BILL ANALYSIS                                                                                                                                                                                                    



                                                                  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