<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:71742.wais]
OVERSIGHT OF THE IMPLEMENTATION OF THE DEBT COLLECTION IMPROVEMENT ACT
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HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JUNE 8, 2000
__________
Serial No. 106-216
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
----------
U.S. GOVERNMENT PRINTING OFFICE
71-742 WASHINGTON : 2001
_______________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Lisa Smith Arafune, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Randy Kaplan, Counsel
Bryan Sisk, Clerk
Michelle Ash, Minority Counsel
C O N T E N T S
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Page
Hearing held on June 8, 2000..................................... 1
Statement of:
Cloyd, Barry G., vice president, sales and marketing, C.B.
Accounts, Inc.; chairman, government services program,
American Collectors Association, Inc....................... 76
Engel, Gary T., Associate Director of Government Wide
Accounting and Financial Management Issues, Accounting and
Information Management Division, General Accounting Office,
accompanied by Kenneth Rupar, Assistant Director........... 8
Gregg, Richard L., Commissioner, Financial Management
Service, U.S. Department of the Treasury................... 45
Jackson, Yvette S., Deputy Commissioner for Finance,
Assessment and Management, Social Security Administration.. 67
Powell, Edward A., Jr., Assistant Secretary for Financial
Management and Chief Financial Officer, Department of
Veterans Affairs........................................... 56
Letters, statements, etc., submitted for the record by:
Cloyd, Barry G., vice president, sales and marketing, C.B.
Accounts, Inc.; chairman, government services program,
American Collectors Association, Inc., prepared statement
of......................................................... 80
Engel, Gary T., Associate Director of Government Wide
Accounting and Financial Management Issues, Accounting and
Information Management Division, General Accounting Office,
prepared statement of...................................... 11
Gregg, Richard L., Commissioner, Financial Management
Service, U.S. Department of the Treasury, prepared
statement of............................................... 49
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Jackson, Yvette S., Deputy Commissioner for Finance,
Assessment and Management, Social Security Administration,
prepared statement of...................................... 70
Powell, Edward A., Jr., Assistant Secretary for Financial
Management and Chief Financial Officer, Department of
Veterans Affairs, prepared statement of.................... 59
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 6
OVERSIGHT OF THE IMPLEMENTATION OF THE DEBT COLLECTION IMPROVEMENT ACT
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THURSDAY, JUNE 8, 2000
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Members present: Representatives Horn, Turner, Owens, Ose,
and Maloney.
Staff present: J. Russell George, staff director and chief
counsel; Randy Kaplan, counsel; Bonnie Heald, director of
communications; Bryan Sisk, clerk; Elizabeth Seong, staff
assistant; Will Ackerly and Chris Dollar, interns; Michelle Ash
and Trey Henderson, minority counsel; and Jean Gosa, minority
assistant clerk.
Mr. Horn. The Subcommittee on Government Management,
Information, and Technology will come to order.
The Debt Collection Improvement Act of 1996 created a
process for Federal departments and agencies to collect tens of
billions of dollars in delinquent non-tax related debts owed to
the Federal Government. These delinquencies arise from a
variety of Federal loan programs for home buyers, small
business owners and students. The delinquencies also stem from
agency overpayment made to Federal beneficiaries and vendors.
This law created a variety of tools and programs designed
to improve the Federal Government's dismal record of collecting
its delinquent debts. The act centralized the debt collection
process by requiring that Federal departments and agencies
refer debts that are over 180 days delinquent to the Department
of Treasury for collection.
At a 1995 hearing to consider this legislation, our
subcommittee learned that the Federal Government was owed
almost $50 billion in non-tax related debts. Despite enactment
of the law, however, that debt grew to $59.2 billion by the end
of fiscal year 1999. The Treasury Department's Financial
Management Service operates two programs aimed at collecting
delinquent, non-tax related debt, an offset program and a
cross-servicing program.
Under the offset program, the Federal payments, including
salary and benefit payments, can be intercepted to satisfy
delinquent debts, such as defaulted home loans or small
business loans. The Treasury Department's cross-servicing
program allows the Department to collect directly from the
debtor, or refer the debt to a private collection agency.
For these programs to work, however, agencies must refer
their delinquent debts to Treasury in a timely fashion. That's
not always the case. The Department of Veterans Affairs, for
example, has referred only 1 percent of the Department's
eligible delinquent debts to the Department's cross-servicing
program. The Social Security Administration has referred none
of its eligible delinquent debts for cross-servicing
collection.
Today we will hear from witnesses who represent these
agencies, as well as witnesses representing the Treasury
Department's Financial Management Service who will discuss the
implementation of the debt collection program. The General
Accounting Office will also present the results of its
comprehensive study of the cross-servicing program which was
requested by this subcommittee.
As part of this study the GAO reviewed the Treasury
Department's efforts to promote timely debt referrals by
Federal agencies. General Accounting Office investigators also
reviewed the Department's allocation of delinquent debts to
private collection agencies. In addition to our Government
witnesses, we have a representative of the private collection
agencies that are working with the Government in its debt
collection effort.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. We welcome our witnesses and we look forward to
their testimony. And I now yield to the gentleman from Texas,
the ranking member, Mr. Turner, for his opening statement.
Mr. Turner. Thank you, Mr. Chairman.
We know that billions of dollars in non-tax debt are owed
to the Federal Government. Recognizing that our collection
practices were inadequate, this subcommittee under the
leadership of Chairman Horn in 1996 passed the Debt Collection
Improvement Act. This law expanded existing tools and
established new tools to assist the Government in collection of
debt.
I certainly want to commend the chairman, who's due much
credit for the work that has been done in this area. Chairman
Horn has been very diligent in trying to provide the Federal
Government with greater capacity to collect debt.
I also would like to commend the leadership of my colleague
from New York, Congresswoman Carolyn Maloney, who has continued
in her efforts, initiated back with the chairman, as the
ranking Democrat on this subcommittee, in an effort to improve
our debt collection practices.
As a result of their efforts and the efforts of many people
who are in this room today, we are beginning to reap the
benefits of a more centralized debt collection system. Within
the last 3 years, the Federal Government's centralized debt
collection activities at the Financial Management Service has
begun to work. In fiscal year 1999, increased management
attention by program agencies and improved use of debt
collection tools by the Treasury resulted in major advancements
in our debt collection efforts.
Collection by the Treasury on non-tax debt for the year
totaled $2.6 billion. Tax refund offset collections totaled
$2.6 billion as well. That is an increase of more than $570
million over 1998.
So far this year, we've collected $2.4 billion in non-tax
collections through the offset of income tax refunds. Clearly,
there has been improvement in the Government's debt collection
efforts, and I commend the Treasury and the agencies for their
work.
However, as we will hear, many challenges remain ahead of
us. I am concerned to learn many agencies have not done a
thorough job of referring all of their eligible debt to the FMS
for collection activities. Additionally, the delinquent debts
agencies refer to FMS are generally much older than the 180
days required by law, and therefore makes recovery more
difficult.
Questions have also arisen concerning the manner in which
FMS is referring debts to the private collection agencies under
contract with the Government. As a part of our oversight
responsibility, this subcommittee is meeting today to discuss
Federal agency implementation and compliance with the Debt
Collection Act. It is my hope that as a result of this hearing
we will be closer to meeting our goal of having an efficient,
effective and equitable Federal debt collection system.
Again, I commend the chairman for his focus on this issue,
and I welcome each of our witnesses here today.
[The prepared statement of Hon. Jim Turner follows:]
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Mr. Horn. I thank the gentleman, and you'll be hearing
about his legislation in the months ahead.
And I now yield to the gentleman from New York, Major
Owens, for an opening statement.
Mr. Owens. No statement, Mr. Chairman.
Mr. Horn. OK, thank you very much.
You know, I think most of you have been here before. But
the process here is that when we introduce you along this
agenda line, your full written statement is automatically part
of the record. We would like you to summarize that position in
about 5 minutes so we can have a dialog between the Members and
the witnesses and among the witnesses as to how we might
improve the act and what we're doing either on the Hill and in
the administration.
And all witnesses, since this is a Government Reform
Subcommittee, all witnesses have to take the oath in order to
testify. So if you will stand, raise your right hands. And if
there's any backup assistance, have them stand, too. Clerk will
take their names. So let's get all the oaths at once.
OK, we have one, two, three, four, five backup, one, two,
three, four, five, six witnesses.
[Witnesses sworn.]
Mr. Horn. The clerk will note all have affirmed. And make
sure we have the names.
Thank you very much. And we will now start with Gary T.
Engel, the Associate Director of Government Wide Accounting and
Financial Management Issues of the Accounting and Information
Management Division of the U.S. General Accounting Office,
which are the eyes and ears of the legislative branch in both
programmatic and fiscal matters and now debt matters. Mr. Engel
is accompanied by Kenneth Rupar, the Assistant Director.
Mr. Engel.
