fees at all. For example kids borrowing books from a library is a classic example.

In related news, 93 year old Sir Owen Woodhouse is reported as being upset with changes:

The father of New Zealand’s accident compensation scheme, Sir Owen Woodhouse, says changes announced last week are “uncaring and predatory”.

Sir Owen, 93, says proposals to double and treble levies on heavy motorbikes and mopeds, and to push accident victims back to work on much lower incomes than they earned before their accidents, breach the principles of the scheme he authored as head of a royal commission in 1967.

I think Sir Owen has just shown us the real problem with ACC. He has spoken out against both the increase in levies and the reduction of benefits. Now you can’t have it both ways. It is quite legitimate to say there should be no reduction in benefits, but then you have to accept that that levies will increase to around $45 a week for an average family. But if you do not reduce benefits, then levies have to increase even further. There is no magic pot of gold to fund the scheme.

Sir Owen’s 1967 report proposed a single flat-rate levy on all employers and another flat rate on motorists, on the basis that everyone benefited from the work of people in risky industries such as aerial topdressing.

Sorry, but wrong an unrealistic view. Firstly industries with higher work accidents should cover those costs, so that the prices of those goods or services reflect that.

I own a polling company. Over the last five years my ACC bill has been a large five figure sum. During that time not a single accident has occurred, or claim filed by a staff member. And Sir Owen is saying we should pay even higher ACC levies to cover not just workplace accidents in other clerical type firms, but workplace accidents in freezing works.

Yesterday he disputed claims by ACC Minister Nick Smith that levies needed to reflect different accident rates in different industries and different kinds of vehicles because that would give employers and motorists more incentive to be safe.

“We are saying people are willing to risk killing themselves for the sake of a few dollars of saved premiums. That’s just ridiculous,” he said.

“I think it’s simply shocking that they are proposing to load people on bicycles and this kind of thing with the extra amounts they are talking about.”

Well if you are saying you want less people killed on the roads, then yes the motorcycle premium makes sense as their injury rate is 16 times that of motorists.

Where I do have some sympathy for motorcyclists is if they own multiple bikes. What might be worthwhile is for the Government to look at a system for all vehicle registrations where the first vehicle per person pays the full license fee, while any subsequent vehicles pay a lower fee.

National actually won an election mandate for introducing competition and choice to ACC. It shouldn’t need ACT to push it in that direction.

The 1998 changes were a win-win. Not only did employers get choice, and lower levies, but workplace accidents fell as other insurers provided incentives to employers to have safer workplaces.

Matthew Hooton has written on ACC in his opening salvo for NBR. It is only available in the tree version, but some extracts:

In 2001, Australian insurance giant HIH collapsed with debts of around A$5 billion, caused by gross mismanagement, including charging too little for premiums and failing to put enough aside for claims.

The Australian authorities took the matter seriously, including Prime Minister John Howard, who established a royal commission. The company’s principals were jailed for offences including knowingly disseminating false information, filing false financial statements, being intentionally dishonest and failing to discharge their duties in good faith and in the best interests of the company.

I think I know where Matthew is going with this.

This week, New Zealand’s biggest insurer, ACC, reported a NZ$4.8 billion loss on top of a NZ$2.4 billion loss the previous year.

Like HIH, ACC’s crisis was knowingly hidden from the public. The Treasury’s Pre-Election Economic and Fiscal Update, signed by then finance minister Michael Cullen, did not disclose it, a failure subsequently found by an independent inquiry to have breached the Public Finance Act.

Yes my suspicions are correct.

Even worse were the public statements of then-ACC minister Maryan Street.
On June 26, 2008, ACC was apparently strong enough for Ms Street to announce that 400,000 casual and seasonal workers would get improved cover.

On September 11, she had enough confidence in the company’s finances to announce a re-elected Labour government would cut the motor vehicle levy from $254 to $203.

Three weeks later, and just five weeks before the election, Ms Street was at it again, announcing an expansion of ACC entitlements to people over 65.

The most charitable interpretation is that the former university academic might suffer from some advanced form of oniomania that makes her believe that, despite ballooning liabilities and a global financial crisis, it was possible to keep buying new services from ACC, while cutting its revenue, and expect it to remain viable. Alternatively, perhaps she was just telling lies in the heat of a close election campaign.

