BILL ANALYSIS �
AB 1007
Page 1
Date of Hearing: April 30, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 1007 (Wagner) - As Introduced: February 22, 2013
SUBJECT : State Government: Payment of Claims Against the State
KEY ISSUE : Should the judgment interest rate for all claims,
judgments, and settlements against the State of California be
based on the much lower variable interest rate that the state
pays with respect to overpayment of taxes, fees, and surcharges?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
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 the state or public
entities is 7%. Under California's Sales and Use Tax Law the
state is required to pay interest when reimbursing a person for
an overpayment of a tax, fee, or surcharge; however, the
interest rate for that limited purpose is based on the rate of
the 13-week U.S. Treasury bills, rounded to the nearest percent.
Currently, this rate is less than one percent. This bill would
apply the interest rate that the state applies when reimbursing
persons for overpayments of taxes, fees, or surcharges. Like AB
748, which this Committee is also scheduled to hear today, this
bill attempts to lower the judgment interest rate charged to the
state by linking it to a federal Treasury index, and for
substantially the same reason - that the statutory interest rate
of 7% for public entities is much higher than market rates.
However, this bill is much broader than AB 748. AB 748 narrowly
applies to claims and judgments that arise out of two limited
circumstances: a tax dispute or an inverse condemnation claim.
This bill, however, would apply a similar index to any claim,
judgment, or settlement against the state. In addition, AB 748
distinguished between prejudgment and post-judgment interest
AB 1007
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rates, in order to reflect their different purposes; this bill
makes no such distinction. This bill is supported by the Civil
Justice Association of California and is opposed by the Consumer
Attorneys of California.
SUMMARY : Requires the interest on the amount of a claim,
judgment, or settlement against the State of California to be
calculated based on the same 13-week U.S. Treasury rate that is
applied to the overpayment of taxes, fees, and surcharges to the
state.
EXISTING LAW :
1)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.)
2)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.)
3)Provides that interest shall be paid by the state to a
taxpayer with respect to the overpayment of various taxes,
surcharges, and fees based on the rate of 13-week U.S.
Treasury bills, as specified. (Revenue and Taxation Code
Section 6591.5 (a)(2) and (d)(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.)
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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
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 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.)
8)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 preceding calendar week. (28 USC Section 1961.)
COMMENTS : 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 the state or
public entities is 7%. Under California's Sales and Use Tax Law
the state is required to pay interest when reimbursing a person
for an overpayment of a tax, fee, or surcharge; however, the
interest rate for that limited purpose is based on the rate of
the 13-week U.S. Treasury bills, rounded to the nearest percent.
AB 1007
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Currently, this rate is less than one percent. This bill would
apply an interest rate that was created for the limited purpose
of reimbursing tax and related overpayments to the state to all
claims, judgments, and settlements against the state.
The Problem and a Proposed Cost-Saving Solution : According to
the author, over "the past several years, the state's General
Fund has paid out millions of dollars in claims," a total that
includes interest payments. The author argues that because the
state is such a large entity with numerous departments and
agencies, the process of paying a claim - which in some cases
requires legislative approval - can take a long time. For this
reason, the author contends, it is difficult for the state to
avoid paying substantial interest on judgments and settlements.
The author believes that lowering the judgment interest rate to
the same U.S. Treasury rate that applies to overpayment of
taxes, fees, and surcharges, "will allow the state to see
significant savings on an annual basis." As an example of the
problem, the author cites a recent settlement in a case
involving the Department of Forestry and Fire Protection, in
which the daily interest was $1,150 per day based on the 7%
interest rate. The case was settled on November 15, 2011. As of
February 9, 2012, after 86 days, the total cost of interest was
98,958.90. Had this bill been in effect, the author calculates,
the interest payment would only have been $847.71 over those
same 86 days.
Claims and Judgments against Public Entities under the
Government Claims Act : Under the California Government Claims
Act, claims against local public entities and the state, unless
otherwise exempted, must first be presented to the relevant
"board." In the case of a local public entity, the relevant
"board" is the governing body of the local public entity. In
the case of the state, other than the judicial branch, the
relevant "board" is the Victim Compensation and Government
Claims Board (Government Code Sections 900 through 905). The
Government Claims Act sets forth the manner by which claims may
be presented to, and considered by, the proper board. (Id.
