Deal on Stress Claims May End Budget Impasse

In a move expected to break the state’s budget logjam and clear the way for higher taxes on the wealthy, Gov. Pete Wilson and legislative leaders reached final agreement Tuesday on a scaled-back proposal limiting the right of workers to collect disability payments for stress suffered on the job.

Passage of a workers’ compensation bill was considered crucial to winning enough Republican votes for an additional $2.3 billion in taxes needed to balance the state budget. Wilson said through his aides that the legislation was sufficient to meet his demand that employers be granted some relief from ever-increasing workers’ compensation insurance premiums. The bill would sharply limit the right of short-tenure workers to be compensated for stress, although it falls far short of what Wilson and some Republicans initially demanded.

The signal having been given by the governor, the Assembly promptly took a preliminary vote on legislation to raise taxes on the state’s highest earners--the last major piece of Wilson’s plan to bridge the state’s $14.3-billion budget gap. The tax bill received 50 votes in its favor--four short of passage--but was expected to win approval once the workers’ compensation measure cleared the Senate.

“The governor’s deal on workers’ compensation is the best deal that he’s going to get,” said Assemblyman Charles W. Quackenbush (R-Saratoga) after voting for the income tax bill. “The governor is asking us (Republicans) to help him bridge the rest of the gap, so we are going to help him out.”

Together, the Senate and Assembly actions were expected to spur the governor to sign the $56.4-billion budget originally sent to him by the Legislature nearly a month ago, resolving the problem that has preoccupied the Wilson Administration since the governor took office in January. Wilson faced a midnight deadline to sign or veto the spending plan or return it to the Legislature.

Already enacted are more than $5 billion in new taxes, including a 1 1/4-cent increase in the sales tax that took effect Monday. Also included in the overall budget agreement was legislation to cut welfare benefits by 4.4% and suspend for five years automatic cost-of-living increases for recipients of welfare and other social services.

Even with these agreements, Wilson, backed by Assembly Republicans, engaged in a lengthy standoff with Democrats over the issue of workers’ compensation. The governor said he would not sign the budget for the fiscal year that began July 1 without major changes in the law governing stress benefits. Democrats refused to give the governor what he wanted.

But as state workers began to go without their paychecks and the financial houses considered lowering California’s bond rating, Wilson changed his tack, scaling back his proposal.

He had insisted on a measure requiring workers who seek disability benefits to prove that at least 50% of their stress was caused by the job. The current threshold is 10%. He also wanted to prohibit compensation for stress that arises out of a firing, layoff or other legitimate personnel action, including discipline, transfers and evaluations.

Assembly Democrats had agreed to require workers to prove that at least 30% of their stress came from the workplace. They also consented to a provision denying benefits for stress caused by a layoff or firing. But they threw in a new element, proposing to repeal a decades-old law that inhibits price competition among workers’ compensation insurers and guarantees that about one-third of the premiums goes to pay for overhead costs.

That proposal drove a wedge between employers, who were seeking lower premiums, and insurers, who said they would oppose any workers’ compensation measure that repealed the so-called minimum rate law. Insurers lobbied heavily against the proposal and encouraged employers and organized labor to develop a new compromise that did not include it.

The compromise, embraced by Wilson, leaves untouched the stress provisions over which the governor and the Assembly Democrats had been struggling. Instead, the bill denies workers the right to collect stress benefits in their first six months on the job unless their stress is caused by a “sudden and extraordinary” employment condition. About 12% to 15% of stress claims are filed by workers with less than six months on the job, experts said Tuesday.

The bill also extends the life of a commission that is studying the repeal of the minimum rate law as a way to inject more competition into the marketplace.

The restriction on stress claims is expected to save employers about $60 million a year, less than 1% of the $10 billion workers’ compensation system. Wilson’s earlier proposal, had it been enacted, was expected to save business about $220 million. One big business group, an association of firms that insure themselves for workers’ compensation, said the deal was too weak to be praiseworthy.

“This bill is so narrow that it is amazing we are even calling it workers’ compensation reform,” said Susan Cavazos, chairman of the board of the California Self-Insurers Assn. “When you have horse manure, let’s call it that and not try to make it into perfume. This is not perfume.”

But others, including the governor, insisted that the bill was meaningful, even if it was modest.

“We pushed as hard and as long as we possibly could,” said Bill Livingstone, Wilson’s press secretary. “We were able to get substantial reforms. It’s not everything we wanted, obviously. There just isn’t time to get additional reforms. But we have elevated this issue statewide and it is not going to go away.”

The tax measure would raise the top personal income tax rate from 9.3% to 10% on single filers earning at least $100,000 a year and couples making $200,000. Individuals earning $200,000 and couples making $400,000 would pay a top rate of 11%. These provisions would be automatically repealed in five years.

The bill also would phase out some deductions for upper income filers and conform the state tax code to federal law. In addition, it would suspend for two years and then reinstate a tax break for business that allows companies to carry forward their operating losses into future years and use them to offset taxable income.

Also pending late Tuesday was the fate of the California version of the Environmental Protection Agency. Proposed by Wilson, the creation of Cal/EPA would streamline the state’s environmental bureaucracy, placing some, but not all, of the regulatory programs under a secretary for environmental protection appointed by the governor.

Under the unusual provisions of the executive reorganization statute, the governor’s new agency will be born automatically today unless a majority of either the Senate or Assembly voted to reject it by midnight Tuesday.

The plan, a keystone of Wilson’s campaign last year, has proved to be controversial, especially among conservative Republicans and lawmakers of both parties from heavily agricultural districts. These opponents object to removing the regulation of pesticides from the generally pro-farming Department of Food and Agriculture.

Times staff writers Jerry Gillam, Carl Ingram and Paul Jacobs contributed to this article.