I had to look up what oniomania is!

Far from turning itself in to the Serious Fraud Office, Labour now has the audacity to launch a new narrative that accuses ACC Minister Nick Smith and ACC chairman John Judge of establishing some kind of conspiracy to privatise the scheme.

Audacity is the nicest word for it. I still think it is a pity the Government did not demand prosecutions for the breach of the Public Finance Act!

Colin Espiner blogs on ACC:

I said I’d post something on ACC, so here goes. Oh dear, what a mess.

It’s hard to know where to start really. Is it all Labour’s fault for increasing entitlements but not premiums? Or the people at ACC, who seem keen to pay themselves large salaries but can’t apparently count? Or the recession? Or the fully funded model? Or all of the above?

When news first broke earlier this year of a hole in the ACC accounts, many of us – and I include myself – were a bit sceptical of National’s motivation, particularly given that excitable boy Nick Smith was in charge, and he is known for, well, exaggerating from time to time.

But the conspiracy theory peddled by Labour and the EPMU (i.e. Labour) that somehow this is all just a VRWC to derail the ACC, lower public confidence in it, and then sell it to the highest (or any) bidder just doesn’t ring true for me.

I can never work out if Labour is the political arm of the EPMU or if the EPMU is the industrial arm of Labour.

For starters, I can’t believe someone with chairman John Judge’s commercial background is going to put his reputation on the line just to help the Government push a particular political ideology. Judge is not going to claim that the very existence of the ACC is under threat if it’s not.

Second,  there have now been three relatively independent reviews of ACC’s financial position, and all of them have come up with the conclusion that it is in the poo.

I actually laugh everytime David Parker insists you can’t trust the Government’s figures, considering the last Government’s failure to mention the ACC blowout broke the Public Finance Act. This is not an area of credibility for them.

Third, there’s little doubt that the additions made to the scheme by Labour a couple of years ago – including things like lump-sum payouts for the families of suicide victims, and physiotherapy, simply aren’t affordable any more.

An employee on the average wage is now paying over $1,000 a year to ACC. That is a huge amount of money.

Having said all that, I do think Nick Smith has over-egged the pudding a little bit. At least some of the need for the big increases is because of the move towards fully funding the ACC.

Fully funding means that like a commercial insurer, ACC is required to hold enough in reserve to meet the claims it expects to have to pay out on over a given time. It has never operated like this before, but is now required to.

Originally this was to happen by 2014. The Government – and in fact Labour too – wants to push this out to 2019. You could question whether ACC should in fact ever be fully funded, but that’s another argument.

I want to cover this argument in detail one day. Michael Littlewood has written at length that a Government backed insurer does not need to depart from the old model of collecting enough every year to cover payments for that year.

The Government is also going to get some heat over the decisions it’s made, and so it should. The massive increases in levies for motorcycles seems grossly unfair to me, and smacks of National hitting a group of voters it doesn’t think are likely to be National supporters.

Sure, motorcycles are involved in more accidents, but how many of those were caused by car drivers? As a former motorcyclist myself, it was being knocked off my bike by some idiot in a car that prompted me to hang up my helmet.

Even under the changes, motorcyclists are being subsidised by other drivers. A motorcyclist is 16 times more likely to be involved in an accident. Not even if half are caused by motorists, that is still eight times more likely.

Ramping up motorcycle levies also flies completely in the face of all the rhetoric from the Government about reducing congestion, cutting carbon emissions, using less petrol, etc etc. Not to mention parking.

The purpose of ACC is not to incentivise people to cut carbon emissions, reduce congestion etc. You have other taxes and policies for that. The purpose of ACC is to cover the costs of accidents.

I hear National doesn’t have the votes to get the changes through Parliament yet, either, although it probably will manage it eventually because it’s cleverly set up a straw man in the form of even higher increases proposed by ACC that don’t require a law change.

Therefore if parties don’t vote for National’s bill, the Government can accuse them of agreeing to even higher imposts on the public. That is quite clever.

I don’t think it is clever. I think one should get 61 votes in favour before you announce the changes.

