Government Operations and Community Development

Interest Rates on Judgments Against Municipalities

The Mandate: Various sections of New York State law govern the interest rate on judgments paid by both public and private entities. Pursuant to the Civil Practice Law and Rules § 5004, the interest rate on judgments is set at 9%. Pursuant to General Municipal Law § 3-a, the interest rate on judgments paid by a local government “shall not exceed 9%.” Despite this language in General Municipal Law, more often than not, the 9% rate is applied. This rate is applied in three circumstances: (1) interest on a claim until a verdict or a court's decision, (2) interest on a verdict or court's decision until it is reduced to judgment, and (3) interest on the judgment until the judgment is paid.  While the requirement to pay interest on judgments is fair and reasonable, the current rate of 9% is much higher than the interest rate that a judgment creditor would earn by investing the money.  This excessively high interest rate is borne to the taxpayers of New York State.

For example, assume that a plaintiff receives a $1,000,000 court award five years after suffering an injury.  Pursuant to CPLR § 5004, the plaintiff would be entitled to the $1,000,000 plus interest on that award calculated at an interest rate of 9%, which works out to $411,582.  If the interest rate was established at a rate that is more equitable and reflective of the current market rates, for example 6.5%, the plaintiff would receive the $1,000,000 award plus $286,466.  Arguably, $286,466 is a fair return for the plaintiff on the $1,000,000 award, and at the same time would save the taxpayers $125,115.  While this is a simplified example, it is useful in demonstrating how amending New York’s laws on the interest rate on judgments could save taxpayers money while at the same time treating plaintiff’s fairly.

The Cost: Although it is difficult to quantify the actual cost associated with the current 9% interest rate, it has been estimated that using market rates would generate significant annual savings for local governments.

The Solution: Enact legislation that would reduce the rate of interest on judgments against municipalities from 9% to a variable market rate with a 9% cap.