OLYMPIA — Just minutes after signing a marquee bill this past month that gave businesses an unemployment tax break worth $300 million in the next year and temporarily increased benefits for the unemployed, Gov. Chris Gregoire flatly stated that the next fight among lawmakers, labor and business wil

l be much harder to solve.

“Any time you start talking about workers compensation there are disagreements. They’ve already surfaced,” Gregoire, a Democrat, said.

Workers compensation is a familiar and contentious issue in Olympia, with labor and businesses interests usually deeply entrenched in their positions.

But this year, the issue has taken a central role in the legislative session because the system is bleeding money. And while the system is not connected to the $5 billion projected deficit in the next-two year budget, lawmakers are in a mood to revamp.

Gregoire, the head of the state Department of Labor and Industries and the state auditor have all said the system is heading toward bankruptcy. In a December report, the auditor’s office said the state’s fund for workers compensation has a 95 percent chance of becoming insolvent in the next five years.

The system had about $499 million in reserves as of Dec. 31. That figure is the total sum from the medical fund of the system, which stands at nearly $709 million; the liability fund that is in the red for $275 million; and the pension fund that currently stands at $65 million.

Workers compensation is a state-provided insurance system in which businesses pay premiums. Businesses, usually bigger companies, can opt to self-insure. If a worker is injured on the job, they can file claims for workers compensation and receive money while they heal. The state funds the system from the payroll taxes that businesses pay and investments handled by the state.

The system tanked, the auditor’s report said, because of fewer payments coming from businesses due to the recession and drop in returns from investments, also because of the economic downturn.

The major expenses of the system, though, come from only 8 percent of all claims. That 8 percent of workers are receiving benefits for a prolonged period of time or have lifetime pensions. That section of workers represents 85 percent of the compensation costs, according to the L&I.

This massive cost is something both labor and business recognize, but vastly disagree on how to fix. And essentially the fight this session is along familiar lines: Organized business wants to decrease benefits to lower spending, while labor is lobbying to keep benefits.

“I have a trajectory that’s not healthy going out. Something has to be done,” Gregoire said. “So what I say to (the sides involved) is that you don’t have to with my bill, but you do have to put us in a trajectory that’s going to be sustainable into the future.”

Earlier this year, Gregoire introduced a handful of changes to workers compensation law with a middle-of-the-road approach.

For the medical side of the system, she proposed establishing a statewide medical provider network to work with injured workers that would be managed by the Labor and Industries department, and expanding support centers for clinics. These two proposals have largely been welcomed by labor and industry interests. The Senate approved their bill this past week.

In liability, the governor proposed bumping up the money for permanent partial benefits for injured workers; subsidizing 50 percent of a recovering worker’s wages for more than two months to encourage a return to the job; a lump-sum settlement option payment for workers 55 and older who can go back to work; cap pension payments for workers when they reach retirement age.

But these proposals are where the fight lies.

Some of these plans have been split from the governor’s bill and are moving independently, such as the subsidized wages proposal.

In addition, legislators in alliance with the business lobby have introduced their own versions of the governor’s proposals. But their proposal goes further than the governor’s: Instead of having an age limit for settlements, the business lobby would like to see that option for all workers.

Washington is one of a handful of states that still operates without a settlement option.

“Except for paying among the nation’s highest benefits, we’re failing in every other respect,” said Kris Tefft, general counsel at the Association of Washington Businesses. “We need to modernize this system, and employers are seeking solutions that work nationally like allowing workers a voluntary settlement option and ensuring the system is only covering conditions that actually arise from work.”

Labor has argued that a system of settlement would put workers who can’t afford good lawyers at risk of getting bad deals, but the business-backed bill has language that would establish an independent agency to review the settlements.

“This year there are a lot of proposals being called ‘workers comp reform,’ but there are actually two tracks of very different ideas,” said Jeff Johnson, president of the Washington State Labor Council. “The difference is simple. One set of proposals get people healthy and back to work faster and thus cuts cost to business. The other set slashes benefits, but doesn’t address the underlying issue of long term disability.”

Labor’s argument is that by boosting medical care, workers will go back to their jobs faster. They also back the subsidized wage proposal.

Business also introduced another proposal not considered by Gregoire: They want to narrow the definition of the law that allows for compensation from diseases or ailments that come from work.

Johnson, of the Labor Council, said that the proposed changes to the law would essentially eliminate any chance of claims from ailments that come from a job.

While their differences are clear, the jobs ahead for these two interest groups are to push their agendas via legislators. It’s going to be a slog. Republicans, who now have a heightened influence in the Legislature due to gains in seats in the past election, usually side with business, while Democrats often champion for labor.

Bills containing the business industry’s proposals appear to have died in the House, but that doesn’t mean those recommendations have gone away. Amendments can be introduced in the floor and it seems likely that will happen in the Senate, where Republicans can join moderate Democrats to push business interests.

“We’re trying to create a negotiated agreement to the issue. I don’t know if we’re going to be successful. I know it’s not going to be easy,” said Senate Majority Leader Lisa Brown of Spokane.