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.
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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
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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
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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
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(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 -
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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
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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
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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
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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.
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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