Sections 910 through 949.) Finally, the Government Claims Act
regulates the payment of claims and judgments by the state or
local public entities. Most significant, existing law provides
that the interest on the amount of a judgment or settlement for
the payment of money against the state shall start to accrue 180
days from the date of the final judgment or settlement.
However, this provision does not apply to any claim approved by
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the Victim Compensation and Government Claims Board.
(Government Code Section 965.5 (c).)
This bill would provide that the interest on the amount of a
judgment or settlement, including any claim approved by the
Victim Compensation and Government Claims Board, be calculated
at the same rate that applies to the overpayment of a tax,
surcharge, or fee - that is, to the 13-week U.S. Treasury bill
rate.
Comparison to AB 748 : Like AB 748, which this Committee is also
scheduled to hear today, this bill attempts to lower the
judgment interest rate charged to the state by linking it to a
federal Treasury index, and for substantially the same reason -
that the statutory interest rate of 7% for public entities is
much higher than market rates. Moreover, this 7% rate only
applies to judgments awarded by state courts; in federal courts,
on the other hand, the rate is based on the U.S. Treasury yield,
as published by the Board of Governors of the Federal Reserve
System. However, while this bill seeks a similar result - lower
judgment interest rates more reflective of actual market rates -
it takes a much broader approach than AB 748. AB 748 narrowly
applies to claims and judgments that arise out of two limited
circumstances: a tax dispute or an inverse condemnation claim.
This bill, however, would apply a similar U.S. Treasury index to
any claim, judgment, or settlement against the state, including
any claim approved by the California Victim Compensation and
Government Claims Board. In addition, AB 748 distinguishes
between prejudgment and post-judgment interest rates, in
recognition of their different purposes; this bill makes no such
distinction. The Committee may therefore wish to consider
whether the narrower solution offered by AB 748 is preferable to
the much broader change proposed by this bill.
ARGUMENTS IN SUPPORT : According to the author, over "the past
several years, the state's General Fund has paid out millions of
dollars in claims," a total that includes interest payments.
The author argues that because the state is such a large entity
with numerous departments and agencies, the process of paying a
claim - which in some cases requires legislative approval - can
take a long time. For this reason, the author contends, it is
difficult for the state to avoid paying substantial interest on
judgments and settlements. The author believes that lowering
the judgment interest rate to the same U.S. Treasury rate that
applies to overpayment of taxes, fees, and surcharges, "will
AB 1007
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allow the state to see significant savings on an annual basis."
The Civil Justice Association of California (CJAC) believes this
measure will "modernize" the state's statutory judgment interest
formula by providing that the interest rate be the same as that
which applies when the state reimburses an overpayment of taxes,
fees, and surcharges. CJAC concedes that judgment interest is
designed to both compensate a plaintiff for the loss of the use
of money as well as to encourage settlements. However, CJAC
believes 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 1007," CJAC
concludes, "would help California correct an imbalance that goes
beyond compensating an unsatisfied debt." CJAC's arguments in
support of this measure are virtually identical to those made in
support of AB 748.
ARGUMENTS IN OPPOSITION : The Consumer Attorneys of California
(CAOC) opposes this bill for many reasons. First, CAOC argues
that the rate of the 13-week Treasury rate used by this bill is
a federal tax tool, not a model for setting general interest
rates in California. Second, CAOC notes 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). Public policy, therefore,
according to CAOC, should be aimed at reducing the incentive to
delay payments. In support of this, CAOC cites Cal. Fed. Saving
and Loan Assn. v. City of Los (1995), which concluded that
California's statutory framework is not just a means of
providing compensation; it is an enforcement tool. Third, CAOC
notes that public entities already enjoy an interest rate that
is three percent lower than the rate applicable to private
parties. Fourth, CAOC points out that, for claims approved by
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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. Fifth, CAOC claims that fluctuating rates lack
consistency and predictability. Finally, CAOC claims that
delays in payment of claims and judgments will hurt injured
workers, where it can take years to reach final judgment. After
spending years winning a judgment, CAOC suggests, these workers
would now find it more difficult to collect that judgment in a
timely manner. In sum, CAOC concludes that the current rates
have worked well "through periods of inflation and deflation and
no sound reason exists to change them now. It will only hurt
consumers and incentivize public entities to hold on to the
money longer than they should."
REGISTERED SUPPORT / OPPOSITION :
Support
Civil Justice Association of California
Opposition
Consumer Attorneys of California
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334