June 24, 2008
HP-1052

Deputy Assistant Secretary for Fiscal Operations & Policy
Gary Grippo
Testimony Before the House Committee on Ways and Means
Subcommittee on Social Security

Washington – Chairman McNulty, Ranking Member Johnson, and other members of the subcommittee, thank you for inviting me here today to discuss garnishment practices and their impact on federal government beneficiaries who receive their benefit payments electronically. The Committee is to be commended for continuing to focus on this issue, and I am hopeful that we will be able to achieve a solution based on sound public policy that provides appropriate protections and a balancing of consumer, government and business interests.

Treasury is willing to offer expertise and assist the federal benefit agencies in crafting a solution to this problem, leveraging our role in regulating Federal payments and working closely with the banking industry. Today, I will provide background on our role as a disburser of federal payments, our use of technology in disbursing government benefits, and our perspective on potential solutions to the garnishment issue.

One of Treasury's core functions is to develop policy for and to operate the financial infrastructure of the federal government. Treasury's Financial Management Service (FMS) provides central payment services to federal program agencies. FMS disburses 85% of the federal government's payments, including income tax refunds, Social Security benefits, veterans benefits, and other federal payments to individuals and businesses.

FMS disburses payments based on certified payment files received from program agencies. In FY 2007, FMS disbursed 982 million payments, of which 78% were issued electronically. Focusing specifically on federal benefits payments, such as Social Security and veterans benefits, or those categories of payments generally exempted by law from garnishment, FMS disbursed almost 800 million payments, of which approximately 81% were issued electronically. The largest federal benefit programs are Social Security and Supplemental Security Income, together comprising 71% of the payment volume. While the other federal benefit programs – veterans benefits, railroad retirement, civil service retirement, and black lung disability programs – represent a much smaller payment volume, the issues their beneficiaries may face when attempting to access lifeline benefits are the same. In our role as a central disburser, we would strive to ensure that any potential solution would work for all federal programs with exempt funds that are protected by law from garnishment.

Integrating and leveraging technology into our payment programs is a long-standing strategic vision for the Department of the Treasury. Treasury's strategic goal to effectively manage the government's finances includes strategies for expanding all-electronic transactions to ensure timely and accurate payments at the lowest possible costs. Electronic payments provide real and meaningful savings not only to the government and the taxpayer but also to the financial industry. For Treasury, it costs approximately 98 cents to issue a check versus 10 cents to issue an electronic payment. When this 88 cents per item savings is multiplied over the millions of federal payments issued annually, and as recipients convert from checks to electronic payments, the savings can become substantial.

On our path toward an all-electronic treasury, we have benefited from statutes, such as the Debt Collection Improvement Act of 1996 (DCIA), that generally require federal payment recipients to receive their payment electronically. As the regulation implementing the DCIA was proposed and finalized, an appropriate public policy on electronic payments was developed, with waivers and carve-outs to electronic requirements so as to not impose an undue hardship on the payment recipients. With the implementation of the DCIA, the rate at which federal benefit payments were made by electronic payment increased from 56% in FY 1996 to 75% in FY 2000. However, since obtaining a 4-5% annual growth rate in the late 1990s, we have leveled off to a 1-2% growth rate, with some years seeing less than a 1% increase.

Treasury has also benefited from the broader acceptance of electronic banking technology as we strive to increase the use of electronic payments. In assessing our future, we recognize a changing landscape, with rapidly increasing federal benefit payment volumes resulting from baby-boomer retirements. One of our strategies to manage future payment issuance costs is to actively market and promote electronic payments, specifically direct deposit of benefit payments.

Federal benefit recipients may opt to receive their payment by check or electronically. For those recipients choosing electronic payments, Treasury offers two programs: Direct Deposit and the recently launched Direct Express card.

Direct Deposit is a payment program for consumers who authorize the deposit of payments automatically into a checking or savings account via the Automated Clearing House (ACH) network . It is Treasury's preferred payment method and is the best way for Americans to receive their federal benefit payments. The advantages of direct deposit to the government, banking system, and recipients are well documented. It is safe, convenient, reliable, and eliminates the risk of lost or stolen checks.

