Opinion ID: 440193
Heading Depth: 2
Heading Rank: 2

Heading: Discounting to Present Value

Text: 17 In English, supra, this court reversed a portion of an FTCA award on the ground that the district court had failed to discount a deceased's projected earnings to present value. See 521 F.2d at 72. We found that the failure to discount gave the widow more money than she could have expected from her spouse's future earnings had the accident not occurred. Id. at 76. English did not specify, however, whether discounting was required as a matter of state law or supervening federal policy. We noted that California law, which applied in other respects, considers the effect of inflation and interest rates on damage awards, but we also mentioned two other policy concerns which influenced our decision. Id. at 74-75. Recently we resolved this question, stating that in English we were applying the law of California. Hollinger, 651 F.2d at 641-42. 18 The Supreme Court of Washington has held that in that state an award for pecuniary damages should be discounted to present worth. 3 Hinzman, 501 P.2d at 1234, citing Warner v. McCaughan, 77 Wash.2d 178, 460 P.2d 272 (1969). We have referred to at least three acceptable methods for determining the appropriate discount rate. The first, the independent incorporation method, requires inflation of the entire lump sum award by the compounded rate of inflation, and then application of the discount rate to the inflated sum. See Hollinger, 651 F.2d at 642. The second approach, the offset method, requires that the inflation rate be subtracted from the discount rate, to achieve the real interest rate, which is then applied to the lump sum. See Alma v. Manufacturer's Hanover Trust Co., 684 F.2d 622, 626 n. 2 (9th Cir.1982). The third technique involves application of a set formula which assumes a constant relationship between the two rates. Id. All three methods require independent and adequate proof of each factor before the inflation and discount rates can be compared. Id. at 626-27. The choice among the methods is left to the trial judge, who must explain the approach he adopted. See Jones & Laughlin Steel Corp. v. Pfeiffer, 462 U.S. 523, 103 S.Ct. 2541, 2556, 76 L.Ed.2d 768 (1983). Once he chooses a rate, he should apply it to each of the estimated annual installments, and then add up the discounted installments to compute the award. Id. 103 S.Ct. at 2551. 19 Based on these standards, the district court here erred in at least three respects. First, it omitted to indicate its choice among the approved approaches for discounting awards. Second, it offered no explanation of its estimates of future inflation and interest rates. Third, once the court arrived at a 1% discount rate, it simply deducted 1% from the total pecuniary damages, instead of making deductions from each annual installment. 4 In light of these mistakes, we are required to remand the pecuniary award for subsidiary findings and recomputation. 5 20