Also Whale Oil has a post on a payout to children of someone killed in an accident. I think there should be some initial support, but when did it happen that  ACC funds you until you are 18, if your parent dies in an accident. If your parent drops dead from a heart attack you get nothing, but if it is an “accident” you get ACC. The original scheme was about looking after people temporarily until they could work again – not social welfare.

Nick Smith has announced some changes to the ACC scheme, to make it more affordable and stop huge employee levy and vehicle levy increases:

• Reversing 2008 income compensation extensions covering casuals, part-timers, non-earners and abatements for holiday pay
• Reversing entitlements for wilfully self-inflicted injury and suicide
• Strengthening disentitlements for criminals
• Enabling safety incentives for employers and vehicles
• Extending full funding date from 2014 to 2019
• Requiring far more open reporting on ACC’s liabilities

The changes are hoped to reduce ACC liabilities by $2 billion.

ACC costs have risen by 57% in the last four years. So even with those changes, levies still have to increase. They are:

• a $32 increase in the motor vehicle levy taking the fee for a petrol car up from $136.44 to $168.46
• ACC petrol levy will rise from 9.34 cents per litre to 9.90 cents per litre
• Motorcycle levies to now vary by size going from $252.69 for all to $257.578 for under 125 cc, $511.43 for 125 – 600 cc and $745.77 for over 600cc

Grahame Armstrong in the SST looks at the bad news:

Cabinet will tomorrow approve a bailout plan that also aims to safeguard ACC’s financial future. The proposed changes will be open to public discussion for four to five weeks before ACC makes recommendations to the government. …

Wage earners currently pay an ACC levy of 1.7% of what they earn, up to $110,000 (any income above that does not attract a levy). That is set to rise to 2.5%.

The Sunday Star-Times understands the ACC levy for a family earning $38,000 is likely to rise by $304 a year, plus an extra $52 to register the family car and 4c a litre more at the fuel pump.

If the government chooses not to increase the ACC petrol excise, which is now 9c a litre, the ACC component of registering a car, now $168, will go up even more – possibly by as much as $107.

Someone on the average wage of $45,000 will pay $360 more a year to ACC, plus the extra fuel and vehicle registration costs. The ACC levy for those on $65,000 will go up about $520 a year while those earning $85,000 will pay $680 more.

This is all because Labour kept adding on more and more entitlements, but didn’t fund them. It was fiscal folly. Don’t think this is just about the investment losses.

ACC chairman John Judge told the Star-Times ACC’s debt was worth about $3000 for every New Zealander, and it was going to take a “hard-nosed” approach – and possibly up to 10 years – to get it into a sustainable position. This would require “substantial” levy increases and legislative change to get people off the scheme and back to work quicker.

“In the last five years we’ve lost $9b. We need to act today because this liability is like a mortgage – if we don’t start paying it off tomorrow it gets bigger by $700 million-$800 million a year.”

Yes, the time has come to get the scheme under control. It really is about saving ACC, because if no changes were made the increased levy payments would be even more horrific.

ACC Minister Nick Smith said the choices for the government were “pretty ugly”.

“It is inevitable there will be levy increases,” he said. “The government’s preferred approach is to get savings out of ACC operationally and out of pulling back on some of the welfare-type entitlements … Without change, ACC is on course to go broke.

It has changed from a well intentioned scheme which provided support if you had an accident and were off work for a few weeks, to a massive extension of the welfare state.

Labour’s ACC spokesman David Parker said the situation was not as gloomy as the government was projecting. The ACC’s liabilities and costs were increasing but it was also the country’s biggest insurer, and the cost blow-out could not simply be blamed on poor management.

Oh yes we are going to believe Labour’s projections on this.

ACC has released its 2008/90 annual report. They lost $4.8 billion. Nick Smith says:

“This $4.8 billion loss for the 2008/09 year comes on top of a $2.4 billion loss for the year before and shows the ACC scheme is financially unsustainable,” Dr Smith says.

“The Government’s major concern is the growing gap between ACC’s assets and liabilities. It comes as no surprise that ACC’s investment returns have been lower through the recession and we are quite confident these will recover. The grave concern is the huge growth in the outstanding claims liabilities from $9.4 billion to $23.8 billion in just four years.

What a lovely Xmas present the last Government left behind for us.

The Herald reports:

An average of 11 people died each week from accidents in their homes in the year to the end of June – an annual total of 573. That compares with the road toll last year of 366.

