Legislature(1993 - 1994)
04/26/1994 09:10 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 161
An Act relating to interest rates and calculation of
interest under certain judgments and decrees and on
refunds of certain taxes, royalties, or net profit
shares; and providing for an effective date.
Co-chair Pearce directed that SB 161 be brought on for
discussion and referenced the original bill, CSSB 161 (STA),
CSSB 161 (Jud), a $39.3 fiscal note from the Alaska Court
System, four zero fiscal notes, the Governor's transmittal
letter, and a position paper from the Dept. of
Transportation and Public Facilities. She then directed
attention to two amendments.
DEBORAH VOGT, Contract Attorney for the Dept. of Law, and
LARRY MEYERS, Director, Division of Oil and Gas, Dept. of
Revenue, came before committee. Ms. Vogt explained that the
bill was introduced by the Governor to address two issues:
1. Pre-judgment and post-judgment interest in civil
litigation. The current rate is 10.5%. That is
dramatically out of proportion to the current
market.
2. Interest on back taxes and royalties.
Speaking to pre- and post-judgment interest, Ms. Vogt
explained that the original bill proposed to calculate
interest on judgments in accordance with the system used by
federal courts: a market-rate indicator tied to sales of
federal treasury bills. Interest rates on judgments would
then be tied to a realistic market rate that will fluctuate
over time so that the statute does not subsequently have to
be amended as the market rises and falls. Since the state
is frequently the defendant in litigation, it seeks the new
calculation because the current 10.5% is too high.
Ms. Vogt noted that the legislature amended statutes dealing
with interest on back taxes and royalties in 1991, setting a
rather high floating market rate of five points above the
federal discount rate, with an 11% floor. The taxpayer thus
pays whichever is higher. The rationale for the relatively
high rate of interest is the fact that taxes and royalties
are the life-blood of the state. It is thus important that
payments be timely made. The high rate encourages prompt
payment and provides an incentive to resolve large,
outstanding disputes.
Since enactment of amendments in 1991, it has been perceived
that the high interest rates could provide an incentive for
"people to intentionally overpay" taxes in order to take
advantage of a rate of return that could not be achieved in
the market. That is the reason the issue is addressed in
this legislation.
Ms. Vogt next directed attention to CSSB 161 (Jud) and said
that it accomplishes neither of the Governor's purposes. It
sets a rate for pre- and post-judgment interest of five
points above the federal discount rate--the intentionally
high rate chosen for taxes and royalties. That is
substantially higher than the rate proposed by the Governor.
It is also higher than what the state can earn on its
investments. The short-term rate of return for the past
twelve to twenty-four months has been "in the three to four
percent neighborhood rather than the eight percent" required
under CSSB 161 (Jud). The state is opposed to the floating
market indicator selected by Senate Judiciary.
On the tax and royalty side, CSSB 161 (Jud) no longer does
what the Governor intended. It does not establish a
disparate rate between underpayments and overpayments. The
Governor proposed the legislation to establish a
differential--an element of federal tax law and tax law in
many states. The Senate Judiciary Committee removed that
provision as well as the 11% floor. That substantially
lowers accruing interest on large, outstanding taxes and
royalties. As the legislation presently stands, the
administration can no longer support it.
Ms. Vogt next spoke to Amendment No. 2. She explained that
current law and proposed amendments submitted by the
Governor use the language "percentage points above the
federal discount rate." CSSB 161 (Jud) uses "percent
above." That could be construed to mean that if the
discount rate is three percent, five percent of three
percent is .15 percent--a tremendous difference from the
original intent. Amendment No. 2 thus replaces "percent"
with "percentage points above" throughout the legislation.
Senator Rieger asked if constitutional issues would be
raised by application of differential rates of interest.
Ms. Vogt explained that legislation proposed by the Governor
did not differentiate between "types of civil suits." It
differentiates between underpayment and overpayment of taxes
and royalties. She further acknowledged that royalties
involve civil dispute. That question was addressed in 1991
when royalties were separated out of other civil litigation
and "lumped together with taxes," for purposes of interest
rates.
