SENATE STATE AFFAIRS COMMITTEE April 2, 1993 9:10 a.m. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Mike Miller, Vice Chairman Senator Robin Taylor Senator Johnny Ellis Senator Jim Duncan MEMBERS ABSENT All Present COMMITTEE CALENDAR 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." SJR 23 Proposing amendments to the Constitution of the State of Alaska relating to the powers and duties of the legislative auditor. SJR 23 (LEGISLATIVE AUDITOR'S POWERS) was scheduled, but not heard this date. PREVIOUS SENATE COMMITTEE ACTION SB 161 - No previous action to record. SJR 23 - See State Affairs minutes dated 3/17/93 and 3/22/93. WITNESS REGISTER Joseph Geldhof, Assistant Attorney General Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Commented on SB 161. Will James, Assistant Attorney General Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Commented on SB 161. 1 Chris Christenson, Staff Counsel Judicial Branch 303 K Street Anchorage, Alaska 99501-2084 POSITION STATEMENT: Commented on SB 161. Ellen Braden, Treasurer Municipality of Anchorage P.O. Box 196650 Anchorage, Alaska 99517 POSITION STATEMENT: Commented on SB 161. Larry Meyers, Director Income and Excise Audit Division P.O. Box 110420 Juneau, Alaska 99811-0420 POSITION STATEMENT: Commented on SB 161. ACTION NARRATIVE TAPE 93-24, SIDE A Number 001 CHAIRMAN LEMAN called the Senate State Affairs Committee meeting to order at 9:10 a.m. and announced SB 161 INTEREST RATES: JUDGMENTS/TAXES/ROYALTIES to be up for consideration. JOE GELDHOF, Assistant Attorney General, explained the bill briefly. WILL JAMES, Assistant Attorney General, was available to answer questions on Sections 4, 5, and 7. Number 112 SENATOR ELLIS moved to adopt CSSB 161(STA). There were no objections and it was so ordered. SENATOR LEMAN asked regarding page 4, if the state's assessment is wrong, would the person get a higher interest rate on the refund for it. MR. JAMES said he wasn't sure of the answer to that. SENATOR TAYLOR asked if the rate of prejudgment interest was calculated after the judgement was made? MR. GELDHOF responded that you would probably wait until you find out if you get a favorable judgement before you do your calculations. Under the proposed legislation, he explained, you could ascertain what the prejudgment rate would be by looking at the week's previous Treasury Bill sale which would be your prejudgment interest rate. When you get a 2 judgement, you can then calculate the interest back to the T Bill sale. SENATOR TAYLOR said there is a significant enhancer for people to settle suits, because of the decline interest rates and fixed court rate. The state is caught in the process of making the determination of whether they want to litigate further if the odds are 75% we're going to loose, or are they wiser to settle now and pay the low interest rate. Number 285 SENATOR LEMAN suggested that the Commissioner of the Department of Revenue adjusting the interest rates on an annual or semi annual basis. MR. GELDHOF said the original concept for the post judgement interest was derived from the system the federal government currently uses which is based on the price of Treasury Bill sales. Number 334 CHRIS CHRISTENSEN, Staff Counsel to the Alaska Court System, said the Court System is only concerned with Section 1 of the CS which they oppose. There is a technical problem on line 1 saying that money shall accrue in a "civil case." The current statute doesn't say "civil case." It says "on a judgement or decree" which they have been interpreting to allow them to award post judgement interest on criminal judgements or criminal fines and criminal restitution. He did not think the state wanted to lose the ability to charge criminals interest on restitution. MR. CHRISTENSEN said they thought this bill would also impose a substantial clerical impact by requiring the rates to change every week at a time when funding is being cut. He said there is also a significant policy change in the bill from current non-tort cases where interest rates are calculated from the date of the breach of contract. It is easy to know when the contract was breached, because it says so in the complaint. However, they do not know when the summons was served, because generally they are not told. Phone calls would have to be made to attorneys or process servers to try to figure out the correct date which is normally not in the file. He also commented that the interest rate has to be calculated twice now instead of once. However, frequently many cases have multiple defendants who were served in 3 different weeks. There could be 4 defendants in a case, each with a different rate of interest which means instead of just doing one calculation for the entire case, you're doing 8 different calculations. Then the clerk would have to figure out the date of service and do the calculation. He said they handle about 10,000 of these cases per year and if you calculate 15 minutes times 10,000, that is a substantial increase in the clerical work load. The federal courts do this calculation only with post judgement interest, not with prejudgment interest, MR. CHRISTENSON said. Number 410 SENATOR LEMAN didn't agree that making the calculation would be particularly difficult. He asked if it would help to make the calculation only semi annually. MR. CHRISTENSON said that would still be some additional workload, but it would be a lot easier. Number 458 SENATOR TAYLOR asked if that annualized calculation would apply to both pre and post judgement interest rates and would different rates be applied to different years for cases that went on for a long time? SENATOR LEMAN said the methodology that tracks the market is the more accurate one and that whenever the rate is adjusted is what should be valid for that period of time. SENATOR TAYLOR asked what would be the simplest way to do the calculation? MR. CHRISTENSON said the best thing to do would be to change the rate as infrequently as possible, perhaps once a year. Also, if one rate would apply to both pre and post judgement, that would make things easier. Number 478 ELLEN BRADEN, Treasurer of the Municipality of Anchorage, commented on Sections 1 and 2 of the CS. She wanted an exception made for the interest charged by a municipality on its delinquent revenue. As it is written the interest rate is charged only to debtors. On page 2, line 20 she suggested changing the word "paid" to "issued." SENATOR TAYLOR asked if she had noted an increase in overpayment by taxpayers in Anchorage over the last few years? MS. BRADEN said she hadn't noticed an increase in overpayment. She explained that overpayments result from 4 two things - taxpayer error and a change by the assessor. Number 565 LARRY MEYERS, Director, Income and Excise Audit Division, testified on Section 4 of the CS. TAPE 93-24, SIDE B Number 580 He illustrated how the state is losing money as the law is written. There would be substantial savings to the state with SB 161. MR. MEYERS said Section 4 of the bill also provides that if a taxpayer pays his taxes on the basis of an assessment which was erroneous, a refund would be paid them at the current rates. SENATOR LEMAN said he didn't see why they shouldn't deal with retainage along with interest rates. Number 545 JEFF OTTESON, Department of Transportation, said they have two classes of activity where this interest rate comes to bear -one is on a right-of-way acquisition where the price is in dispute and they end up in condemnation and the state's last offer is deposited in the court. The difference between the last best offer and the judgement can be making interest which is currently about 3 times what market rates are. So there is no incentive to settle. Then they can have very large construction claims. If the state loses those claims, it will be paying 10.5 times $7.5 million times the number of years involved. Their concern is that it can add up to a lot of money. SENATOR LEMAN asked him to comment on the interest rate for retainage. MR. OTTESON said they had a lot of experience with that and this bill should address that area as well "to keep things equal." Number 520 SENATOR LEMAN asked about including criminal cases. MR. GELDHOF said there was no problem with that. They feel where restitution is made in a criminal matter that interest should accrue. SENATOR LEMAN said addditional work would be done on the language in SB 161 and bring it up at another time. He then adjourned the meeting at 10:10 a.m. 5 6