Of course people spend more time at home than driving, but that figure seems incredibly high.

The article gives a breakdown of total accidents in the home, but not of fatal accidents. I would be fascinated to see a breakdown of the almost 600 fatal home accidents.

I’m gald to see some rationality going back into what ACC funds with the Herald reporting:

Visiting the physio will cost patients at least $10-20 each time, now that the ACC has decided to cut costs.

Of course the physio never was free. It was just paid for by ACC levypayers rather than those receiving the physio.

In March, Dr Smith said that the free physiotherapy service – which was introduced in 2004 – had got out of control.

Up to $8.9 million extra had been budgeted for free physiotherapy visits in 2004, but costs had gone from $58 million per year to $139 million this financial year. …

In 2008-09, physiotherapy cost levy payers $144 million. If this were to continue, that cost would reach up to $232 million by 2013 – a figure that is unaffordable for levy payers, the ACC says.

This is not surprising. If you make something “free”, demand for it increases massively. Very very few things should be “free”. A partial subsidy tends to be far more effective as even a small part charge will deter people from needlessly accessing the “free” service.

The projected increase in levies, if no changes are made, was around $25 a week extra ACC levy for someone on the average wage. Labour let the entitlements get out of control by constantly expanding them (it even includes suicide now!) and by paring some of them back it will stop the scheme collapsing under its own weight because there is no way workers would want to be paying 5% of their wages as ACC levies.

Dr Smith said since the service became free, the number of clients in higher socio-economic areas using the service had “occurred disproportionately”.

I am not surprised again. Would be interesting to see the data behind this though.

BERL have done a fuller response to the criticism of their study. An extract:

BERL freely accept comment and debate on our publicly released reports. The project brief for this study was focussed on providing detailed information on the costs of alcohol and other drug abuse to New Zealand society. Measurement of benefits was clearly outside the scope of the project. We cannot accept criticism for not covering issues that were outside the project’s terms of reference.

This raises to me the question of why the hell did the Government spend $135,000 on a report that won’t be of great use for decision makers, as it deliberately ignores benefits. I’m not angry at BERL – I’m angry at the Ministry of Health and ACC for wasting our money.

Crampton and Burgess have done a detailed ten page response to BERL’s response. First they note:

Prior to corrections, we had found net external costs of $146.3 million. Our adjustments produce a net positive figure for alcohol consumption: net external annual benefits totalling $37.8 million, an overall adjustment of $4,832 million from BERL’s original estimate. However, given the margin of error in work of this sort, we would regard both our initial figure and our corrected figure as suggesting external costs roughly equal to collected tax revenues.

It is worth noting that our adjustments were made without access to BERL’s calculations, our request for access declined by BERL on 15 May on grounds of protecting intellectual property. We provided BERL with an early draft of our paper seeking comment in case we had erred in our reverse-engineering of their figures; now, nearly a month later, they have raised objections leading to an adjustment totalling only $36 million. We not aware of any substantive errors that remain in our critique; we welcome additional feedback.

They also look at the issue of benefits being excluded:

Regardless of the terms of reference, BERL’s treatment of benefits in their report is integral to their headline costs calculation. As BERL correctly points out at page 173 of their report, private costs can only be counted as social costs if there are no offsetting private benefits:

BERL’s treatment of private benefits adds $2.2 billion of private costs to their headline costs for alcohol. Plainly, and regardless of the scope of the RFT, BERL’s treatment of benefits is material to their method, directly affecting their measurement of the costs of diverted resources, and more subtly affecting all of their other cost measures.

It does sound like BERL is trying to have it both ways. Crampton/Burgess compare drinking to skiing:

Consider, by analogy, skiing: a risky, but enjoyable activity.
If we wished to count the “social costs” of skiing and wanted to include all of the costs borne by those skiers who broke their legs while skiing, we would need to weigh those costs against the benefits enjoyed by all of the skiers who made it down the slope without accident. Alternatively, we could consider only the external costs of skiing. Counting all of the private costs as social costs by virtue of an unsupported assumption that gross benefits are zero does not provide a useful cost figure.

And this is the crux. If you ignore benefits, you can find any activity has horrible costs. If you ignore benefits, it would be logical to conclude that skiing should be restricted or banned.

