Gov. Jared Polis has resurrected the idea of converting Pinnacol Assurance, the state-chartered workers’ compensation insurer of last resort, into an independently operated mutual insurance company and is pitching it as a budget-balancing proposal in a year in which the state faces a shortfall of more than $600 million.
Such a plan would have a major impact on the insurer, which has argued for many years that it needs to be able to expand its sales to out-of-state workers to keep up with Colorado’s rapidly nationalizing workforce — a move it could undertake through such a conversion. And it could have significant repercussions on Colorado employers, as Pinnacol provides workers’ comp policies to more than 50,000 Colorado companies, though its market share, once estimated at 56% of all state businesses, has declined in recent years.
But it remains to be seen if labor groups and workers’ advocacy organizations, who led the effort to kill a privatization bill that contained similar principles in 2021, will get on board with the Democratic governor’s request this time. The Colorado AFL-CIO and the Workers’ Compensation Education Association warned at the time that allowing Pinnacol to develop a profit-first expansionist mindset could reduce its focus on worker benefits.
Why Polis wants to convert Pinnacol
Still, Polis appears ready to push forward the proposal as a lynchpin of his budget-balancing plan. While exact details are still coming together, he wrote in a letter Friday to members of the Joint Budget Committee and General Assembly that conversion could cover $100 million of his proposed $638 million in balancing maneuvers and benefit both Pinnacol and Colorado workers.
Gov. Jared Polis speak to a Colorado Chamber of Commerce board meeting in February.
“A spinoff and conversion would remove coverage barriers and allow Pinnacol to better support the needs of Colorado employers and workers in a modern economy,” Polis wrote. “It would further allow Pinnacol to balance and diversify its customer base, take advantage of economies of scale, keep insurance premiums low while still providing exemplary service and still playing an essential role as Colorado’s insurer of last resort.”
Colorado chartered the workers’ compensation insurer in 1915, exempting it from all state and local income, property, sales and insurance-premium taxes in exchange for it agreeing to be the insurer of last resort. That means it writes policies for employers unable find private-market coverage, requiring it in turn to take on risks that lower its ability to turn a profit.
A former group of Pinnacol executives and board members studied privatization with the support of then-Gov. John Hickenlooper in 2012, but they ran into major opposition not just from workers’ advocates but from businesses who say they were blindsided by the idea and the amount of their money that Pinnacol spent to investigate it. In 2021, Rep. Matt Soper, R-Delta, revived the idea as a way to help Pinnacol and the state budget in the aftermath of the coronavirus pandemic, but unions and then-House leadership said potential drawbacks outnumbered the benefits.
Why conversion would benefit Pinnacol
In addition to conversion, Pinnacol leaders also have discussed the possibility of amending their charter to allow the company to sell policies in other states or to sell policies other than workers’ comp insurance — two things that would make it more competitive with private insurers. Legislators have balked at those suggestions, however, fearing that it will take the company’s eye off the ball of providing top service to injured workers.
But as more companies employ workers in multiple states, a trend exacerbated by the remote-work changes of the pandemic, Pinnacol has lost the ability to even compete for the business of a growing share of the market. Colorado companies with employees elsewhere either must work through Pinnacol to contract with partners in other states to write those policies, often at a significant markup from home-state pricing, or must contract with a separate insurer to cover those workers. Increasingly, they opt for going with a single insurer that can cover all their needs.
Current law makes it difficult for Pinnacol to insure out-of-state workers of Colorado employers.
Under Polis’ plan, Pinnacol would be able to grow out of state and diversify its product offerings. It would boost the state’s coffers by paying the taxes from which it now is exempted. And while the state could continue to retain it as insurer of last resort, officials also could use a portion of the proceeds that Pinnacol would pay to the state to contract that service to another insurer or find alternative ways to offer the service, Polis wrote in a memo attached to his budget letter.
Pinnacol
The state is still undertaking the due diligence needed to formulate how much Pinnacol would pay it in order to go through the conversion, according to a supporting memo that accompanies the governor’s budget letter. The 2021 bill put that figure at $305 million, but Polis’ letter anticipates that it’s now higher, due to the passage of time and changes to market dynamics.
Pinnacol President/CEO John O’Donnell said in a statement to The Sum & Substance that he must ensure any financial details work for both the company and the state before agreeing to a deal. But he plans to continue the conversation.