Discussion followed between Senator Rieger and Mr. Meyers
regarding differential rates. Mr. Meyer noted that the
Internal Revenue Services and ten states use different rates
for underpayment and overpayment. Rates average 15% for
underpayment and 9% for overpayment.
In response to an additional question from Senator Rieger,
Ms. Vogt explained that AS 45.45.010 sets both the legal
rate of interest and the usury rate. The legal rate is
currently 10.5%. Usury statutes speak to five points above
the federal discount rate. That was not changed in 1991.
Those provisions were merely incorporated into the tax and
royalty statute. Further discussion of the usury rate
followed.
Responding to a question from Co-chair Frank, Ms. Vogt
advised that CSSB 161 (STA) is similar to the Governor's
bill, with minor changes.
In further discussion of changes within CSSB 161 (JUD), Ms.
Vogt explained that the Governor proposed interest equating
to the federal reserve discount rate, plus two, for
overpayments. Senate Judiciary changed that to five points-
-current law. For underpayments current law requires "fed
plus five or 11%, whichever is higher."
Co-chair Frank asked why the federal reserve discount rate
was not used for pre- and post-judgment interest as well.
Ms. Vogt said that the administration based judgment
interest on federal treasury bills since that standard is
used by the federal court system. It is currently 3.49%.
She then distributed a tabulation (copy on file) listing
judgment interest rates under the federal discount rate,
CSSB 161 (Jud), and treasury coupons.
Co-chair Pearce referenced an arrangement whereby the former
attorney general lowered the interest rate on taxes owed by
a taxpayer in exchange for other considerations (statute of
limitations was mentioned). Noting that that action was
outside of statutory authority, the Co-chair then asked if
changes in the proposed bill would allow that flexibility.
Ms. Vogt said that if the action was improper under current
law, it would be improper under the proposed bill.
Statutory amendments contained therein do not address
changes in discretion for enforcement of interest
provisions.
As a final issue, Ms. Vogt expressed concern that provisions
of CSSB 161 (Jud) may no longer be consistent with the title
because the legislation is no longer confined to judgments
and refunds of taxes and royalties. It also addresses
underpayments of those items since it removes the 11% floor
and changes the manner in which interest changes and is
compounded. Current law tracks the federal rate quarterly
and is compounded quarterly. CSSB 161 (Jud) tracks annually
and is compounded annually.
Discussion followed between Co-chair Frank and Ms. Vogt
regarding pre- and post-judgment interest. Ms. Vogt
explained that, under current law, interest accrues from the
date a suit is filed. Under both Senate Committee
Substitutes, interest would accrue from the date of injury.
Both the original bill and CSSB 161 (STA) set the interest
rate as of the initial event (the date of injury or the date
on which a suit is filed). That rate remains in effect
until the date of judgment, at which time a new post-
judgment rate is set and continues until payment of the
judgment. Under the Senate Judiciary version, the rate
changes. Ms. Vogt advised that the court system staff would
speak to that impact.
In response to further comments by Senator Frank regarding
interest rates and inflation, Ms. Vogt said that the
administration seeks to find "that number" which neither
benefits nor penalizes the party "who didn't have the money
who was supposed to have the money." It is not the intent
to make pre- and post-judgment interest either a benefit or
penalty to the litigant. It should provide neither an
incentive to settle nor incentive to drag out a lawsuit in
the hope that interest will continue to accrue at an
unusually high rate. The administration believes that the
treasury coupon rate is close. Five points above the
federal discount rate is too high. Co-chair Frank noted
that the treasury rate generally reflects the market while
the federal discount rate may be used to effect the market.
Senator Rieger voiced support for two separate rates of
interest. He noted that in commercial transactions, the
value of possession of the cash is much higher. In
commercial transactions the five percent premium is probably
necessary as an inducement to avoid dragging out the case.
Ms. Vogt advised that the original bill and both Senate
versions leave in current law provisions that allow parties
to contract for different rates. That is likely to cover
commercial litigation and is different from the default rate
set in statutes.
Mr. Meyers noted that refunds from the treasury currently
earn between 3 and 4%. Those refunds are presently paid out
at 11%. Lack of fluctuation and variance of the two rates
is costing the state a considerable amount. The
administration is proposing to do no different than banks
which use different types of rates. Since the 11% floor was
established in 1991, the state collected over $1.7 billion
in settlements. The interest rate was a primary motivator
in reaching agreements. Mr. Meyer expressed concern that if
rates are too low, there will be no incentive for parties to
"get together." The floating floor is intended to provide
inducement. The department has over $3 billion in interest,
relating to outstanding settlements, on the books.
In response to questions from Senator Rieger, Mr. Meyer
advised of "provisions for failure to file or failure to pay
of 5% a month, not to exceed 25%." There are thus penalties
in addition to interest. Penalties only arise in instances
relating to filing and compliance in payment of tax returns.
They do not apply to settlements whereby taxpayers have
filed and paid what they believe they owe, and the amount is
in dispute. Penalties are not imposed in those instances.
Co-chair Frank inquired regarding overpayments following
1991 interest rate changes. Mr. Meyers said for the period
commencing July 1, 1991, and ending March 15, 1992, the
state paid out $8.8 million. For the same period through
1993, a total of $22 million was paid. From July 1, 1993,
to March 15, 1994, payments total $65 million. In one
instance for which the department "paid out a refund of the
tax of $31 million, interest was $8 million." On that $8
million in interest, the state treasury earned $2 million.
The taxpayer earned 11% on the refund which sat in the state
treasury for two years, and the interest payment cost the
state $6 million.
CHRIS CHRISTENSEN, General Counsel, Alaska Court System,
next came before committee. He explained that CSSB 161
(Jud) establishes an immediate effective date for the
legislation. At the request of the Court System, CSSB 161
(STA) provided a delayed effective date of sections relating
to court judgments. Mr. Christensen directed attention to
proposed Amendment No. 1 and explained that it changes the
effective date for judgment interest to January 1, 1995. At
the present time, court system computers cannot perform the
interest calculations required by the bill. They will have
to be reprogrammed, associated forms and booklets provided
to litigants will have to be revised, and personnel will
have to receive additional training. A six-month window
would be helpful.
Reviewing the amendment, Mr. Christensen noted need to
change the January 1, 1995, date to January 2, 1995. He
said that would be in keeping with a further change within
CSSB 161 (Jud), requiring that the interest rate change on
January 2 of every year.
Mr. Christensen further remarked that additional changes
made by Senate Judiciary have the effect of doubling
personal services costs on the fiscal note from $7.4 per
year to $19.5. Proposed Amendment No. 1 would reduce the
note by approximately $10.0 for FY 95 since new interest
rates would only be in effect for half of the fiscal year.
The Senate State Affairs bill calls for two interest
calculations: one for pre-judgment interest and one for
post-judgment interest. CSSB 161 (Jud) calls for the
interest rate to be recalculated every year for ongoing
cases. An individual who is injured and files suit two
years thereafter and receives a judgment three years hence
is entitled to pre-judgment interest for five years. The
specific rate will be different for each of the five years.
Further if payment on the judgment is not made for
approximately three years, post-judgment interest will also
be different for each year. In a number of cases, instead
of performing two interest calculations, the court system
will perform six or eight or ten. That translates into
extra clerical time. The court system presently makes
approximately 10,000 calculations annually. Most are small
claims cases, however it takes equally as long to calculate
interest on small amounts as it does for larger cases.
Further, the court system is responsible for recalculating
figures presented by attorneys. If this is not done, and an
incorrect interest figure is applied, the state may be
liable for the difference.
Co-chair Pearce queried members concerning disposition of
the bill. Co-chair Frank voiced a preference for the
original bill. Senator Rieger acknowledged that he also was
more comfortable with the original version. Senator Sharp
termed the Senate Judiciary version "too fat" because of
provisions allowing for 5 points over the federal discount
rate. That more than doubles the market interest rate for
the past several years. He voiced a preference for the
Senate State Affairs bill. Co-chair Pearce asked that
Senators Rieger and Sharp work on an alternate draft to
bring back to the next meeting. SB 161 was thus HELD in
subcommittee.
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