STATEMENT OF GARY T. ENGEL, ASSOCIATE DIRECTOR OF GOVERNMENT
WIDE ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES, ACCOUNTING AND
INFORMATION MANAGEMENT DIVISION, GENERAL ACCOUNTING OFFICE,
ACCOMPANIED BY KENNETH RUPAR, ASSISTANT DIRECTOR
Mr. Engel. Mr. Chairman and members of the subcommittee,
good morning, thank you.
It is a pleasure to be here today to discuss our review of
Treasury's progress in implementing the cross-servicing
provision of the Debt Collection Improvement Act of 1996. As
you know, OMB has designated implementation of this
legislation, which this subcommittee was highly instrumental in
passing, one of the Government's priority management objectives
to modernize and improve Federal financial management.
You asked that we address the effectiveness of Treasury's
use of the cross-servicing tool, which involves the transfer of
non-tax debt over 180 days delinquent to Treasury's Financial
Management Service. I will briefly focus on four issues. First,
the success of FMS' program significantly depends on agencies
identifying and promptly referring eligible debt. While FMS has
taken several steps, including various outreach efforts, to
encourage agencies to refer eligible debt, thus far the results
have been limited.
Since inception of the program in September 1996 through
May 1999, almost half of the dollar amount of referred debts
were over 4 years delinquent. Industry experience shows that
the likelihood of recovering amounts owed decreases
dramatically as debts age. The old adage that ``time is money''
is very relevant in the debt collection area.
Collection possibilities are also hampered by the low
percent of debts eligible for cross-servicing. Of the $59.2
billion of delinquent debt reported as of September 30, 1999,
about 89 percent has been excluded from cross-servicing
requirements. FMS reported that through April 2000 only $3.7
billion has been referred to it since inception of the program.
Even when agencies referred debts, the debts were not
always valid or legally enforceable, and thus not eligible for
cross-servicing. Based on our analysis of 200 delinquent debts
referred to FMS, we found 22 debts that were invalid or
involved debtors that were either deceased or in bankruptcy.
The second issue in question involved the Treasury's cross-
servicing process for collecting referred debts. Treasury has
established standards for agencies wanting to be a debt
collection center and has granted certain agencies waivers or
exemptions which allow them to perform collection activity for
certain of their own debts. In addition, three agencies applied
to Treasury to be governmentwide debt collection centers. But,
Treasury determined that these agencies did not have the needed
capabilities, so they were denied approval.
As such, today, FMS is the sole operator of a
governmentwide cross-servicing debt collection center. FMS'
center had well developed standard operating procedures. But,
our tests showed that its staff did not always follow them. For
96 of the 200 debts we reviewed, we found no evidence that FMS'
collectors tried to contact the debtors who did not respond to
demand letters. For 29 of the 46 demand letters in our sample
that were returned as undeliverable, FMS' debt history files
contained no evidence that FMS' collectors performed the
required skip tracing to locate the debtors.
Contributing to these results were some large influxes of
debts that were received by FMS during our test period.
Concerning collection agreements, we selected and reviewed 78
compromised debts and typically found no evidence that FMS
collectors adhered to key requirements, such as analyzing the
debtor's ability to pay before agreeing to the compromise
amount.
FMS also often did not adhere to repayment agreement
timeframes. Despite a 3-month repayment limit, the terms of 30
of the 32 compromise agreements that we reviewed exceeded the
limit, on average by 54 months.
The third issue you were interested in involved how FMS
distributed debts to private collection agencies. FMS intended
its methodology for such distributions to be performance based.
Distributions were generally made biweekly by placing all
available debts into a pool and systematically distributing
them. Our analysis of FMS' distribution of debts to PCAs from
February 1998 through February 2000 showed that 1 of the 11
PCAs had received a significantly higher percentage of the
debts with smaller balances. This PCA also received a
significantly higher percentage of the total number of debts
that were less than 1 year delinquent.
One contributing factor to these distribution results was
that the debts within the distribution pools were generally not
homogeneous. Collection industry experience, as well as FMS'
collection experience, have shown that collection rates are
generally higher on less delinquent debts and those with
smaller dollar balances.
Finally, fees charged by FMS to referring agencies have not
covered FMS' estimated fiscal year 1999 cross-servicing costs.
Based on our analysis, cross-servicing collections would have
to be over seven times as much as that for fiscal year 1999 for
this program to operate on a break-even basis.
In summary, for FMS' cross-servicing program to become a
fully implemented and mature program, challenges lie ahead that
FMS as well as agencies must overcome. These challenges are
magnified since, as delinquent debt ages, the likelihood of
collection diminishes. To assist in addressing these issues, we
plan to issue a report with recommendations.
Mr. Chairman, this concludes my testimony. I would be
pleased to answer any questions.
[The prepared statement of Mr. Engel follows:]
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Mr. Horn. Well, we appreciate the thoroughness with which
you've looked at this matter, and we do look forward to any
further recommendations you want to make.
Next is Richard L. Gregg, the Commissioner of the Financial
Management Service of the Department of the Treasury.
STATEMENT OF RICHARD L. GREGG, COMMISSIONER, FINANCIAL
MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE TREASURY
Mr. Gregg. Mr. Chairman and members of the subcommittee,
thank you for giving me the opportunity to update you on the
progress of the Financial Management Service in implementing
the Debt Collection Improvement Act of 1996. As always, FMS is
grateful for the subcommittee's support for its governmentwide
debt collection program.
I am pleased to report that during this past year, FMS has
continued to make significant strides in carrying out the
provisions of this landmark legislation. The Treasury
Department is firmly committed to the successful operation of
the governmentwide debt collection.
Federal debt collection is a highly complex and ever
expanding program, one that requires active participation and
support from Federal program agencies, States and private
collection agencies. In addition to carrying out the
requirements of the DCIA, in January, FMS began collecting
State income tax debt as mandated by the 1998 IRS Restructuring
and Reform Act.
Next month, FMS will initiate the continuous tax levy
program as authorized by the 1997 Taxpayer Relief Act, to
collect delinquent Federal tax debt. FMS developed these
important programs, I might add, in conjunction with
undertaking an intensive 2 year effort that successfully
modified FMS' mission critical systems for a smooth and
uninterrupted transition to the year 2000.
Mr. Chairman, FMS has moved swiftly on each of these major
collection initiatives and has concurrently implemented
appropriate administrative safeguards and controls.
Nevertheless, challenges do lie ahead. This morning, I will
provide a status report on FMS' debt collection efforts using
the Treasury Offset Program [TOP], and the cross-servicing
program, including the important contract work of private
collection agencies. Finally, I will discuss our most recent
program enhancements aimed at increasing future collections.
As I reported last year, the Tax Refund Offset and Treasury
Offset Programs were successfully merged in January 1999. For
calendar year 1999, collections through the offset of income
tax refunds totaled $2.6 billion, an increase of more than $570
million over 1998. An increase of this magnitude in such a
short period of time, I believe, represents a most impressive
achievement.
This calendar year to date, we have collected almost $2.4
billion. This figure includes almost $1.3 billion in delinquent
child support payments and $1.1 billion in non-tax debt
collections. Collecting $1.3 billion in overdue child support
debts, Mr. Chairman, is a reflection of Secretary Summers'
commitment to supporting our children and strengthening
American families.
The dollar amount of delinquent debt referred to TOP by the
program agencies continues to increase. As of September 1999,
$31.3 billion in Federal delinquent debt was eligible for
referral. And as of May 31 of this year, $25.4 billion, or 81
percent of that amount, has been referred. This represents an
increase of $16.6 billion in referrals since 1997.
The TOP Customer Assistance Center, located in Birmingham,
AL, provides toll-free telephone customer service 7 days a
week. During peak workload periods, up to 100 center
representatives answer questions regarding tax refund and other
offsets and provide agency contact information. The center has
already responded to more than 2 million phone calls during the
2000 tax season. Furthermore, FMS prides itself on its track
record of timeliness, fairness and balance in responding to all
inquiries.
Mr. Chairman, I will now discuss the newest addition to the
TOP system, the State income tax debt offset program. This
program entails offsetting Federal income tax refunds to
collect delinquent State income tax debt. Since launching the
State income tax program in January of this year, seven States
including Delaware, Illinois, Iowa, Kentucky, Maryland,
Missouri, and New Jersey have referred $362 million in
delinquent State income tax debts. As of May 31, 2000,
collections have exceeded $20 million and participating States
have been greatly enthusiastic and see enormous potential for
growth. Additional States will be added as they become ready.
Under cross-servicing, agencies refer debt to FMS for
collection that have been delinquent for more than 180 days.
Upon receiving debts for cross-servicing, FMS' Birmingham Debt
Collection Center attempts to collect the delinquent debt by
using a variety of approaches, including demand letters,
telephone followup and administrative offset. If, at the end of
30 days, the debt has not been collected or a repayment
agreement has not been negotiated, it is referred to 1 of the
11 private collection agencies on FMS' contract.