“In the coming weeks and months, the Pinnacol leadership team will engage with the governor’s office, state lawmakers, policyholders and industry stakeholders to work through the many early details associated with the governor’s proposal,” said O’Donnell, who is new to the company since the 2021 privatization discussion. “In doing so, we will prioritize Pinnacol’s capital adequacy, long-term solvency, price stability and ability to adapt to meet the needs of those we serve.”
John O’Donnell is president and CEO of Pinnacol Assurance.
What the funding would go to
The final compensation figure would recognize the state’s contribution to creating Pinnacol’s current economic value, Polis wrote. But while that number is unknown, the intended purpose of the new state income is spelled out in the proposal: It would be used to help the Public Employees’ Retirement Association.
With PERA mired in actuarial insolvency, legislators passed a law in 2018 requiring both higher contributions from workers to the account and a $225 million annual transfer from the Legislature to get it to solvency by 2048. Reports offered since then have said that some lower-than-expected years of interest returns still leave it short of its solvency goal.
Under details outlined in Polis’ proposal, the conversion price paid by Pinnacol would transfer immediately to PERA coffers, and the general fund would recoup the money by lowering the amount of transfer payments it makes on an annual basis, allowing it to spend those savings in other areas. The transfer would be $100 million lower in next year’s budget and $80 million lower in the fiscal year beginning in July 2026, and the total amount would be spread out “over five years or so,” according to the budget letter.
In his supporting memo to his budget letter, Polis emphasized that PERA would have the ability to invest and earn proceeds from this new funding over time to provide permanent ongoing budget savings. And the revenues received from Pinnacol would be exempt from the state’s Taxpayer’s Bill of Rights revenue cap, he added.
Former sponsor backs the plan
“This will allow PERA to benefit from money in the fund, while also ensuring the state can manage this funding to help the state budget at similar levels over the next several years as well as on an ongoing basis,” Polis wrote.
Colorado state Rep. Matt Soper speaks in a House committee hearing in April 2024.
One early fan of the proposal is Soper, who believes, as he did three years ago, that allowing Pinnacol to diversify its revenue and risk base will bring more stability to the important company and, in doing so, give it more resources to help injured workers. Seven other states have partially or fully privatized their state-chartered workers’ compensation insurance providers in recent decades.
Soper said he felt that poor timing was the death knell for his 2021 bill, as he began discussing it during the early months of the pandemic, when plummeting sales- and income-tax revenues left legislators having to cut $3.3 billion from the budget. But by the time his bill was introduced in 2021, an infusion of federal money and quickly normalizing tax revenues made it seem less of a necessity.
With the budget facing another significant shortfall, however, he believes Polis is right to capitalize on this moment.
“This is a time of ‘Let’s not waste a crisis,’” Soper said. “Pinnacol could sell plans across state lines … This could streamline and make business much more efficient.”
Soper also suggested that Polis’ decision to put the money toward PERA, which the legislator lauded, could change the tenor of any potential opposition. Labor and workers’ advocates must decide if they are willing to oppose a stabilizing infusion of cash to the retirement accounts of state workers, many of whom are union members, he suggested.
Labor backing to Pinnacol deal remains questionable
However, it wasn’t just the fear of Pinnacol chasing profits at workers’ expenses that left opponents sour on the potential conversion in 2021.
In a letter sent at the time, Colorado AFL-CIO Executive Director Dennis Dougherty and then-WCEA President Royce Mueller warned that taking away state oversight from the company — including a board that is appointed by the governor — would limit injured workers’ voices and their power to push for reform. While Pinnacol officials tout the company’s high marks in injured-worker satisfaction, the AFL-CIO has argued repeatedly that Pinnacol’s policies limit workers’ ability to get treatment as they wish, and it has tried unsuccessfully to expand doctor choice.
Colorado AFL-CIO Executive Director Dennis Dougherty testifies before a Colorado House committee in March.
In 2023, the groups pushed for a bill to change workers’ compensation benefits-calculation formulas to allow injured employees to receive much higher payouts, saying that long-standing formulas undervalue the impact that workplace injuries have on those people. That bill, however, was never introduced.
“Privatizing Pinnacol will put the profit motive over the public good,” read the 2021 letter. “There is no guarantee that the state would have an insurer of last resort for higher-risk employers, like those in oil and gas and construction industries, and those that have been turned down by other providers. Premium rates could go up, causing more employers to work around the law and not provide coverage for their workers.”
Any conversion would require legislation, which likely will draw significant debate. Polis is expected to present his financial plan that includes the proposal to the powerful Joint Budget Committee later this month, and that will start the legislative process.