This White Paper analyzes the financial risks of S. 852, the Fairness in Asbestos Injury Resolution Act. Specifically, it assesses the likelihood that the federal trust fund established by S. 852 will become insolvent and what that failure could mean for taxpayers. There are a number of relevant factors for policymakers to consider in assessing S. 852. These factors include the benefits that a federal trust fund potentially could provide both to claimants by streamlining the claims process and to defendant companies and insurers by limiting the risks that they and their employees face from further asbestos litigation. Another factor, however, should be the risk to taxpayers of trust fund insolvency.
A Senate Budget Committee (SBC) Democratic staff analysis finds that the risk of trust fund failure is significant. While CBO’s August analysis of the trust fund found that it could remain solvent under certain circumstances, the SBC staff analysis found that little, if any, margin for error exists. Making even minor adjustments to CBO’s analysis revealed the likelihood of trust fund insolvency. The analysis suggests that the value of claims is likely to exceed the value of compulsory contributions from defendant companies and insurers by at least $20 billion. Likely administrative expenses add close to another $5 billion to that shortfall.
Those costs alone, however, understate the full amount of the shortfall. The mismatch in timing for the trust fund between the filing of claims and the receipt of compulsory contributions from defendant companies and insurers means that taxpayers will likely be called upon to finance a significant amount of the fund’s debt service. That subsidy can be avoided only if Congress allows the trust fund to terminate under the provisions of S. 852, an unlikely event.
Including interest costs, SBC staff estimates the shortfall at approximately $150 billion over the trust fund’s expected lifetime of almost 50 years. On a present-value basis, a more accurate measure that expresses the amount of lifetime underfunding in today’s dollars, the shortfall is approximately $50 billion. That figure represents the amount of liability of defendant companies and insurers that taxpayers could be called upon to subsidize under S. 852.
Under a more pessimistic scenario that assumes an even higher number of cancer claims, claims expenses exceed contributions by more than $60 billion. With debt service and administrative expenses, the total shortfall increases to close to $300 billion in nominal terms, or more than $85 billion in net present value terms.
Asbestos Litigation and S. 852
Overview of Asbestos Issue
Claims arising from asbestos-related injuries have flooded the tort system over the last several decades. It is estimated that around 850,000 individuals have filed claims against more than 8,400 businesses that have either manufactured or sold asbestos-containing products or owned a building or plant that contributed to asbestos exposure. Costs from such suits are estimated to approach $80 billion and have resulted in numerous bankruptcies and lost jobs.1 Future claims look to push total costs above $200 billion. Congress has attempted for several years now to address this problem. S. 852, the Fairness in Asbestos Injury Resolution Act of 2005, which the Judiciary Committee reported on June 16, 2005, represents the latest effort.
Overview of S. 852
Federalization of Asbestos Compensation. S. 852 attempts to reform the current system of asbestos compensation by federalizing the responsibility. It removes cases from the tort system, processing them instead through the Department of Labor on a no-fault basis. In doing so, it creates a new – albeit, capped – entitlement for claimants. That is, if the claimant satisfies the bill’s medical criteria and filing deadlines – and assuming that the new Asbestos Injury Claims Resolution Trust Fund contains sufficient resources to pay the claim – the individual, or his or her family in the case of death, is entitled to compensation from the federal government.
Payments to Claimants. S. 852 compensates claimants according to nine levels of medical impairment – five for non-malignant diseases, such as asbestosis, and four for malignant diseases, such as mesothelioma. Eight of the nine levels result in cash awards, with the first level providing for medical monitoring only. For example, claimants with mesothelioma qualify for a level IX award of $1.1 million, while claimants with mixed disease with impairment qualify for a level II award of $25,000. For levels VII and VIII lung cancer claims, payments vary depending on whether the claimant is a smoker, ex-smoker, or non-smoker. Award levels are adjusted annually for inflation starting in 2007.
Financing. To finance awards and other expenses, S. 852 establishes the Asbestos Injury Claims Resolution Fund, a federal trust fund, to be overseen by a Presidentially appointed Administrator. The fund will receive compulsory contributions – $90 billion from defendant companies that have spent more than $1 million on asbestos injury litigation, $46 billion from insurance companies that have made more than $1 million in asbestos-related payments, and approximately $7.5 billion in assets from existing private trust funds established to settle asbestos claims. Defendant companies and insurers can offset a portion of their contributions by claiming bankruptcy trust credits of about $4 billion. Thus, the bill is designed to collect a maximum of about $140 billion. In addition, the Administrator can invest unused assets, which could earn additional proceeds.
Borrowing Authority. S. 852 provides for roughly constant contributions from defendant companies and insurers over a 30-year period. CBO estimates the fund will face more than half of all claims expenses within the first 10 years; other analysts place this amount even higher. Because of the mismatch in timing between contributions into and payments from the fund, S. 852 authorizes the administrator to borrow funds. That borrowing is capped and cannot exceed the sum of the fund’s existing assets plus the amount of contributions expected to be collected over the subsequent 10 years. The fund must repay borrowed amounts with interest.
Termination of the Trust Fund. The bill requires the Administrator to terminate operations if it is determined that the trust fund has insufficient resources to continue paying claims. Remaining claimants would be forced back into the courts. Such a scenario assumes that future Congresses would allow the trust fund to fail. That scenario seems unrealistic. Defendant companies and insurers will have paid billions, if not tens of billions of dollars, into the trust fund, only to face the prospect of paying unknown billions more in the courts. Claimants with valid claims, believing they are entitled to the same federal compensation received by other claimants with identical medical conditions, will instead be turned away and forced to start anew in the courts. All of this would happen with a new federal bureaucracy already up and running and in the midst of receiving medical files and processing claims.
Federal Liability. S. 852 states that “nothing in this act shall be construed to create any obligation of funding from the United States Government…or obligate the United States Government to pay any award or part of an award, if amounts in the fund are inadequate.” As alluded to by CBO in its August estimate (p. 18), some risk remains that the Administrator could borrow beyond the fund’s ability to repay Treasury. For instance, the Administrator could borrow against future collections up to the authorized limit. S. 852 requires companies to pay off any borrowing by the fund, even amounts remaining after fund termination. Even so, some portion of the future collections could fail to materialize once companies recognize the fund will terminate and that they will be forced again to litigate claims in the courts.
Analysis of CBO Estimate
On August 25, 2005, CBO released its estimate for S. 852. Some proponents of S. 852 have mis-characterized CBO’s conclusions, citing its estimate as proof that the trust fund will have adequate resources to cover all obligations. Such a presentation is incorrect both because it significantly distorts CBO’s conclusions and because CBO’s estimate likely understates the amount of obligations. That is, there are a number of items either not included or understated within CBO’s estimated range. All but one of these items would worsen the trust fund’s performance.
What CBO’s Cost Estimate Actually Says
CBO does not assert that the trust fund will have sufficient resources to meet all obligations over the next 50 years. CBO instead found the following: