BILL ANALYSIS Ó AB 748 Page 1 Date of Hearing: April 30, 2013 ASSEMBLY COMMITTEE ON JUDICIARY Bob Wieckowski, Chair AB 748 (Eggman) - As Introduced: February 21, 2013 As Proposed to be Amended SUBJECT : Judgments Against public entities: Interest KEY ISSUE : Should the interest rate on judgments against Public Entities, arising from tax or inverse condemnation claims, be linked to prevailing market rates instead of a fixed rate of seven percent? FISCAL EFFECT : As currently in print this bill is keyed fiscal. SYNOPSIS In addition to damages, a prevailing plaintiff in a civil suit is often entitled to prejudgment interest on the amount of the claim and post-judgment interest on the amount of the final judgment award. The California Constitution requires the Legislature to set the rate of interest upon a judgment rendered at no more than 10% per annum, but in the absence of a legislatively set rate, the Constitution provides that the interest rate shall be 7% per annum. The Legislature has set a rate of 10% for civil suits between private litigants, and the courts have held that the judgment interest rate for claims against public entities is 7%. The author contends that the existing legislatively determined interest rates are too high, having been set a time when interest rates were much higher than they are now. The author contends that this is especially problematic for local government, who are less able to settle suits quickly and therefore can accumulate significant prejudgment interest obligations. Therefore, this bill would tie the judgment interest rate on judgments or settlements against a state or local public entity to the weekly average U.S. Treasury yield, but not to exceed 7%. Specifically, the prejudgment interest rate would be set at the U.S. Treasury yield; the post-judgment interest rate would be set at the U.S. Treasury yield plus two percent. Currently the U.S. Treasury yield is less than one percent per annum, thus creating substantial reductions in both pre- and post-judgment rates. AB 748 Page 2 The author will take substantial amendments in this Committee. The summary and analysis below reflect those proposed amendments. This bill is supported by individual local governments and associations representing cities, counties, and districts. The bill as introduced was opposed by the Consumer Attorneys of California and the Consumer Federation of California; the former has informed the Committee that it will remove its opposition in light of the proposed amendments. SUMMARY : Bases the interest accrual rate on claims or judgments against the state or public entities upon a United States Treasury index, as specified. Specifically, this bill : 1)Provides, except as specified, that the prejudgment interest rate on any tax or inverse condemnation claim against a public entity shall accrue at the same rate as the weekly average one-year constant maturity U. S. Treasury yield, but shall not exceed 7 percent per annum. Provides that this rate shall control until such time as the judgment becomes enforceable, and then shall accrue at an annual rate equaling the weekly average one-year constant maturity U.S. Treasury yield at the time of judgment plus two percent. 2)Provides, except as specified, the post-judgment or post-settlement interest rate on a tax or inverse condemnation claim against a state or state agency shall commence to accrue 180 days from the date of the final judgment or settlement and shall accrue at an annual rate equaling the weekly average one-year constant maturity U.S. Treasury yield at the time of the judgment or settlement plus two percent, but shall not exceed 7 per cent per annum. 3)Provides, except as specified, that the post-judgment or post-settlement interest rate on a tax or inverse condemnation claim against a local public entity shall accrue at a rate equaling the weekly average one-year constant maturity U.S. Treasury yield at the time of the judgment or settlement plus two percent. EXISTING LAW : 1)Bars a suit for money damages against a public entity on a cause of action for which a claim is required to be presented, until a written claim has been presented to the public entity and acted upon by the California Victim Compensation and AB 748 Page 3 Government Claims Board, the governing body of a local public entity, the Judicial Council, or the Trustees of the California State University, as applicable, or has been deemed to have been rejected, except as specified. (Government Code Section 900 et seq.) 2)Provides that a judgment for the payment of money against the state or state agency is enforceable until 10 years after the judgment is final and provides that interest on the amount of a judgment or settlement for the payment of money against the state shall commence to accrue at 180 days from the date of the final judgment or settlement. Specifies that this provision does not apply to any claim approved by the California Victim Compensation and Government Claims Board. (Government Code Section 965.5.) 3)Provides that a judgment for payment of money against a local public entity is enforceable until 10 years after the time the judgment becomes final or, if the judgment is payable in installments, until 10 years after the final installment is due. (Government Code Section 970.1.) 