Washington businesses and most workers will get a deferred Christmas present in six months if the Department of Labor and Industries adopts a “rate holiday” proposed by Gov. Chris Gregoire.

But that festive occasion will underscore an ongoing challenge that the department needs to resolve on a more permanent basis.

Thanks to good management, good health and good luck, the department has amassed a sizable medical aid contingency fund to make sure injured workers’ job-related medical costs are paid. The medical aid contingency (one of three workers’ compensation funds built on employers’ and workers’ contributions) is about $1.1 billion higher than actuaries say it needs to be.

How did it get so high?

A 16-year decline in workplace injury claims helps. Savvy investment strategies during a positive stock market climate have been timely, too. Plus, by encouraging proven medical strategies and generic drugs, while closely monitoring prescription use, the department has held medical costs to a 4 percent inflation rate, barely more than half the national average.

A decade ago, the state had another big surplus and substantially reduced the fees charged to employers and employees. Then the stock market took a nose dive, and the department went through what had been a healthy contingency fund at the rate of $800 million a year, necessitating whopping rate increases that infuriated businesses.

That’s a mistake Gregoire is avoiding this time. Her plan is that for the second half of 2007, the state will simply not collect contributions to the medical fund – an estimated $315 million. But the governor and the department emphasize that even if the rate holiday is approved later this month, as expected, the payroll deduction is likely to be restored in January 2008.

But at what level?

Representatives of government, business and labor will soon begin reviewing the system to consider, among other things, whether a target level can be established for the medical aid contingency fund – perhaps a range such as 5 to 10 percent of the state’s liability – that would achieve more gradual adjustments instead of radical fluctuations.

With one of the most generous workers’ compensation programs in the country, Washington owes it to businesses to strive for predictability in a system that, while essential, imposes a significant expense.