14 Mar

ACC – The Facts

Published by MacDoctor on March 14th, 2009
12 Comments »

There has been a lot of activity in the blogosphere about ACC recently. Much has been written about the apparent “blowout” in ACC accounts (as if this is something new). Some right-wing bloggers have suggested legal proceedings against Michael Cullen for not revealing the extent of the current deficit, but, while he deserves some scorn for being a complete tosser, I don’t think his duplicity quite merits summary execution. Left wing blogs, notably the Standard, have tried to play up the economic crisis as the sole cause of the deficit but this will not hold water either.

PriceWaterhouseCoopers, in their latest report do suggest that the majority of the current deficit is being caused by the economic climate. This is partly true, but only in the sense that massive increases in expenditure and long-term liabilities are now not being covered off by rapid growth in ACC’s assets.

The boys at the Standard suggest that, when the upturn comes, this gap will disappear. This is only true of very long-term liabilities where a transient drop in interest earned causes a large blow-out in estimated liabilities. However, the graph below suggests there is a much greater problem than a transient accounting glitch (you can find these graphs and tables here). First the graph:

Notice the persistent rise in costs from the time Labour excludes competition from ACC thereby making it a state monopoly again. The Standard attempts to blame these increasing costs on population growth and aging population and the obesity epidemic. Ploughing through the available population stats from 2000 – 2008 we find that the population growth was about 17%, the number of elderly as a percentage of population actually decreased (due to immigration, I assume) and about an additional 6% of the population became obese (from 20% to 26%). In the meantime, ACC expenditure doubled. Even generous weighting for the obese (no pun intended) would increase costs by less than 16% (20% of 6% x 13 – ACC costs for the obese are assumed to be 13 x higher). Thus the maximum increase in ACC should be 33% NOT 100%.

This table is even more revealing:

claim_liability

Notice that the blow-outs in liability started in 2002 and have been increasing rapidly ever since. The two years before the current year had liability increases of $2.6 billion each year – well before the current economic crisis. This suggests that the ACC expenditure blow-out started well before the drop in asset growth blew out the long-term liabilities. Note especially that the discount rate for 2007 and 2006 was 6.6% – denoting good returns on assets. Yet the liabilities increased by over $5 billion.

acc_assets

As at 20th February net assets were $10.124 Billion. Nick Smith was right, if ACC was a private insurer, they would be insolvent. ACC, of course, get an automatic bail-out from the tax payer. Note that the largest asset increase was $1.66 billion (2005 to 2006) but that 2006-7 was only $1.3 billion. In conjunction with a good discount rate (i.e. good rates of return), this suggests some draw-down of assets to alleviate costs. This makes the increase in liabilities for that year even more worrying. ACC was feeding off its assets.

Overall, the facts suggest that, rather than a long-term liability problem, ACC has a short term expenditure problem. Clearly, ACC is picking up short term and long term liabilities at an alarming rate. The causes of this can only be the changes made by Labour during the course of their tenure.

Physiotherapy: I have discussed this here. Current cost $139 million.
Change from medical misadventure (where you had to demonstrate the complication was rare or cause by negligence) to treatment injury which includes all undesired effects, regardless of cause or frequency. Current cost $89 million
A screed of 13 changes in 2007 as detailed below. Current cost at least $75 million.

- Cover for mental injury suffered arising from workplace traumatic events
- Weekly compensation for seasonal and casual employees
- Changes to cover provisions for work-related gradual process, disease or infection
- Workers who are injured “between jobs”
- People receiving minimum weekly compensation
- Loss of potential earnings compensation for young people
- Abatement during return to work
- Discretion to extend the three-year limit on vocational rehabilitation
- Removal of upper age limit on vocational rehabilitation
- Abatement of leave payouts for weekly compensation, when leave payment is made on termination
- Extension of earner status to self-employed
- Repeal of disentitlements for wilfully self-inflicted injury
- Extending eligibility for lump sum entitlements under Work-related Gradual Process Disease or Infection

The astute will have noticed that these increases total only about $300 million. Assuming the population drivers already discussed are responsible for a third of the total $1.5 billion increase (i.e. about $500 million), that leaves a shortfall of $700 million. Incredibly, one can only come to the conclusion that ACC has indeed moved from being an accident insurance company to become a covert welfare agency. Only a cultural change such as this could explain the stupefyingly large increase in otherwise unexplained expenditure. It is therefore unsurprising that the blow-out in liabilities started well before the current economic difficulties. ACC was acting like a covert sickness benefit. Unfortunately, even if the ACC welfare culture changes overnight, we are stuck with the enormous liability it has generated.

Now you know why Ross Wilson’s ass is grass…

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