Since the establishment of this program in September 1996,
$63.4 million has been collected and repayment agreements total
$160.4 million. As of May 31 of this year, fiscal year to date,
total collections are $28.6 million, which is more than the
$23.5 million that was collected in all of fiscal 1999.
Currently, 62 percent, or $3.95 billion of the $6.4 billion
of delinquent debt eligible for cross-servicing has been
referred to FMS. This represents an increase of approximately
$2 billion in referrals over fiscal 1998. Progress in
increasing referrals has been slow; nevertheless, FMS will
continue to press and encourage agencies on this front and we
expect further progress. Attached is a report on the 10
agencies with the largest dollar amounts eligible for cross-
servicing.
Private collection agencies are an integral and critical
part of the cross-servicing program. Referring debts to the 11
PCAs under contract with the Treasury Department allows these
agencies to bring their unique expertise, systems, and
techniques to the cross-servicing program. These specialized
skills and methods have not been, nor should they be,
replicated by FMS' cross-servicing operation. The contract for
the services of private collection agencies is, first and
foremost, performance based. FMS continues to work diligently
to ensure that the terms of the contract are met.
As the members of the subcommittee are aware, the process
by which delinquent debts are distributed by FMS to the PCAs
has been the subject of some debate. While FMS is agreeable to
considering alternative distribution procedures for future
contracts, complying with the terms of the current contract,
administering the contract efficiently, and maximizing
collections are, without question, FMS' primary goals.
As I stated earlier, all FMS debt collection programs
include safeguards and controls. FMS monitors the actions of
private collection agencies with call monitoring and onsite
reviews. Private collection agencies collected $14.9 million
during fiscal year 1999, and as of May 31 of this year,
collections total $13.6 million for this fiscal year.
Additionally worth noting are the efforts of private
collection agencies in working with debtors to negotiate
repayment agreements, resulting in agreements totaling $30
million fiscal year to date and cumulatively $71.3 million.
At this point, Mr. Chairman, I will focus my remarks on
FMS' other new collection initiatives. FMS is moving forward on
the implementation of the program to offset the remaining
Federal salary payments. Based on the results of a test match
conducted by FMS, between $48 million and $80 million can be
collected through the offset of Federal salary payments.
Beginning in March 2001, we expect to implement a phase-in of
the Federal salary offset program.
With respect to the offset of Social Security benefits, FMS
estimates that annual collections will be between $37 million
and $61 million. While FMS is currently prepared to move
forward on implementation, we have been advised the by Social
Security Administration that they will not be ready until
February 2001. We will continue to meet with them to resolve
implementation issues.
On July 1, 2000, FMS and IRS will launch the continuous tax
levy program. Under the provisions of the Taxpayer Relief Act
of 1997, the IRS is authorized to collect overdue Federal tax
debts from individuals and businesses that receive Federal
payments by levying up to 15 percent of each payment until the
debt is paid. Initially, IRS will levy vendor and Federal
retiree payments disbursed by FMS, with the levy of Federal
salary and Social Security benefit payments to follow.
At full implementation, GAO projects annual collections of
$478 million from the tax levey program, with an estimated
annual collection of $312 million from levies of Social
Security benefit payments. Although FMS has made the necessary
preparations to move forward with the tax levy program, as of
this date, we have not received a commitment from SSA on an
implementation date.
In addition to sharply reducing debt collections, the delay
in implementing the programs to offset benefit payments and to
levy benefit payments has significant consequences for overall
operations of the program. Specifically, it will result in an
$8 million reduction in reimbursable income to FMS for fiscal
year 2001.
Mr. Chairman, in conclusion, FMS' governmentwide debt
collection program continues to experience solid growth. The
dollar amount of collections has increased in all program
areas, with total collections from fiscal year 1998 to the
present amounting to $7.1 billion. FMS is making headway in
increasing the delinquent debt referrals by program agencies.
Furthermore, amounts projected to be collected by expanding the
offset and cross-servicing programs to include tax levy,
benefit offset, salary offset, and administrative wage
garnishment should result in significant increases in
collections of debt owed to the Federal Government. The efforts
to date of FMS in the governmentwide debt collection arena
clearly demonstrate our firm commitment carrying out the
express intent and purposes of the DCIA.
Again, thank you for the opportunity to testify. I would be
happy to answer any questions.
[The prepared statement of Mr. Gregg follows:]
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Mr. Horn. Thank you very much, Commissioner. We appreciate
that. There will be a few questions when we get through the
panel.
The next witness is the first of the agency witnesses.
Edward A. Powell, Jr., is Assistant Secretary for Financial
Management and Chief Financial Officer of the Department of
Veterans Affairs. Welcome.
STATEMENT OF EDWARD A. POWELL, JR., ASSISTANT SECRETARY FOR
FINANCIAL MANAGEMENT AND CHIEF FINANCIAL OFFICER, DEPARTMENT OF
VETERANS AFFAIRS
Mr. Powell. Thank you, Congressman.
Mr. Chairman and members of the subcommittee, it is my
pleasure to testify on behalf of the Department of Veterans
Affairs [VA] regarding VA's implementation of the Debt
Collection Improvement Act [DCIA] of 1996.
As a former banker and business owner, the issue of
receivable collection is one I know to be of critical
importance. It is clear the most important time to collect a
receivable is during the first 90 days of its life. We have
initiated a coordinated effort in VA directed at receivables
management to consolidate all debt collection activity, with
the exception of the vendee home loan program, into our Debt
Management Center in Minneapolis, MN.
VA has reduced its outstanding receivables from $4.7
billion at the end of fiscal year 1991 to $3.3 billion as of
the end of fiscal year 1999. Much of VA's success in benefit
debt collection can be attributed to the DMC. Utilizing all
available tools, including benefit and salary offset, credit
bureau reporting and private collection agency referrals,
compromises and litigation, write-offs and the Treasury's
Offset Program. DMC has become the cornerstone of our debt
management effort.
Even though we have reduced our outstanding debt by 11
percent last year, we continue to emphasize the importance of
debt management. How we deal with our debt is in large part
determined by the different types of debt generates. Of the
$3.3 billion debt outstanding at the end of fiscal year 1999,
$1.1 billion was delinquent and $937 million was more than 180
days delinquent.
$1.96 billion of the $3.3 billion outstanding are active
vendee home loans. A vendee loan is a mortgage which is
generated by the sale of foreclosed property under the Home
Loan Guaranty Program. These mortgages are not delinquent debts
per se, but assets of VA. Periodically, we package and sell
vendee loans to the private markets, which eliminates the
mortgage and any obligation owed to the Government.
The remaining program debt is comprised of compensation and
pension overpayments, defaulted home loans, which by the way
are generally in transition to the vendee loan home program,
readjustment benefit overpayments and receivables for the
provision of medical care and services.
My staff works closely with the Department of the
Treasury's Financial Management Service to implement the
provisions of the DCIA. We have worked with FMS to revise the
report on receivables due from the public so it will provide
better information on the implementation and effectiveness of
the DCIA requirements, not just for VA, but for all Federal
agencies. Last year we worked with FMS to refer most of
eligible debt from VA to them for offset and to develop the
programming and processes needed to refer those same debts for
cross-servicing.
VA has been a long time participant in all available
administrative offset programs, including tax refund offset,
Federal salary offset and benefit offset, and has effected many
interagency matching programs. We continue to actively pursue
Federal salary offset pending its inclusion in the TOP.
Of the $937 million debt that was more than 180 days
delinquent at the end of fiscal year 1999, approximately $329
million was eligible for TOP and $460 million was eligible for
cross-servicing. Many debts are eligible for both
administrative offset and cross-servicing. The debts not
eligible for referral for TOP or cross-servicing are exempt for
a variety of reasons, including debt in bankruptcy or
foreclosure proceedings, debt in VA's mandatory waiver/
appellate process, and debt statutorily barred from referral.
As of December 8, 1999, VA referred $250 million for TOP.
By the end of this fiscal year, VA expects to implement the new
automated file formats required by Treasury and to be in
compliance with the offset referral requirement of the DCIA.
To date, VA's cross-servicing referrals to Treasury total
$4 million worth of debt from the health professional
scholarship program. We targeted these debts for referral
because they are among the most collectible of VA's debts and
the easiest to refer. Thus far, Treasury has collected
approximately $225,000 of the $4 million referred since May
1998.
The DMC currently houses approximately 80 percent of VA
debt over 180 days delinquent and eligible for cross-servicing.
This debt will be referred for cross-servicing in September
2000 when Treasury and the DMC will have completed the
development of automated processes needed to update each
other's databases. This has been a joint effort between us and
Treasury and is progressing well.
Although it is taking longer than we had hoped to refer the
bulk of our portfolio for cross-servicing, we have continued to
refer our debts for the Treasury offset program and for Federal
salary offset, both of which have historically proven to be
highly effective external sources for collection of VA debt.
The subcommittee should know that the Debt Management Center is
a highly efficient and effective operation which already
executes all the functions required of a cross-servicing
center. The DMC has generated an average of approximately $10
of cash collections for every dollar of operating cost.