And their conclusion:

BERL has chosen not to defend its economic cost report on grounds of economics. Instead, BERL’s main strategy has been to attack the personal values and world view of its critics. BERL’s use of analogies suggesting our personal acceptance of murder and drink driving are in the nature of personal smears. BERL disingenuously continues to allege that our results hinge on perfect rationality and perfect information, in spite of our repeated rebuttals of that point. Their complaint that benefits are out of scope and beyond criticism is obviously incorrect: their treatment of benefits is the basis on which private costs are included alongside external costs. BERL’s treatment of benefits defines the methodology.

And finally:

Most seriously, BERL has not explained what policy makers can do with a cost report that by BERL’s admission has no policy relevance absent benefits. Without this explanation, we are left to observe that the methodology used by BERL produced very large headline cost figures, their report repeatedly mischaracterised those costs as welfare measures, that these costs were misinterpreted by at least one group of policy makers and BERL did not to our knowledge make any attempt to correct this misinterpretation until after our critique of their work was released and picked up by the mainstream media. It is this non-response by BERL that motivated our review.

Identifying a use for BERL’s report on the important issue of alcohol misuse is a matter that remains unexplained

Hopefully the next time the Ministry of Health and/or ACC has to front up to a select committee, an MP or two can ask them that exact question. And ask for our $135,000 of taxes back.

The Dom Post reports on how unions are against ACC rewarding employers with safe workplaces:

The Government is set to reintroduce lower ACC levies for firms with the best safety records, a move unions claim will see bosses cover up accidents.

Sigh – the paranoia is rampant. Do they actually have any proven examples of this happening from last time? Failing to register workplace accidents is basically a criminal offence. So unions are saying we should not reward safer workplaces because they think so many employers are criminals who will cover up accidents. Really – at times they are just dinosaurs.

ACC Minister Nick Smith said he wanted an upcoming review of the corporation to consider bringing back “experience rating” of the 1990s, which saw employers pay levies according to the number of accidents in their workplace.

It’s called a carrot. The left want only a stick – prosecutions after the fact if an accident happens. I would much prefer getting the incentives right before an accident by having some carrot.

Today’s ODT editorial:

There is no doubt the Accident Compensation Corporation faces considerable funding challenges, but such is the intemperate tenor of ACC Minister Dr Nick Smith’s pronouncements and actions – the latest being his unheralded and reportedly overbearing appearance at the transport and industrial relations select committee last Thursday – the suspicion arises he is unduly trying to “soften up” the public for as yet unannounced and radical changes to the scheme.

I doubt there will be radical change. For the most part the Government is doing what Labour would do – increasing levies and delaying the date we move to full funding. But there may be some pruning of the scheme – but this would merely take it back to where it was a few years ago – hardly a radical change.

Even the possible competition in workplace insurance cover is far from radical, and was explicitly mentioned in the pre-election policy.

Dr Smith and, to a lesser extent, Treasurer Bill English, have been right to draw attention to the problems at ACC.

Former finance minister Michael Cullen and ACC minister Maryann Street were technically exonerated in a report released last week of obscuring the corporation’s true financial position for the pre-election financial update, but National may have genuine cause for alarm at the “hospital pass” it has received over the state of ACC’s finances.

However, Dr Smith is almost certainly incorrect when he says ACC is “technically insolvent” and with his more extravagant pronouncements appears to be gilding the lily.

With a new chairman and board appointed, he needs to tone down the rhetoric and get on with sorting out the problems – in a calmer and more confidence-inspiring manner than he has done to date.

The status quo of $47 a week levy increases for the average household is clearly unacceptable.

Today’s Dom Post editorial:

The annual cost of claims paid out by ACC has grown 12 per cent a year, and is expected to top $3 billion this year. A more generous approach to funding physiotherapy, adopted in 2004, was expected to cost $8.9 million, but has been growing at nine times that. This financial year, it is expected to be $139 million.

An extension of the medical misadventure provisions in 2005, when they cost $42 million, was expected to increase costs by $8.7 million a year. Instead, this financial year, ACC expects to spend $82 million. The real cost of the 2007 extensions to the scheme in 13 areas, estimated to cost $75 million a year, is, according to the Government, still unknown.

It is amazing this info never came out earlier.

