Opinion ID: 1821943
Heading Depth: 1
Heading Rank: 2

Heading: The Commissioner's Use of a Simple Interest Discount Factor.

Text: The other issue on the appeal involves appellants' challenge to the use by the commissioner of a simple interest discount rate in reducing the sum of the periodic payments to present worth. The commissioner's calculations in the present case employed a discount interest factor of ten percent in accordance with the provisions of section 85.47. While respondent urged in the district court that a five percent discount factor should have been employed because that was the rate which was statutorily prescribed at the time of his injury, the district court rejected that contention and held that the discount rate at the time of commutation was controlling. Respondent has not cross-appealed from the district court's judgment and thus may not urge in this court that the district court erred in approving a ten percent discount rate. The industrial commissioner rejected appellants' contentions that the process of discounting the periodic benefits to present worth requires the compounding of interest. The commissioner relied on an opinion of the attorney general which indicated that judgments bear simple interest rather than compound interest. See 1916 Op. Iowa Att'y Gen. 106. We believe that section 85.45 clearly indicates that the goal of commutation is to commute to a present worth lump sum the total of the probable future payments capitalized at the rate provided by statute (in the present case ten percent). In analogous situations involving discounting awards to present worth, we have opted in favor of a compound interest factor. See Mallinger v. Brussow, 252 Iowa 54, 59, 105 N.W.2d 626, 630 (1960). The difference between using simple and compounded interest in calculating reduction to present worth could amount to several thousands of dollars in a given case. We believe that a compound interest factor more nearly accords with a sound annuity basis than a factor which involves only simple interest. See, e.g., 3 A. Larson, The Law of Workmen's Compensation § 82.71, at 15-591 (1983) (should be calculated on a sound annuity basis); Pray v. Narragansett Improvement Co., R.I., 434 A.2d 923, 931 (1981) (present value connotes discounting of the award to that amount which, if presently received, could be invested [in a reasonable and secure manner] in order to yield the future sum). Based on the foregoing considerations, we believe the commissioner applied an improper legal standard in equating the discount factor with interest recoverable upon judgments. We further believe that a compound interest factor more nearly accords with the legislative intent which produced the applicable statutory provisions. The judgment of the district court is affirmed with respect to all issues except the discount rate to be employed in reducing the future benefits to present worth for purposes of effecting a lump sum commutation. As to the latter issue, the judgment is reversed and the proceeding is remanded to the industrial commissioner for further proceedings consistent with this opinion. AFFIRMED IN PART; REVERSED IN PART.