The DMC's recent collection rates for overpayment debts are
approximately 67 percent for compensation and pension debt and
over 95 percent for education debt. We believe the DMC collects
a high percentage of debt before it becomes seriously
delinquent.
As for the remaining 20 percent of eligible VA debt not
managed by the DMC, VA staff and Treasury's FMS staff are now
determining how we can best achieve referral. We are also
considering whether VA should request the Secretary of the
Treasury to exercise his authority to exempt most of this debt
from the referral requirements, since it may not be cost
effective to refer certain VA types for cross-servicing.
For example, VA's first party medical debts are especially
problematic and expensive to refer, as explained in my full
written statement. The first party medical debt and the debt
management of the DMC comprise most VA debt potentially
eligible for referral. Therefore, once the DMC has referred its
debt in September, VA will be over 90 percent compliant with
the cross-servicing requirements of the DCIA. The remaining
debt is made up of a few smaller benefit programs not managed
by the DMC, and miscellaneous VHA debt such as vendor debt,
employee debt and non-Federal sharing agreement debt. We plan
to refer all appropriate debt for cross-servicing during the
fiscal year 2001.
This concludes my statement, and I will be happy to answer
any questions that the subcommittee may have.
[The prepared statement of Mr. Powell follows:]
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Mr. Horn. Thank you very much. We appreciate that
presentation. And we now move to the next agency and that's
going to be represented by Yvette Jackson, the Deputy
Commissioner for Finance, Assessment and Management of the
Social Security Administration. Ms. Jackson.
STATEMENT OF YVETTE S. JACKSON, DEPUTY COMMISSIONER FOR
FINANCE, ASSESSMENT AND MANAGEMENT, SOCIAL SECURITY
ADMINISTRATION
Ms. Jackson. Thank you, Mr. Chairman and members of the
subcommittee.
Thank you for the opportunity to come here today to discuss
the Social Security Administration's efforts to implement the
Debt Collection Improvement Act of 1996 that I will refer to as
the DCIA. We particularly appreciate your leadership, Mr.
Chairman, and that of this subcommittee, in enactment of this
legislation which has enabled SSA to improve our debt
management program.
As you will see, we have already implemented a significant
number of debt collection improvements. We will implement five
more debt collection tools in the year 2001. When we finish
with these tools, we will turn our attention to the remaining
provisions to be implemented. The public's trust in the Social
Security program is absolutely critical. Even a perception of a
lack of program integrity can threaten this trust. SSA is
dedicated to program stewardship and program integrity. We must
remain vigilant if we are to fulfill our role as capable
stewards of the public trust.
SSA has undertaken significant initiatives over the past
several years to prevent and detect Social Security program
overpayments. Our stewardship responsibilities require that we
recover as much of the debt owed as possible. We have a high
degree of success in collecting debts owed by people on the
rolls, achieving a collection rate of more than 90 percent. If
the debtor is no longer on the rolls, the tools provided by the
DCIA give us the enforcement capability we need to collect from
delinquent debtors.
SSA has made substantial progress toward implementing the
debt collection tools authorized by the DCIA, as well as other
legislation enacted during the 1990's. This has greatly
improved SSA's ability to collect its debt.
In January 1992, we began receiving our first collections
from the tax refund offset in which debts are recovered
directly from Federal tax refunds before the refunds are sent
to taxpayers. We expanded the tax refund offset twice, in 1995
and again in 1998, to add new classes of debtors, such as SSI
debtors, and to make use of the Treasury offset program which
allows us to collect delinquent debts from Federal payments in
addition to tax refunds. These tools have resulted in
collections of $370 million.
In 1995, we began using credit bureau locator services to
help track down delinquent debtors who moved and left no
forwarding address. And in 1998, we began reporting our
delinquent Social Security debtors to credit bureaus as a way
of inducing them to repay their debts and therefore clear their
credit records. To date we have located more than 200,000
debtors using the credit bureau locator services.
We have been busy over the last year developing the debt
collection tools that we think will have the most payoff. Our
choices are governed by deciding which tools will give us the
most return earliest in the process of collecting the debt. Of
course, for the last few years, much of our systems resources
were devoted to the year 2000 changeover during which SSA
reviewed all of its systems supported by more than 35 million
lines of in-house computer code and all vendor products. We
accomplished this changeover without additional resources.
In January 2001, we will implement mandatory cross program
recovery or the collection of an SSI debt from the debtor's
Social Security benefits. We estimate that it will yield about
$175 million in extra collections over the next 5 years.
Also in January 2001, we plan to implement two additional
tools to collect delinquent SSI debts. These tools are
administrative offset, which is the collection of a delinquent
debt from a Federal payment in addition to a tax refund, as
well as credit bureau reporting.
In February 2001, SSA, in partnership with the Financial
Management Service, plans to implement benefit payment offset.
This is the reduction of Social Security benefits to collect
delinquent debts owed to other Federal agencies. While this
tool will not contribute to SSA's debt collections, it will
benefit the Federal Government by enabling the Treasury
Department to collect an estimated $40 million to $60 million
in delinquent debt. Treasury estimates that about 400,000
Social Security beneficiaries per year will incur a reduction
of their benefits as payment toward another Federal debt.
We have been working with the Financial Management Service
since July 1998 to develop a program that gives maximum
collections at minimum cost to the Federal Government. As you
can imagine, we had many issues to resolve, such as concerns
about adequate notification of Social Security beneficiaries
who will incur an offset. We want to make sure that the right
people are offset for the correct amount. We also want to
ensure that the people who are offset under this program
understand why it is happening and who they can contact if they
have questions.
We have worked out these issues with the Financial
Management Service and our agencies are in the final phase of
our development of our payment benefit offset. In less than 1
year, we expect payment benefit offset to start generating debt
collections for the Federal Government.
In June 2001, we plan to implement administrative wage
garnishment, a DCIA authorized tool, as one more tool for
collecting delinquent Social Security and SSI overpayments. In
addition, we will focus on another DCIA provision, Federal
salary offset. Treasury plans to incorporate Federal salary
offset into the Treasury offset program after the third quarter
of fiscal year 2001.
We will also implement another DCIA provision, Treasury's
cross-servicing program, in which Treasury acts as a debt
collector for Federal agencies. An important aspect of cross-
servicing involves the use of private collection agencies which
is on our list of debt collection tools to implement after we
finish the tools that are currently being implemented.
Interest charging is another provision of DCIA that we plan
to implement. Our priorities are such that we will begin
developing interest charging as early as the year 2002. While
interest charging is a valuable tool, we believe it will yield
collections in the form of voluntary payments by people who
will perceive it as something to avoid.
In conclusion, our agency has accomplished much in
implementing the new debt collection tools authorized for us.
SSA is committed to implementing the provisions of DCIA and
other relevant debt collection laws. Our record of achievement
in implementing the tax refund offset, administrative offset
and credit bureau reporting shows our commitment to debt
management.
Thank you for the opportunity to testify before you today.
I will be glad to answer any questions that you may have.
[The prepared statement of Ms. Jackson follows:]
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Mr. Horn. Thank you, Commissioner. That's very helpful.
Our last witness this morning is Barry G. Cloyd, the
chairman of the Government Services Program for the American
Collectors Association, Inc.
STATEMENT OF BARRY G. CLOYD, VICE PRESIDENT, SALES AND
MARKETING, C.B. ACCOUNTS, INC.; CHAIRMAN, GOVERNMENT SERVICES
PROGRAM, AMERICAN COLLECTORS ASSOCIATION, INC.
Mr. Cloyd. Thank you, Chairman Horn, subcommittee members,
good morning.
My name is Barry Cloyd, and I am vice president of sales
and marketing for C.B. Accounts, Inc., which is a private debt
collection agency based in Peoria, IL. I appear before you this
morning as chairman of the Government Services Program [GSP],
which was formed in 1996 to promote active participation by
debt collectors in developing new collection opportunities in
the specialized area of Government collections and to assist
members serving Government entities.
GSP is part of the American Collectors Association [ACA],
which is an international trade association comprised of 5,000
credit and collection organizations and companies. The
Association's mission is to help members comply with a strict
code of ethics and applicable State and Federal laws and
regulations through a variety of means, including educational
material, seminars, research, legislative updates and guidance
with individual problems.
On behalf of all ACA members, who represent approximately
one half of third party collection agencies in the United
States and their 65,000 employees, I want to express our
appreciation to you, Mr. Chairman, for holding this hearing and
for giving us the opportunity to present this statement.
As you are well aware, Chairman Horn, the Debt Collection
Improvement Act, which is Public Law 104-13, affects private
collection agencies [PCAs], and the services they provide. The
act was designed to accomplish three goals: maximize collection
of delinquent debts owed to the Government by ensuring quick
action to enforce recovery of debts and the use of all
appropriate collection tools. No. 2, minimize debt collection
costs by consolidating related functions and activities and
utilizing interagency teams. No. 3, rely upon the experience
and expertise of private sector professionals to provide debt
collection services to Federal agencies.