4)Requires, under the California Constitution, that the Legislature set the rate of interest upon a judgment rendered in any court of this state at not more than 10% per annum. In the absence of the setting of such a rate by the Legislature, the California Constitution provides that the rate of interest on any judgment is 7% per annum. (Section 1 of Article 15 of the California Constitution.) Provides, therefore, that the interest rate on judgments against the state or a public entity is set at 7% per annum. (Harland v. State of California (1979) 99 Cal. App. 3d 839; California Fed. Savings & Loan Assn. v. City of Los Angeles (1995) 11 Cal 4th 342.) 5)Provides for a legal rate of interest of 10% per annum on civil judgments arising out of tort claims, as specified. However, this provision does not apply to any tort actions against a public entity, or a public employee acting within the scope of employment. (Civil Code Section 3291.) 6)Provides that every person who is entitled to recover damages, as specified, is entitled also to recover interest thereon from that day, except during such time as the debtor is prevented by law, or by the act of the creditor from paying the debt. Specifies that this provision is applicable to AB 748 Page 4 recovery of damages and interest from any such debtor, including the state or any county, city, city and county, municipal corporation, public district, public agency, or any political subdivision of the state. (Civil Code Section 3782). 7)Provides that interest accrues at the rate of 10 percent per annum on the principal amount of a judgment that remains unsatisfied. (Code of Civil Procedure Section 685.010.) 8)Provides that no interest is payable on the amount allowed by the California Victim Compensation and Government Claims Board on a claim if payment of the claim is subject to approval of an appropriation by the Legislature. However, if the appropriation is made, interest on the amount appropriated for the payment of the claim commences to accrue 180 days after the effective date of the law by which the appropriation is enacted. (Government Code Section 906.) 9)Provides, under federal law, that judgment interest rates in federal district courts shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding. (28 USC Section 1961.) COMMENTS : In addition to damages, a prevailing plaintiff in a civil suit is often entitled to prejudgment interest on the amount of the claim and post-judgment interest on the amount of the final judgment award. The rationale for pre- and post-judgment interest awards is twofold: (1) to compensate the plaintiff for interest that would have accrued had the funds been in the plaintiff's possession: and (2) to encourage settlement, in the case of prejudgment interest, and to encourage prompt payment of judgment, in the case of post-judgment interest. The California Constitution requires the Legislature to set the judgment interest rate at no more than 10% per annum, but in the absence of a legislatively set rate, the Constitution provides that the interest rate shall be 7% per annum. The Legislature has set a rate of 10% for civil suits between private litigants, and the courts have held (in the absence of a clear legislative mandate to the contrary) that the judgment interest rate for claims against public entities is 7%. (Harland v. State of California (1979) 99 Cal. App. 3d 839; California Fed. Savings & Loan Assn. v. City of Los Angeles AB 748 Page 5 (1995) 11 Cal 4th 342.) According to the author, this existing judgment interest regime discussed above "was enacted during a time when inflation was skyrocketing. At the time, the rates adopted were lower than the market rates. Now the reverse has happened and market rates are far lower, but there has been no adjustment to reflect this." The author believes that bringing judgment interest rates into line with market rates is especially important at this time, when local governments are operating under budget constraints that have forced them to cut vital services. This bill, therefore, would tie the judgment interest rate on judgments or settlements against a state or local public entity to the weekly average U.S. Treasury yield, but not to exceed 7%. Specifically, the prejudgment interest rate would be set at the U.S. Treasury yield; the post-judgment interest rate would be set at the U.S. Treasury yield plus two percent. Currently the U.S. Treasury yield, as published by the Board of Governors of the Federal Reserve System, is less than one percent per annum. In adopting this index, this bill would create substantial reductions in both pre- and post-judgment rates. Consistent with the Constitution, even if the U.S. Treasury yield were to suddenly rise, the judgment interest rate could never surpass 7%. Federal Rates and Other States : This bill would adopt a modified version of the judgment interest rate established under federal law for civil actions brought in federal court. The federal formula calculates the judgment interest rate based on a rate equal to the weekly average one-year constant maturity U.S. Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the preceding calendar week. (28 USC Section 1961.) This bill would apply this same measure to prejudgment interest rates - that is, interest on the amount of the underlying claim - and would apply the federal measure plus two percent to post-judgment interest rates. The rationale for the latter is that post-judgment interest rates have generally been seen as providing an incentive for prompt payment of judgments, in addition to providing fair compensation. The sponsors and supporters of this legislation point out that, once a judgment has been rendered, local public entities are already required by California's Prompt Payment Act (Government Code Section 927 et seq.) to pay judgments in a timely manner. If this is so, then the higher rate on post-judgment interest - AB 748 Page 6 which would still be much less than the existing rate of 7% - should not adversely affect local public entities. The local public entities that support this bill contend that pre-judgment interest rates, on the other hand, can be much more significant because disputes can drag on for long periods of time. High interest rates do not provide much incentive for local public entities to settle, the sponsors and supporters contend, because public entities, unlike a private litigant, may be defending the application of an ordinance or statute. In short, many things other than interest rates determine a local public entity's decision to settle or not settle. The sponsors and the supporters have provided the Committee with citations suggesting that about half the states have rejected fixed rates in favor of market-based indices of some sort, and that several other states are considering doing so. Many of the states have adopted a federal index rate like the U.S. Treasury yield - all of which appear to be currently less than one percent - but add anywhere from one to four percentage points to this baseline. This bill more or less mirrors those other state approaches, adopting the Treasury rate for prejudgment interest and the Treasury rate plus two percent for post-judgment interest. Although this bill sets a rate that is arguably somewhat less than most of the other states, those other state measures are not always comparable because these other state laws are not necessarily limited to judgments arising out of tax disputes and inverse condemnation. Given that this bill is departing from long-standing practice, the author and sponsor have agreed to limit the new formula just to those types of actions that local public entities most often encounter. ARGUMENTS IN SUPPORT : According the Urban Counties Caucus (UCC), the bill's sponsor, this measure will "ensure that local governments would be charged a reasonable interest rate on claims." UCC contends that in the counties alone, interest rates have totaled over $15 million in just the last three years. UCC points out that these payments come from taxpayer funds, and therefore "lowering the interest rate will help to save money and ensure that all parties are given a level playing field." UCC, like many of the other supporters of this bill, reject the contention made by the opposition that lowering judgment interest rates will reduce a local public entity's incentive to pay judgments promptly. UCC points out that existing law, most notably the prompt payment requirements in the Government Claims Act, already ensures that local public AB 748 Page 7 entities will pay judgments in a timely manner. Several other local government groups and district associations support this bill for substantially the same reasons as UCC. The Civil Justice Association of California (CJAC) supported this measure prior to its newly proposed amendments because it will "modernize the statutorily set interest rate on judgments against public entities." CJAC contends that "California's judgment interest rate rules are out of date and provide an artificially higher rate of return than what can be found in the marketplace." Additionally, CJAC contends, "these rates discourage defendants from exercising their fundamental right to appeal - even for the most meritorious claims." CJAC claims that the "ongoing recession has severely impacted the general funds of our public entities, reducing the funding for critical public services including public safety, social services and education." CJAC points out that a number of other states have either reduced their overall judgment interest rates to market levels or at least set lower rates for public entities. "Assembly Bill 748," CJAC concludes, "would help California correct an imbalance that goes beyond compensating an unsatisfied debt." ARGUMENT IN OPPOSITION : The Consumer Attorneys of California (CAOC) opposed this bill, as introduced, for many reasons. First, CAOC argued that the indices used by this bill represent only the most conservative rates of return for government investments; they do not reflect market interest rates generally. Second, CAOC noted that the purpose of the judgment interest rates is not simply to provide compensation that is consistent with prevailing market rates, but to provide an incentive to settle (in the case of prejudgment interest rates) and to promptly pay judgments once awarded (in the case of post-judgment interest rates). Third, CAOC noted that public entities already enjoy an interest rate that is three percent lower than the rate applicable to private parties. Fourth, CAOC pointed out that for claims approved by the California Victim Compensation and Government Claims Act, the state is already allotted 180 days from the time that a settlement or judgment is approved without having to accrue any interest. Finally, CAOC claimed that fluctuating rates lack consistency and predictability. CAOC has apparently agreed to remove its opposition when the author narrowed the bill's application to claims or judgments AB 748 Page 8 that arise out of a dispute over tax obligations or an inverse condemnation action. The Consumer Federation of California (CFC) opposed the bill as introduced for substantially the same reasons as those articulated by CAOC, adding that "the current 7% rate is fair" and that it provides an appropriate incentive for prompt settlement and payment. It is not clear whether the amendments that the author will take in Committee today adequately address the concerns of the CFC. RELATED PENDING LEGISLATION : AB 1007 (2013 session) would use the interest rate that currently applies to overpayments of taxes, surcharges, and fees to the state, under the California Sales and Use Tax Law, to any claim, judgment, or settlement against the State of California. AB 1007 will be heard in the same hearing as the present bill. PROPOSED AUTHOR AMENDMENTS : In order to narrow the application of this bill to actions of most concern to the sponsor and supporters - tax claims and inverse condemnation - and to appropriately account for the differing rationales for prejudgment and post-judgment interest, the author will take the following amendments in this Committee. - Delete Section 1 of the bill in its entirety (line 1 of page 2 through line 17 of page 3.) - Insert a new Section 1 to read as follows: SECTION 1. Section 3287 of the Civil Code is amended to read: (a) Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day, except during such time as the debtor is prevented by law, or by the act of the creditor from paying the debt. This section is applicable to recovery of damages and interest from any such debtor, including the state or any county, city, city and county, municipal corporation, public district, public agency, or any political subdivision of the state. (b) Every person who is entitled under any judgment to receive damages based upon a cause of action in contract where the claim was unliquidated, may also recover interest thereon from a date AB 748 Page 9 prior to the entry of judgment as the court may, in its discretion, fix, but in no event earlier than the date the action was filed. (c) Unless another statute or a collective bargaining contract provides a different interest rate, in any tax or inverse condemnation claim against a public entity that results in a judgment against the public entity, interest shall accrue at a rate equaling the weekly average 1-year constant maturity U.S. Treasury yield, but shall not exceed 7 percent per annum. That rate shall control until such time as the judgment becomes enforceable under Section 965.5 or 970.1, then shall accrue at an annual rate equaling the weekly average 1-year constant maturity U.S. Treasury yield at the time of the judgment plus 2 percent. - Delete SEC. 2 of the bill in its entirety (page 3 liens 18-35) - Delete subdivision (c) on page 4, lines 7-14, in its entirety and replace it with: (c) Unless another statute or a collective bargaining contract provides a different interest rate, the interest on a tax or inverse condemnation judgment or settlement for the payment of money against the state shall commence to accrue 180 days from the date of the final judgment or settlement and shall accrue at an annual rate equaling the weekly average 1-year constant maturity U.S. Treasury yield at the time of the judgment or settlement plus two percent, but shall not exceed 7 percent per annum. This subdivision does not apply to any claim approved by the California Victim Compensation and Government Claims Board. - Delete subdivision (c) on lines 24-27 of page 4 and replace with: (c) Unless another statute or a collective bargaining contract provides a different interest rate, interest on a tax or inverse condemnation judgment or settlement against the state shall accrue at a rate equaling the weekly average 1-year constant maturity U.S. Treasury yield at the time of the judgment or settlement plus two percent, but shall not exceed 7 percent per annum. AB 748 Page 10 REGISTERED SUPPORT / OPPOSITION : Support Urban Counties Caucus (sponsor) California Association of County Treasurers and Tax Collectors California Health Care Districts California Special Districts Association California State Association of Counties Civil Justice Association of California Contra Costa County Board of Supervisors Los Angeles County Board of Supervisors Rural Counties Representatives of California Sacramento County Board of Supervisors San Francisco, City and County Santa Clara County Board of Supervisors Opposition Consumer Attorneys of California (to pre-amended version of the bill only) Consumer Federation of California Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334