The options the Government has are to raise levies, cut costs, cut cover or, most probably, a combination of the three.

Yes, but also to move out the date for full funding from 2014.

The trick for the Government now is to reform the ACC scheme so it is affordably workable but still delivers on the social contract.

It’s about saving ACC. Labour’s planned $47 a week levy increase for the average household must not be allowed to occur.

Brian Fallow writes on ACC. He bashes Nick Smith up a bit for calling the scheme insolvent (and I agree that was not the most useful contribution to the debate). But Fallow also concedes there are problems:

The briefing to the incoming minister highlights three troubling trends.

One is in the number of claims. In the 2007-08 year claims rose 4 per cent when the population grew only 1 per cent.

In the case of workplace accidents alone the number of claims per million hours worked has increased by 15.6 per cent over the past four years, and is now at the same rate as Australia (where the trend has been declining).

Secondly the proportion of claimants who return to work has been trending down, from 93 per cent in 2001 to 87 per cent six years later.

And the combined effect of more claims and high rates of inflation in the health industry have pushed ACC’s overall cost of medical treatment up an arresting 55 per cent in the three years to June 2008.

So more people are claiming, workplace accident rate is increasing, rehabilitation rates are declining and costs are massively blowing out.

And since then:

The Department of Labour’s most recent quarterly report card on ACC says: “The three-month rehabilitation rate, return-to-work rate and long-term claims pool are continuing to show negative results, indicating clients are staying on the scheme longer, thus increasing outstanding liabilities, particularly weekly compensation.”

And who is driving the cost increases:

Another $200 million was the result of court rulings (about asbestos) and legislative changes to increase the scheme’s coverage, on top of $600 million in Cabinet-approved policy decisions.

The Labour Government did.

“The previous Government wanted to increase ACC benefits take-up and coverage. Now the new Government wants greater cost control.”

The shift in focus is fair enough.

But ACC is a civilised and cost-effective approach to dealing with the injured. Why undermine confidence in the scheme, unless you plan to undermine the scheme itself?

I don’t think the scheme is being undermined. It is the previous management of the scheme that is being highlighted as lacking.

Afters outraged e-mails from Hamiltonians that I did not include the Waikato Times as a major newspaper, I have relented and now include it in my daily read of editorials for anything interesting.

And if last week’s editorial is an example, that may be a good thing:

The ACC blowout is a terrible look for the former Labour Government. It will lead to either greatly increased cost for New Zealanders, a trimming of the service or, more likely, a bit of both.

I don’t think Labour get it. They were actually trying to attack the Government in teh House on ACC. They do not realise their moral authority on ACC is now zero. nada. zilch. They are wasting their questions on areas where National wants them to talk about so National can repeat how the average household under Labour would have been paying $47 a week more in ACC levies. I can already see the TV ads next campaign reminding people of that.

What is worse is that Labour knew before the election more funding would be needed but said nothing.

Technically they have been cleared by a ministerial report that came out this week. The report found Treasury wrongly thought it did not have to include the forecast shortfall in a pre-election financial update because it was not under consideration by ministers. Treasury Secretary John Whitehead said his department took responsibility.

But that shouldn’t let Labour’s ACC Minister Maryan Street and Finance Minister Michael Cullen off the hook.

Indeed. They deliberately avoided making a decision, so that it would not appear.

State-funded ACC has been an effective and successful way of ensuring Kiwis are compensated for loss of earnings through injury. National must now ensure that continues while fixing a mess primarily of Labour’s making.

Labour almost killed ACC off by bloating it. Annual costs doubled from under $1.5 billion to over $3 billion. National’s job is to save ACC so it is affordable.

Nick Smith has just announced that John Judge will replace former CTU President Ross Wilson as Chairman of ACC. Other board appointments will be confirmed by the end of March.

Judge has a very strong background in financial management and governance. He was Chief Executive of Ernst & Young for 12 years and serves on a number of boards, and is the Chair of both Te Papa and the Auckland Art Gallery Foundation. So he seems well skilled at balancing financial objectives with wider social objectives. He also is on the advisory boards to both the Auckland University and Otago University Schools of Business.

Labour appointed Judge to the Te Papa Board in 2000, so presumably will find it difficult to attack his appointment to chair ACC.