Now, PCAs work very hard to return money to Government
agencies that could otherwise be lost. And most financial
management, FMS contractors, are ACA members. Since the first
Government contracts were placed with private collection
agencies shortly after the Debt Collection Act of 1982,
literally billions of dollars have been collected, including
more than $3.2 billion for the Department of Education from
fiscal year 1986 to the present.
PCAs continue to improve the amount that they return to the
Government, which of course also benefits American taxpayers.
PCAs collected $265 million in fiscal year 1998, and in fiscal
year 1999, they returned $536 million. And so far through 9
months in fiscal year 2000, PCAs have collected $445 million
and look well positioned to surpass last year's record.
We would hope that DOE's success could be replicated by the
Department of Treasury's FMS contract. The FMS, which has been
working with PCAs since March 1998 reported that PCAs have
collected slightly more than $30 million for the agency
according to figures tallied through April 30, 2000. In
addition, referrals of accounts total 272,127, with a value of
more than $4 billion for those accounts.
The important work of this subcommittee in fashioning the
DCIA under your able leadership, Mr. Chairman, has been very
significant. But we would respectfully suggest several
modifications that we believe would allow PCAs to return more
money to the Government and ultimately to the taxpayer.
In preparing this testimony, ACA asked member agencies that
had been under contract with FMS to provide suggestions for
improving the implementation of and compliance with the DCIA.
Those contractors suggested three important improvements for
achieving better results from the DCIA relating to timeliness
and number of accounts that are referred, current delays in
resolving accounts, and the inefficiency of multiple
contractors contacting the same debtor.
First, we feel that accounts aren't being referred to PCAs
on a timely basis. In order to maximize collection of
delinquent debts, Federal agencies must comply with the DCIA
and forward to the Department of Treasury all non-tax debt that
is more than 180 days delinquent. At this time many accounts
which ACA members receive are far more than 180 days old, so
the ability to collect on them is greatly decreased.
And as the old saying goes, which was echoed earlier this
morning, time is money, and that saying couldn't be more
appropriate for today's hearing. There is a direct correlation
between the time a debt is turned over to a debt collector for
collection and the amount of dollars that are recovered. Simply
put, the longer a debt remains unpaid, the less likely recovery
becomes.
And per a recent Price Waterhouse survey, as well as my
association's research, we find evidence for those statements.
If an account is referred to a collection agency when it is 180
days past due, it has a much better chance of being collected
than if it's referred, say, 2 or 3 years later. A debt that is
181 to 210 days delinquent has a 23 percent chance to be
collected. But for items that are more than 421 days past due,
the ability to collect decreases to 4 percent.
Now, these results, which show how time affects debt
collection, were backed by a portfolio analysis conducted by
Price Waterhouse which found that only 1 percent of debts are
collectible after 2 years of delinquency. Obviously, time plays
an important role in the recovery of these debts.
And another important factor to consider is approximately
how many referring agencies are participating in the referrals
of delinquent debt to the Department of Treasury. According to
some estimates of ACA members that contract with Government
agencies, the number of participating referring agencies is
only around 40 percent. According to a June 5, 1998 General
Accounting Office report, literally $26.4 billion of reported
non-tax debt over 180 days delinquent has not been referred to
Treasury and was unlikely to be referred in the near future.
While our members feel that Treasury within its current
boundaries is doing a very commendable job, they realize that
the Department doesn't have the necessary power to enforce the
DCIA. Accordingly, we believe that Treasury must be given
enforcement power to bring non-participating referring agencies
into compliance with the act's provision, stipulating that all
non-tax debt over 180 days old be referred to Treasury for
collection.
Bringing more accounts to our members in a more timely
manner will only work to the advantage of all parties involved.
And this would clearly help the Government attain one of those
goals of the act, to ensure quick action on recovery of debts.
To be perfectly frank, the sooner PCAs receive delinquent
accounts, the sooner they will be able to return delinquent
money to Government agencies.
Second, multiple contractors contacting the same debtor is
of course inefficient.
Another modification we respectfully suggest concerns the
transfer of accounts. Now, we believe that multiple debts for
the same debtor should be consolidated and placed with only one
contractor. Placing a debtor's various debts with different
contractors through the same or different referring agencies,
which is currently the process, is unproductive. It's also
confusing for debtors, because many different contractors are
contacting them, which some debtors even interpret as
harassment.
Now, we strongly recommend that FMS adopt an account
referral policy that consolidates all transfers for the same
debtor and places them with a single contractor. We also
suggest that any additional debts that are referred to FMS for
these debtors should be flagged and referred to that same
contractor so all of the debts can be maintained together. Very
common practice, particularly in private and State sectors.
Based on our members' extensive experiences, consolidating
the debts would provide a much better chance to resolve that
debt, as well as reduce the possibility of a complaint. And
third, there are unnecessary delays in resolving accounts. PCAs
must undergo a cumbersome process when seeking account
information from referring Federal agencies. And as such, PCAs
would like the authority to approve repayment agreements, and
compromise directly with a referring agency. PCAs desire this
direct contact with referring agencies, especially in regard to
compromises, to ensure that cases will get resolved in a timely
manner.
As a case in point, if a debtor says that he or she has
just entered a payment arrangement with a referring agency, the
PCA would be able to quickly verify that claim and speed up the
process. Several contractors have mentioned that it currently
takes up to 6 months to resolve accounts, which makes the
accounts more difficult to collect. The expedience a PCA can
offer in this situation results in efficiency as well as good
customer service, which is a primary focus of the very
successful education contract.
Contact with referring agencies would also result in debtor
sensitivity and likely a higher percentage of collectible
debts. Overall, resolving debts more quickly will allow PCAs to
collect and return money sooner to Government agencies. If the
recommendation for direct compromises with referring agencies
cannot be met, we respectfully suggest that Federal agencies be
strongly encouraged to respond on a more timely basis to
inquiries they receive from PCAs via Treasury.
We believe these changes, as well as the others I have
mentioned earlier, would provide several benefits to both PCAs
and to the Federal agencies they collect on behalf of. The
improvements we recommend would meet the goals of the DCIA to
maximize collection of delinquent debts allowed to Government
agencies by ensuring quick action on accounts, and minimize
collection cost through consolidation. In addition, we believe
that these changes would promote increased competition among
PCAs that contract with Government agencies.
At the current time, we believe that healthy competition is
not being fostered among contractors due to incomplete data and
unequal distribution of accounts. By making the changes that
ACA suggests, referred accounts would be distributed more
evenly by volume and better partnerships would result.
Thank you very much, Chairman Horn and subcommittee
members, for the opportunity to present this testimony. I will
be happy to answer any questions you may have.
[The prepared statement of Mr. Cloyd follows:]
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Mr. Horn. Well, we thank you, thank you for coming and
making that perspective.
We now go to the questions and answers. We're going to have
5 minutes per member, alternating the membership between the
majority and the minority. I will first yield 5 minutes for
questioning to the ranking member, Mr. Turner of Texas.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Engel, I want to address a portion of your testimony.
It's pretty clear that we are collecting more of our
outstanding Government debt. That's the good news. The bad news
seems to appear on page 4 of your statement, and I believe you
shared this with us in your oral presentation, which says the
FMS has not covered its cross-servicing costs through related
fees collected and is not likely to do so in the near future.
Based on FMS' own estimated cross-servicing costs and using
the current fee structure, and FMS fiscal year 1999 collection
experience, we determined that collection volume would need to
rise over sevenfold to put this operation on a full cost
recovery basis. In common language, what are you saying there?
Mr. Engel. What we're talking about there is that under the
act, distribution centers such as FMS are allowed to charge
fees to the referring agencies. Typically they'll charge 3
percent if the debt that comes in ends up going to a private
collection agency and there's a collection on it. If instead
FMS collects on those funds, they charge the referring agency
18 percent.
What we were saying is that we went through and calculated,
based on FMS' estimated costs to run the cross-servicing
program, which for fiscal year 1999 was about $11 million,
based on that and their collection experience as to which
percent was collected by the private collection agencies and
themselves, and using the fees that they charged at that time,
that in order to cover the $11 million of costs, they would
have to have about $173 million of collections, which was well
more than what they actually collected during a year.
Mr. Turner. So are you saying we're losing money on this
deal?
Mr. Engel. Well, not in total as it relates to collections
coming in and total for the Federal Government and just what
FMS' costs are. However, we only know what FMS' costs are for
this program, you'd have to add to that agency costs. But what
we're talking about is for their program itself, what it's
costing them to run the program, the fees that they're
charging, whether the fee rates could be increased or their
costs could go down, something would have to happen for them to
be able to break even and it would have to happen in quite a
large amount, as we said, sevenfold, the collections would have
to be.
Mr. Turner. Well, do we need to consider some adjustments
in the fees that are charged? Or are we simply considering
those appropriate and the only answer is to increase the volume
to show the agency's paying its way?