Ideally, individuals would sign-up for direct deposit when they apply for their benefit payment. Treasury is working with the Social Security Administration in encouraging more individuals who have a bank account to opt for direct deposit when applying for their benefit.

Just this month, Treasury launched the Direct Express card. The Direct Express card is a prepaid debit card offered to Social Security and Supplemental Security Income check recipients who wish to receive their benefits electronically. While specifically designed as a product for unbanked federal beneficiaries, anyone receiving Social Security or Supplemental Security Income benefits can sign up for the card. Treasury has designated a financial agent to issue this nationally available card for the payment of federal benefits. The features of the card were formulated after a one-year pilot program and discussions with consumer groups and other stakeholders. Most of the card services are free. There is no cost to sign up for the card and there are no monthly fees. While there are fees for a limited number of optional transactions, it is possible to use the card for free, and while the Direct Express card is currently available to only Social Security and Supplemental Security Income benefit recipients, Treasury plans to add other federal benefit programs at a later date.

Treasury strongly encourages and actively promotes electronic payments, but we do recognize that electronic payments may cause problems in certain instances. Specifically, individuals who have bank accounts and are subject to garnishment actions may find direct deposit unattractive. Financial institutions may freeze accounts that receive federal benefits as they perform due diligence in complying with a myriad of state laws and court orders. An account may be temporarily frozen even when the account contains federal benefits which are exempt from garnishment. Thus, a federal benefit recipient who receives direct deposit may not be able to access lifeline funds because they have been automatically routed in to a frozen account. If the recipient had received their benefits by paper check, they could cash the check without depositing it into the frozen account and have full access to the funds.

Treasury believes that any solution to this problem, whether operational, regulatory, or if necessary statutory, would ensure that federal benefit recipients have access to a certain amount of funds that cannot be frozen while the garnishment order is adjudicated by the courts and financial institutions, and while the final amounts of exempt and non-exempt funds are determined. The model used to establish the appropriate amount of funds excluded from an account freeze would need to be developed based on an analysis of benefit payment amounts and the ability of financial institutions to implement it without complex accounting or research. This type of solution seems essential to ensure that benefit recipients have access to their statutorily protected funds while the details of a garnishment order are resolved.

As referenced above, one operational solution to the problem that we currently have in place is the Direct Express card. The card account contains primarily Social Security benefit payments, which, under federal law, are protected from garnishment by creditors other than the United States government. This means that creditors do not have the right to have these funds taken out of the account, none of which would be frozen pending resolution of a garnishment order.

Treasury is willing to coordinate a joint inter-agency effort in establishing a regulatory solution to the problem, based on our expertise in managing federal payments and working with the banking industry. Treasury, the Social Security Administration, and other federal benefit agencies are working together to provide specific guidance to financial institutions on actions they must take if there are benefits in an account subject to a garnishment order. We have discussed options with Social Security Administration staff and look forward to collaborating with them and other federal benefit agencies. Treasury can offer its expertise in the payments and banking systems to help craft a government-wide policy solution. As part of this interagency effort, Treasury is willing to assist the federal benefit agencies by serving as central point-of-contact on implementation, compliance, and general administration of a rule, and in working with the appropriate federal banking regulators on enforcement.

We envision that through this interagency effort, we would provide guidance to financial institutions on how to discern if there are exempt funds in an account and what amount of funds should not be frozen. For example, a regulation could provide a safe harbor to financial institutions that follow the guidance and allow recipients access to funds. Treasury is working closely with the Social Security Administration and other federal benefit agencies on a number of complex issues that would need to be addressed as we move toward a solution. These issues include commingling of funds, account fees, look-back periods, compliance costs, and enforcement. We believe further discussion with stakeholders and a public comment period are essential to fully address these issues.

The impact of garnishment orders on recipients of federal benefit payments is a public policy issue that needs to be addressed. Progress has been made over the last 18 months in evaluating the complexities of this issue. Garnishment practices are also an impediment for Treasury as we strive to further promote direct deposit and electronic payments. Treasury is willing to use its expertise with Federal payments and commercial banking practices to help develop and implement a solution. We look forward to working with the federal benefit agencies, consumer groups, banking regulators, financial institutions, and the Congress to come to a consensus solution.

This concludes my formal statement. I am pleased to address any questions you may have.