Senate Bill S6471

                                
 
BILL NUMBER: S6471A

SPONSOR: FELDER
 
TITLE OF BILL:  An act to amend the general municipal law, the public
housing law, the state finance law, chapter 585 of the laws of 1939,
relating to the rate of interest to be paid by certain public corpo-
rations upon judgments and accrued claims and the New York city health
and hospitals corporation act, in relation to rates of interest paid by
certain governmental entities on judgments and accrued claims

 
SUMMARY OF PROVISIONS:

This bill would amend subdivision I of section 3-a of the General Munic-
ipal Law, subdivision 2 of section 3-a of the General Municipal law,
subdivision 5 of section 157 of the Public Housing Law, section 16 of
the State Finance Law, section 1 of Chapter 585 of the laws of 1939, and
subdivisions of section 20 of Chapter 1016 of the laws of 1969, respec-
tively, by linking the rate of interest paid by certain government enti-
ties on adverse judgments or accrued claims to prevailing market inter-
est rates as determined by the weekly average 1-year constant maturity
Treasury yield. The bill retains the current 9% statutory cap on inter-
est rates (and the current 61; statutory cap on interest rates for judg-
              

ments or accrued claims arising out of condemnation proceedings or
actions to recover damages for wrongful death). For judgments and
accrued claims against the New York City Health and Hospitals Corpo-
ration, the bill retains the current 3% statutory cap on interest rates
and the 6% statutory cap on interest rates for such judgments and
accrued claims arising from actions to recover damages for wrongful
death.

 
REASONS FOR SUPPORT:

Amendments in 1982 to the General Municipal Law, the Public Housing Law,
the State Finance Law and Chapter 585 of the Laws of 1939 increased to
9% the maximum rate of interest paid by the State and local governments
on judgments and accrued claims. The 1982 amendments were enacted in
response to then soaring interest rates.  Interest rates fell almost
immediately after the enactment of the 1982 amendments and since the
financial crisis of 2007 interest rates have dropped to the lowest
levels in 40 years. For example, the one-year U.S. Treasury bill rate
peaked at 12.27% in 1982 and the rate was 1.2% in 2017. As a result,
unfair economic burdens have been placed on the fiscs of state and local
governments by judicial awards of interest reflecting the statutory
maximum that have no rational connection to prevailing market condi-
tions.

Pre-verdict and pre-judgment interest at such a rate places a partic-
ularly onerous and unfair financial burden on civil defendants because
in breach of contract, property damage and wrongful death cases, inter-
est starts to accrue even before the plaintiff commences an action. See
CPLR 5001(b) (stating that the clerk computes interest from the earliest
ascertainable date that the cause of action exists). In most tort
actions for personal injury, interest starts to accrue from a verdict,
report or decision and is included in the entered judgment.  (CPLR
S5002). Post-judgment interest accrues from the time of entry until the
judgment is paid. (CPLR S5003). The specter of a windfall rate over an
indefinite and elongated period of time artificially inflates settlement
values and leads to exorbitant judgments. Already strained public fiscs
are thereby exposed to additional unwarranted liabilities.
The trial courts do have the recognized discretion to set an interest
rate lower than 9% upon a proper showing that diverse and prudent
investment vehicles would not net such a rate of return. See generally
Denio v. State of New York, 7 N.Y.3d 159 (2006): Rodriguez v. New York
City Housing Authority, 91 N.Y.2d 76 (1997). However, as a practical
matter, courts infrequently invoke that discretion, and typically apply
a 9% percent rate. This bill's application of a predictable rate of
interest moored to the market embraces sound economics and protects the
public fisc from undue windfalls. Further, its guarantee that all simi-
larly situated litigants are subject to the same and a fair rate of
interest in all cases promotes fundamental fairness.

Congress has determined that the post-judgment interest awarded by
federal courts shall be 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 the date
of the judgment." 28 U.S.C.A. § 1961(a). Such an indicator accords with
sound financial market principles and should apply wherever interest is
available. The purpose of interest is to compensate persons for the lost
opportunity to use or invest money elsewhere. Markets apply two funda-
mental variables to capital in determining the rate of return that one
may obtain for another's use of its capital: (1) the time period for
which the capital will be used and (2) the risk the lender incurs as to
the return of that capital. The greater the risk, the higher the inter-
est rate; the lower the risk, the lower the interest rate. In situations
involving damage awards against the City' and other governmental enti-
ties in civil litigation, the plaintiff incurs no risk as to the return
of capital. The governmental entity will pay the verdict as surely as
the U.S. Government will return capital loaned to it in the form of a
U.S. Treasury Bill. Indeed, in his commentary on Civil Practice Law and
Rules § 5004, pertaining to the rate of interest on judgments, David
Siegel posited that "the use of a conservative standard like the Treas-
ury investment, measured by its relevant figures for the periods
involved in the particular ease, does seem an appropriate gauge, other
things being equal."

Likewise, the appropriate rate of return on the capital paid from a
verdict against the City and other governmental entities should be tied
to the rate of return on U.S. Treasury Bills. The City and other govern-
mental entities are constrained in the types of instruments in which
they may invest their revenues. For example, Section 11 of the General
Municipal Law restricts municipal investments to federal or state bonds
and a few other short-term limited-risk investments. * The City's aver-
age rate of return on its investments ranged from a high of 6.24% in
2000 to approximately 1.06% in 2017. At the same time, the one-year U.S.
Treasury bill rate dropped from 6.11% in 2000 to 1.2% in 2017. The
difference between the City's investment return rate and the one-year
U.S. Treasury bill rate has consistently remained marginal. The City
would not, therefore, reap a windfall by tying the interest rate to the
one-year U.S. Treasury bill rate and the plaintiffs would be obtaining a
rate of return recognized by sound financial market risk/loss princi-
ples. See Karagiannis v. New York State Thruway Authority, 209 A.D.2d
993 (4th Dept., 1994); Hancock v. 350 Hull Realty Corp., N.Y.L.J.
2/28/95 at p. 30 (Sup. Ct. , Bronx Co.), affd on other grounds, 225
A.D.2d 365 (1st Dept., 1996): Reid v.  County of Nassau, 156 Misc.2d
533, 535-36 (Sup. Ct.. Nassau Co., 1993).


Almost one third of the City's judgment and claims budget is spent on
cases with judgments and settlements in excess of SI million. The
difference in interest payments can be significant. For example, in a
case involving what may be a S5 million payout, the difference between
interest at 0.13% and 9% is 5443,500 per year, or S2.217.500 over five
years. A 300 basis point difference on the interest rate would have a
substantial effect on the public fisc. In a similar vein, the 9% rate
applied while a post-judgment appeal is pending can eliminate the
savings that the City otherwise would have realized from a damage award
that is reduced by the appellate court.

 
FISCAL IMPLICATIONS:

New York City estimates that the savings to the City attributable to the
measure set forth in this bill would be approximately $5 million in
Fiscal Year 2018 in prejudgment interest and $1 million in post-judgment
interest. The New York City Health and Hospitals Corporations and other
public entities would similarly save significant sums.

Accordingly, the Mayor urges the earliest possible favorable consider-
ation of this proposal by the Legislature.