Mr. Engel. Actually, FMS has had a contractor look at this
area, not just in the cross-servicing. And there are some
suggestions to consider increasing the fee rate.
However, I think an important point to make is again that
as we pointed out, much of the debt that's coming over is
extremely old by the time it comes over. And as the American
Collection Association representative has said, you can expect
a very small fraction of those dollars to be collected because
they are so old.
So unless we start getting more current debts coming over
from the agencies, it will be very difficult for FMS to
generate the collections that would be needed to cover those
costs. So I'd say a fee increase may be something to consider,
but the fees would have to be increased, I think the one study
that was done, one of the fees would have to increase from the
18 percent they currently charge to 106 percent, which would be
more than you're even collecting, which is obviously
unrealistic.
Mr. Gregg. If I might, Congressman Turner, may I respond to
that?
From my perspective at FMS, there's a couple issues. First
of all, we're still rolling out this program. As I indicated in
my testimony, we're about halfway there in the amount of
referrals coming into cross-servicing. So that's one element.
And as part of that element, there's a lot of cleanup work
that's going on within FMS and with the private collection
agencies on just how good some of that debt is.
Now, in many cases, we don't collect a fee, but it actually
is a benefit to the Government, because there's a lot better
information on what's collectible and what's a good debt and
what's not a good debt. So that's part of our process.
The other thing from my perspective, is that our overall
debt collection program, not just at the cross-servicing. And
if you look at the total amount that we brought in last year,
of $2.6 billion, and we're spending about $30 million, the
return is great. Whether or not we should charge an additional
fee or higher fee in cross-servicing, I'm not sure. We have to
be careful not to go overboard there.
But that's really part of the whole process. It's tied in
very closely with our top system. From my perspective, just to
look at the cross-servicing and the fee income you are only
looking at part of the picture.
Mr. Turner. Thank you. Thank you, Mr. Chairman.
Mr. Horn. We'll have 5 minutes, I yield to myself for the
purpose of questioning, and then we'll have Major Owens.
This is directed to Commissioner Gregg. A few agencies,
including the Department of Veterans Affairs, have applied to
the Treasury to be debt collection centers. However, their
applications have been denied. Currently, the Financial
Management Service is the only agency with this status. Why
were these agency applications denied?
Mr. Gregg. The primary reason that they have been denied is
based on our own reading of the DCIA, plus hearings that have
taken place over the last 3 years. I think it was clear to us
that a high standard had to be established in order to be debt
collection centers. And we, in looking at different
applications that we did receive, tried to apply those
standards and make up our own determination whether or not we
thought that they would either for their own debts or for
governmentwide debts be an organization do an outstanding job.
That's really the threshold that we set. We want someone who
can do a good job.
In some cases, we did authorize agencies to continue the
work that they'd been doing, because we felt that they were
doing well. For example, the Department of Education, has done,
in my view, an outstanding job in collecting delinquent student
debts and they continue to perform that work.
In other cases, we didn't feel that agencies really had
their act together, if you will, in coming to us. Because when
we started asking questions about how well they were doing on
their own debts, at least in some cases, they couldn't give us
the information that made us comfortable that they'd be able to
continue that role.
So the standard has been high. And that we also have
refined the process which was taking way too long when the
program first started, to expedite it and set some clearer
standards on what our expectations are.
Mr. Horn. Well, I guess I want to ask the question here,
what do you have to do to have a governmentwide debt collection
center in the future if all of these applications have been
turned down?
Mr. Gregg. I think first of all it's to demonstrate that
you can do an excellent job. I think it's a responsibility of
the agencies to demonstrate to us and show that they can do
that. The other thing is that this program is still in its
early stages. And we're not opposed to granting additional debt
collection centers, whether it's for their internal debts or
for governmentwide debts.
At the same time, there is an obligation on us as
performing this governmentwide function to look at it very
broadly. That's what we try to do.
There's also an issue of first of all, walking before you
run. The walking part is, have only half of the cross-servicing
debt referred to us. And the process of going through that I
think is very beneficial. Also, some of the debt we get is very
old. I think if an agency came to us and made a very strong
case and a good case to be a debt collection center for their
own debts or for others, maybe we would approve it.
Mr. Horn. Secretary Powell, how do you feel about the VA
application to become a debt collection center, and do you
think it was appropriately denied?
Mr. Powell. I'm reminded I'm under oath, is that correct?
Mr. Horn. That's right. [Laughter.]
Mr. Powell. What Mr. Gregg has said, I don't take a great
deal of exception with when we first applied. We've come a long
way from that point, I think as evidenced in my testimony. I do
think there's a case to be made for continuity in the
collection efforts for some of these debts, as we heard. There
is an issue of having multiple contact points disrupting the
continuity.
The VA in particular, as you know, is fairly sizable
relative to most of the departments. We have significantly
improved our debt collection efforts. We feel we are fully
capable of being an effective debt collection center. TOP delay
for us is really a software issue. It's not a lack of
willingness on our part to comply.
I think Treasury does a credible job. We have no argument
with the effort that they make, especially on these very old
debts. I think the point is well taken that as this program
evolves, you'll see the process become more effective. I know
from many arguments and discussions within CFO Council, there
is a real problem distinguishing those debts that are
collectible from those which actually should be written off,
removing them from the Government's balance sheets as you would
do in the private sector.
I think over time, it would be appropriate for VA to
reapply and make the case for certification as a debt
collection center. That will take a natural course, and
hopefully we will receive a favorable ruling.
Mr. Horn. Well, do we know, Commissioner Gregg, the degree
to which someone has to redo their denial? I mean, is it the
supervision of the employees, if they haven't been trained yet,
or just what is it that turns people down? Now, the aging debt
you and I have talked about, because that to me is, I just
can't believe it. But when they tried the first IRS bit, before
the law, well, the law had just started, and they gave us
several year old debts.
Now, I'd like to know from GAO who's got most of the old
debts. Is it the FMS, the Financial Management Service in
Treasury? Is it some of the agencies that are just letting it
accumulate? And we all agree, I think, the evidence shows that
when you have ancient debt, don't expect to collect very much.
Because everybody thinks it's a grant by that time, certainly
if you're in the Department of Education, and they forget it's
a loan.
So what's your feeling on looking at it?
Mr. Gregg. Well, as it relates to the debts that have been
referred over to FMS, they do have a significant portion that
is extremely old, as I had pointed out.
Mr. Horn. So they're dumping it on the Treasury, you're
saying?
Mr. Gregg. Yes. Most of what is coming over to FMS is very
old debt.
Now, as far as how much debt is still sitting at the other
agencies that have not yet been referred over, I can't really
speak to the age of those. I don't know.
Mr. Horn. Well, how do you feel, Commissioner Gregg? I
mean, are you the dumping ground for the aged debt? [Laughter.]
Mr. Gregg. Well, it goes with the territory. I think that
you can't make progress in this area unless you go through what
we're going through. If you have I don't know how many years of
having debt sit there and some agencies take a very aggressive
stand on collections, others not, and then pass the DCIA and
expect a magical transformation, I think we'd all be misleading
ourselves. I think from my perspective, whether it's considered
a dumping ground or not isn't so important. But it's to look at
the debt, figure out whether there is documentation actually go
after the debt. In some cases that isn't there, and in some
cases there are delinquencies that weren't identified.
So I think it's an important process. And as I envision it,
in the next few years, when we get through this and agencies
are able to send their debts to us that are delinquent, 180
days and do that quickly, then we'll be looking at a different
picture. And I think this is, from my own view, something we
have to work through.
Mr. Horn. Well, I've overtaken my time here. But we might
have an exchange in writing, for at this point in the record,
without objection.
I now yield 6 minutes to Major Owens, the gentleman from
New York for questioning.
Mr. Owens. When you collect debts, where does the money go,
the money you've collected, what do you do with it?
Mr. Gregg. It does back to the agencies.
Mr. Owens. The agencies get the money back? So they have a
great incentive for you to collect debts.
Mr. Gregg. Well, it goes back, but I'm not sure that they
can use it in their ongoing appropriations. It goes back so
they can clear out their books. But I think for the most part,
maybe with some exceptions, it goes back into the general fund
of the Treasury and there may be some exceptions to that.
Mr. Owens. Which is it now? It's an important question.
Does it go to the general fund or can they just recycle it and
spend it? Do they have any incentive for collection of debts?
Mr. Gregg. It really does depend on the program. And I'll
have to give you a specific answer in writing.
Mr. Owens. Most of it goes to the general fund, doesn't it?
Mr. Gregg. In some cases it does go to the general fund.
But it has to go back to the agencies so they know the debt has
been collected. In some cases, I think the agency can keep some
of it.
Mr. Owens. Does GAO know the answer to that question?
Mr. Engel. Well, one thing I would add to that is that the
amount that goes back to the agency is net of the fees that FMS
charges the agencies.
Mr. Owens. So they do have some incentive for cooperating
in getting their debts collected, great incentive, the money
goes back to them?
Mr. Engel. The portion that they can apply toward the
receivable itself, yes, they would want to have that money
back.
Mr. Horn. If I might help this question along, because I
remember distinctly, we wanted to give an incentive, but I'm
told that not too many agencies, if any, are taking that
incentive, because they feel the appropriators will not give
them the money for the next budget. And they don't really like
that. So that's part of the problem, I think, and Major has his
finger on the right one. And here's the Treasury with the
general fund, they throw it in there, and the agency says, you
know, I'd like to do it. We wanted an incentive for them to
help improve the debt collection process and computing and
everything else, telephones, you name it.
Mr. Owens. Thank you, Mr. Chairman.
Mr. Horn. You're welcome.
Mr. Owens. Where do patterns of multiple debtors appear?
What agencies is that like? Is that Agriculture, or do you have
students who are multiple debtors in the Department of
Education? There was a discussion of multiple debtors and how
it's difficult to collect because several people will contact
them. Where do those kinds of patterns appear?
Mr. Gregg. Well, I think it can appear anywhere. There are
24 CFO agencies and what our colleague from the PCA was saying
is that we will refer debt to them from agencies, say from
Veterans Affairs or from somebody else. And that same
individual will owe a debt to the Small Business Administration
and we might send it to another PCA.
Mr. Owens. Oh, you mean a multiple debtor across agencies?
Mr. Gregg. Yes.
Mr. Owens. You don't mean within? Because we've seen
situations in the Department of Agriculture where people who
are delinquent sit on the credit committees and they were
allowed to get additional loans. I call those multiple debtors,
and that's what I thought you were talking about, within an
agency. Is it likely a student who's delinquent can get more
loans for graduate or post-graduate education in the Department
of Education?
Mr. Gregg. Well, I can't speak for the Department of
Education, but I do know that is an issue that's been addressed
by this subcommittee, the concern that once you have a debtor,
whether or not they can continue to get loans from the
Government.
Mr. Owens. In New York City, we have something called a
VINDEX system, where it's highly computerized, and if you get a
grant or a contract, it runs through there and they can spit
out any debt you owe to any agency of the city and you're
stopped from getting an additional contract. We don't have
anything similar to that for the Federal Government,
centralized checking system where a debtor would be picked up?
I know it doesn't apply to the Pentagon, but normal agencies.
Mr. Gregg. Probably the closest thing that we have is the
references to credit bureaus, if in fact they were checked.
Mr. Owens. Private sector credit bureaus?
Mr. Gregg. No, for Government debts, if providing the debts
were reported to credit bureaus and that tool was used by
agencies systematically in granting loans.
Mr. Owens. So Federal agencies do report debts to credit
bureaus?
Mr. Gregg. In most cases, yes.
Mr. Owens. Is that required, that they must do that?
Mr. Engel. There's a bar provision within the act that
individuals that have a delinquent debt to the Federal
Government are not supposed to be given another loan until
they've cleared that delinquent debt.
Mr. Owens. That's a gentleman's agreement or understanding
or is that a law?
Mr. Engel. That's in law. The agencies are responsible for
reporting in information that can be used by other agencies
such as through credit bureau reports. HUD has a system called
KAVERS, where they also track information from agencies as to
delinquent debtors, that agencies can go to and they should be
going in and looking and seeing, before they give a new loan,
does that individual have an outstanding delinquent loan to the
Federal Government. If they do, under the bar provision, they
should not be.
Mr. Owens. They've broken the law, if the Farm Credit
Committee gives a loan to someone who's delinquent, they've
broken the law, is that correct?
Mr. Engel. Yes, they've broken that provision. Now, there
are a few exclusions, and I think disaster loans and, there's a
couple type of loans that are excluded. But that is what's
supposed to happen.
Mr. Owens. Is it possible to get a list of persons or
corporations who owe the Department of Agriculture more than $1
million? Can it be generated? A $1 million debtor, that's a
pretty big debt, isn't it? Do some people owe as much as $1
million?
Mr. Gregg. Congressman, the Department of Treasury would
not have that. Treasury would not. The debts that we get from
any agencies are by definition supposedly delinquent of 180
days or more.
Mr. Owens. The Department of Agriculture would have it,
right?
Mr. Gregg. Yes.
Mr. Owens. Is it possible to publicize those? Is there any
provision of privacy rights that debtors have that would keep
the public from knowing who owes large amounts of money?
Mr. Horn. Well, that's a good suggestion, and Mr. Turner is
drafting a bill now, you might want to do it. I think when we
had this discussion before, the small farm area that I grew up
in, if you didn't pay your taxes, the sheriff printed everybody
who hadn't paid their taxes. So the next month, everybody paid
their taxes. And I don't know whether that's done anywhere in
the Government, where they've posted these.
But what you're talking about, they're not the farmer
that's really working his field, it's somebody that's got a
loan out of them, which could be a ski lift, and those have
known to be granted over in Agriculture, or it could be a
mansion. With the mansion bit, it got me motivated to do
something about it on these loans. Because this person in
northern California had his mansion, defaulted on it, the right
hand didn't know what the left was doing, went to Santa
Barbara, rather tiny place, and they got another mansion.
So I think you're on the right trail.
Mr. Owens. Let me conclude with this line of questioning, I
know I'm a little over my time.
We've asked for documents in the past, and I'm not sure
we've gotten them. We've been promised lists and summaries. But
if it's possible to get a list of those who owe more than $1
million, more than $100,000, is there some how in this very
computerized bureaucracy that we can get such lists? For the
Department of Education, I'd like to know how many individuals,
is there any individual who owes more than $100,000, more than
$25,000? And how many individuals owe less than $10,000? If you
look at the amount for the Department of Education, it looks
like they're one of the big places where we have a lot of crime
being committed in terms of people not paying their loans.
But I think that represents many, many individuals at very
low rates.
Mr. Horn. In the law, let me just read you these two
sentences, perhaps, section 37(2)(o)(e), dissemination of
information regarding identity of delinquent debtors. A, the
head of any agency may, with the review of the Secretary of the
Treasury, for the purpose of collecting any delinquent non-tax
debt owed by any person, publish or otherwise publicly
disseminate information regarding the identity of the person
and the existence of the non-tax debt.
So they have the authority to do that. And I now yield to
the ranking member, the gentleman from Texas, Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Gregg, your report makes it clear that you have noted
the complaints made by the private collection agencies
regarding the distribution of the account debts among the
various 11 contractors. And we've heard the testimony today
from Mr. Cloyd, who represents the association of private
collection agents, and he has shared with us his concern not
only about the distribution based on the size of the debt and
the age of the debt, but he's also brought up the point that
debts owed by one debtor ought to be referred to the same
agency.
Those seem like very sensible suggestions. And I noted a
reluctance, Mr. Gregg, in your testimony, what I interpreted as
a reluctance, to make these changes, when you said, and I'm
reading here from your statement, while FMS is agreeable to
considering alternative distribution procedures for future
contracts, complying with the terms of the current contract,
administering the contract efficiently and maximizing
collections are without question FMS' primary goals.
Now, it seems to me that if one of your goals is to
maximize collections, you're going to have to keep the 11
private contractors who are out there on the playing field
trying to collect these debts happy with the rules of the game.
And it seems to me that it would be appropriate if what I'm
hearing is correct, that all of the contractors agree that the
current distribution of account of debts is unfair, that we
would all be better off if we revised that distribution system
immediately and corrected that problem and renewed the
enthusiasm that I suspect may be lacking in these 11
contractors to collect the debts of the Federal Government.
Mr. Engel, what is your thought on that comment I made?
Mr. Engel. Well, based upon our discussions with the 11
PCAs, what I think they were looking for was what we term as a
proportionate mix of accounts being sent to them. In other
words, taking a look at the different characteristics such as
age of debt, maybe the dollar amounts of the debt, maybe the
particular agency that is being referred over. And they felt
that more competition would be in place if there was a
proportionate mix, so that each of them would be getting some
proportion of those different types of characteristics of debt.
There was no problem with it being performance based and
that the better performer be rewarded with more of the
proportion. But I think they were hoping to get debts where
they might have as many small type debts, or a proportion of
small type debts which have generally been shown to be a little
easier to collect, or the less delinquent debt, which again has
been a little easier to collect. They'd like to get a
proportionate mix of that, so they're standing on a similar
ground to their competitor.
Mr. Turner. Well, it's of course important to preserve the
performance based incentives that we have in the system. But it
seems to me that the distribution of accounts as suggested by
the private debt collectors is not inconsistent, in fact may be
supportive of the performance based incentives that we are
trying to pursue. Do you think they're mutually exclusive?
Mr. Engel. No. No, I'm not saying that.
Mr. Turner. And do you see any reason why the FMS should
not proceed immediately to make that correction, to renew that
enthusiasm and that incentive on the part of those 11
collectors?
Mr. Engel. No, I think that your advice of getting together
with the PCAs to get a agreement as to what characteristics, if
they're going to go down this, or what characteristics the PCAs
agree should be used, I think that has to happen first. Because
you wouldn't want to go and start devising something that then
again half of the PCAs don't agree, or the characteristics that
should be there.
Mr. Turner. If FMS yielded to the suggestions of the
private collectors, do you see anything that we could possibly
lose from the point of view of the Federal taxpayer by
following their suggestions in the way the accounts are
distributed?
Mr. Engel. Well, it's hard for me to say that because of
the distribution there's been less collections than there would
have been if the distribution was done differently. Again, I
think the belief is, it fosters more competition if you feel
that you're getting your share of the debts, and as you pointed
out, are going to try harder.
Mr. Turner. Mr. Gregg, is there any reason why you can't
proceed immediately to make these suggested changes to renew
the fairness of the system as it's perceived by the debt
collectors?
Mr. Gregg. Yes, Mr. Turner, there are a number of reasons.
First of all, this contract has been looked at six ways to
Sunday. And from my perspective, the good news is that we're
complying with the contract as agreed upon by ourselves and the
11 PCAs. That's very important. And it's been looked at very
carefully.
The other thing is that, as I had said in my opening
statement, this is complex business. And we actually have a
system set up for the way that debts are distributed today. And
to change that, you don't just turn a switch, you have to go
through and make programming changes.
What I am willing to do, and we've been talking with the
PCAs and with GAO, is to consider these suggestions when we
renew the contract. Next year we'll have the opportunity to go
out for bids again. And we will certainly consider all of these
ideas in looking at how to structure this.
I would like to make one point, however. And that is that I
don't know whether you have all 11 PCAs that are unhappy with
the way it's done. For those that are doing the best, I'm not
so sure that they wouldn't think it's pretty good.
But the other thing is that it's structured in a way where
PCAs can actually improve their status. For example, back in
the letter that the Department of Treasury sent you in October,
one of the agencies, one of the PCAs listed there was at that
time I think ranked No. 10 in how well they were doing. And
currently, they're tied for first. And you have that,
throughout the this fiscal year to date on how well the PCAs
were doing.
And I'm not suggesting that this is proof that a different
kind of distribution methodology would be better. What I am
saying is that it is complex. And the data that I have pulled,
the PCA that was ranked first, and actually, this one's been
ranked first since the beginning, it got out of the blocks very
early, has the eighth highest average distribution of debt for
this fiscal year, eighth highest distribution, average
distribution of debt. The PCA ranked second has the 10th
highest, 10 of 11.
So again, I'm not saying that there couldn't be a
correlation. But it is complex, and it's complex because we
don't know which agencies are going to be referring debt to us
at any given time. There's no schedule, as we had talked about
earlier. We've been pushing to get debts, and suddenly a block
of them show up. Part of our responsibility, and also something
we talked about, is to move those quickly so that they don't
age further.
And that's one of the things we'll have to look at as we
think about the new contract. We don't want to sit there
waiting for a really good homogeneous blend of debts and let
them age another 60 or 90 days. So those are the kinds of
things that we would certainly want to consider as we prepare
for this next contract.
Mr. Turner. I think the complaint has been that the private
collection agency that was ranked No. 1 was getting the smaller
debts and the fresher debts. Let me just ask you if you'd be
willing to do this. If all 11 collection agencies got together
and came up with an agreement among themselves as to a fair
system of distribution, would you be willing to sit down with
them and try to implement that earlier than the renewal of a
new contract? Because at some point, I think your agency needs
to come to grips with this, or otherwise, we're going to start
losing contractors. And I don't think that would be a healthy
outcome, either.
Mr. Gregg. I think that we have to be careful in doing
that. This is a legal contract that we agreed to with the 11
PCAs. And I'm not sure that we know enough and really could
move any faster than the renewal of the contract before we take
these into consideration and see who, actually we don't even
know whether these same 11 current PCAs will be the ones that
win out in the next contract.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Horn. I think you raised a very good question and we
need to maybe hold further hearings on this.
Commissioner Jackson, let me ask you this. According to
Financial Management Service, the Social Security
Administration has not referred any of its delinquent debts to
the Treasury for cross-servicing as required by the Debt
Collection Improvement Act. Can you explain why Social Security
isn't cooperating with the law?
Ms. Jackson. Mr. Chairman, soon after Treasury issued its
guidelines for Federal debt collection center designations, the
Social Security Administration did submit an application to be
designated as a debt collection center. We made that
application on May 30, 1997.
We received notification of the denial of our request on
May 10, 1999, some 2 years later. We then pursued a request to
have some of our debts, specifically our SSI debts and our
debts owed by former child beneficiaries exempted, and we did
receive approval of that waiver request on November 15, 1999.
So these are very recent decisions that we received.
At that point in time, we were very much embroiled in
dedicating almost all of our systems activities to preparing
for the year 2000 rollover, and in fact, we were basically
barred from any new systems activity until after the rollover
period, which continued through February of this year.
We have continued to work with FMS, have made commitments,
and have worked out our various systems program requirements
with them. We will be testing over the next 6 months for the
benefit offset program, and we will be actually implementing
that in February 2001.
We have also set up meetings, including going down to the
Birmingham Debt Collection Center with FMS later on this month.
So we are proceeding, but much of our delay in moving forward
was based on our waiting for the final decision from Treasury
on our request to be designated as a debt collection center for
our own debts.
Mr. Horn. Let me ask Secretary Powell, the Department of
Veterans Affairs has referred only 1 percent of its eligible
delinquent debt to the Treasury for cross-servicing. Why is it
taking so long for this debt to be referred?
Mr. Powell. Congressman, I believe, as I commented, one of
the problems we've had has been the computer interface issue.
Like SSI, this effort that was interrupted by the Y2K
moratorium. We now have a September 1 deadline that I believe
we are working toward, in which case, at which time that will
be resolved. We would anticipate at that point in time that the
flow of data would be much improved and much more seamless. And
we fully expect to be compliant with the law in the relatively
near future.
Mr. Horn. What will happen to the Veterans Administration
debt management center when all of its delinquent debts are
referred to the Treasury?
Mr. Powell. Well, we wouldn't be referring to them debts
under 180 days old. As I mentioned, when you were asking the
question about our designation as a collection center, we are
very active with our management of our debts. We do a number of
things to get in touch with our debtors immediately after the
first 30 days. We begin contacting them and we begin a process
of calling and notification. And we do experiment with PCAs as
appropriate in certain locales.
We have a number of debts that are also not eligible for
cross-servicing, such as medical claims, because of their lack
of specificity. There's oftentimes a negotiated amount that
ends up being paid by the insurance companies. And we have with
Treasury come to an agreement that those would not be eligible
for cross-servicing.
So we will still have functionality, and as I indicated,
hopefully we will prevail in our application as well at some
future date.
Mr. Horn. Any particular view on this, Commissioner Gregg?
Mr. Gregg. The issue on the nimbleness of which Treasury
was reviewing debt collection requests is accurate. When I got
to FMS in 1998, that process had really bogged down. I think it
was a matter of other priorities. We have taken steps to
certainly streamline that and make some clear criteria for
agencies referring debt.
From our perspective on the cross-servicing, we'd just as
soon not see any debt. The idea of, and I don't know what's
going to happen, but the idea of over time the agencies being
able to collect all this within 180 days is really what we're
all interested in. To the extent that that can happen, then it
needs to come to us and we need to get it to the PCAs as
quickly as we can.
Mr. Horn. Well, I don't want to rush this today, but I
think the best way I've heard now about the couple of places
where the law is not being implemented, and we ought to deal
with that, and I think we ought to deal with early time for the
collectors, very frankly. And I think in the next few months,
we'll call another hearing and maybe with a few different
debtors here, if you will. And we will get back to what Major
Owens has brought up on the publicity bit, and see where we're
going.
So I'm going to have, as was mentioned earlier, Mr. Ose had
a markup, Mr. Turner had another commitment, both majority and
minority have some questions they'd like to ask, and we'd like
them, without objection, at this point in the record. So we'd
appreciate it when they send them to you, back in your office.
I would like to thank the following people that set up this
hearing, Russell George, standing there, just came in, staff
director, chief counsel. Randy Kaplan, to my left, your right,
has responsibility for this matter. And so you'll be hearing a
lot from him, as counsel to the subcommittee. Bonnie Heald,
director of communications; Bryan Sisk, clerk; Elizabeth Seong,
staff assistant; Will Ackerly, intern; Chris Dollar, first day
at work, I think, intern, highly paid by us, namely nothing.
[Laughter.]
And minority staff, Trey Henderson, counsel; and Jean Gosa,
minority clerk. And we've had the pleasure of the official
reporter, Ruth Griffin, and thank you all.
And with that, we're going to adjourn this hearing, and
we'll pick it up about 3 months from now.
[Whereupon, at 12:12 p.m., the subcommittee was adjourned.]