FROM THE OFFICE OF PUBLIC AFFAIRS

Introduction

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to discuss the Department of the Treasury's progress in implementing the Debt Collection Improvement Act of 1996 (DCIA). Chairman Horn, your continued support and strong interest in our efforts to carry out this important program has been of great value to us, and we would like to reiterate our firm commitment to the successful implementation of the DCIA. Continued support from the highest levels within Treasury is further evidence of this commitment.

In my testimony today, I will discuss some of the program's more significant accomplishments since the last hearing, and a few challenges that lie ahead. As background, the DCIA provides that any non-tax debt or claim owed to the United States that is 180 days delinquent, with certain exceptions, will be referred by the program agency to the Department of the Treasury for collection. To collect these debts, Treasury's Financial Management Service (FMS) applies a variety of debt collection tools, including administrative offset, tax refund offset, cross-servicing, private collection agencies, credit bureau reporting and referrals to the Department of Justice.

Administrative offset and tax refund offset are collectively referred to as the Offset program. Offset is a program whereby Federal payments are reduced or "offset" to satisfy a payment recipient's overdue Federal debt. A payee's name is matched against a Treasury database of delinquent debtors for automatic offset of funds. Offset funds are then used to satisfy payment of the delinquent debt to the extent allowed by law. Current payment types subject to offset include Office of Personnel Management (OPM) retirement, Internal Revenue Service (IRS) tax refunds, vendor payments, and some Federal salary payments.

Cross-servicing is a program consisting of a variety of collection tools that are applied once agencies refer their debt to Treasury. These tools include Treasury demand letters, telephone calls to debtors, and the use of one or more of the 12 Private Collection Agencies (PCAs) on the Government-wide contract which function concurrently with the Offset program.

Government Debt Portfolio

In close consultation with Federal agencies over the last several months, FMS has updated its evaluation of the Federal government's debt portfolio eligible for referral to Treasury for offset and cross-servicing, as well as the amount of referred debt that is collectible by Treasury. This analysis is a follow-up to the Price Waterhouse study completed last year assessing the Federal Government's delinquent debt portfolio. That study revealed that over 47% of the Government's delinquent debt was more than four years old, placing it in a category of debt that is the most difficult to collect. Based on industry standards and private sector benchmarking, Price Waterhouse determined that once all payment streams are incorporated into the Offset Program and all eligible debts have been referred, FMS could expect to collect between $864 million and $1 billion annually. Although much work remains to complete the full implementation of the administrative offset program, FMS has made significant progress in increasing collections above the highest Price Waterhouse estimates. As I will discuss more fully, this is due in large measure to the increased collections from the Tax Refund Offset program.

This year's analysis revealed that as of the end of FY 98, $60 billion in non-tax delinquent debt was held by the respective agencies and owed to the Federal government, compared to $51.9 billion in FY 97; and $46.4 billion of the total is more than 180 days delinquent, compared to $47.2 billion in FY 97. While the DCIA requires Federal agencies to refer debts more than 180 days delinquent to Treasury for offset and cross-servicing, certain debts are not eligible for referral to Treasury for either offset or cross-servicing because of various exemptions under the DCIA or otherwise required by law. As a result of these exemptions and requirements, of the $46.4 billion in debt that is more than 180 days delinquent, $31.2 billion is eligible for referral to Treasury for offset, and $8.1 of the $31.2 billion is eligible for referral to Treasury for cross-servicing. To date, $22.5 billion, or 72%, of the amount eligible for referral for offset, has been referred, leaving a balance of $8.7 billion. Of the $8.1 billion eligible for referral for cross-servicing, $2.3 billion, or 28%, has been referred, leaving a balance of $5.8 billion.

MERGER OF THE TAX REFUND OFFSET AND TREASURY OFFSET PROGRAMS

During the past year, we have made significant progress in a number of areas. One of the most important, as well as the most challenging and successful, was the merger of the Tax Refund Offset program with the Treasury Offset Program. The merger, which was implemented in January 1999, streamlined and improved operations by providing a single point of contact for agencies to simultaneously refer debts for both tax refund offset and other administrative offset programs. As a result of the tremendous teamwork between FMS, IRS and the Federal Reserve System, the new system is showing dramatic results. Calendar year Tax Refund Offset collections, as of May 26, 1999, totaled more than $2.4 billion, which is an increase of $643 million over last year's figures for the same time period. In fact, we are well ahead of the $2.028 billion in total collections reported for the entire 1998 calendar year. The increase reflects collections of non-tax Federal debt up over $414 million in just the past year and child support up an additional $230 million. This dramatic increase can be attributed to several factors: system enhancements such as matching on both social security numbers on joint tax returns; system flexibility that allows creditor agencies to add or update debt records on a continuous basis; increased debt referrals; and, an increase in the average amount and number of tax refunds.

CHILD SUPPORT

Treasury also plays an important role in collecting delinquent child support obligations owed to, or being enforced by, States and territories. Delinquent child support obligations currently are matched against tax refund payments and, at the State's option, against vendor payments and OPM retirement payments. As of the end of May, more than $1.2 billion in tax refund offsets have been collected this calendar year which exceeds collections during this same period in 1998 by more than $230 million and exceeds total collections for all of 1998. In order to further improve the collection of delinquent child support obligations, Treasury participates in an inter-agency task force on child support collection and meets frequently with officials from the Office of Child Support Enforcement, Department of Health and Human Services. Our challenge over the next year is to increase the number of States that fully participate in the administrative offset component.

REGULATIONS

We have made tremendous headway in putting in place the regulatory framework necessary to facilitate implementation of the DCIA. FMS has published 10 regulations since the last hearing, including all regulations necessary to fully implement the offset program. Included in these regulations are a final regulation for implementation of administrative wage garnishment, a final regulation outlining the requirements for transfer of debts to Treasury for collection, and a final regulation barring delinquent debtors from obtaining Federal loans, loan insurance or guarantees.

OUTREACH EFFORTS

Finally, I would like to briefly mention the great strides made to strengthen the relationships with the various Federal agencies. This has been a significant point of emphasis at FMS. As of April 30, 1999, agencies have referred approximately 63% of the debt that is eligible for offset and cross-servicing. Our challenge over the next year is to improve this number by increasing referrals and strengthening agency compliance. To accomplish this, FMS has implemented an outreach effort designed to assist more than 50 agencies in analyzing their debt eligible for transfer to FMS for offset and/or cross-servicing. In addition, the President's Council on Integrity and Efficiency is working with the Offices of Inspector General of several CFO agencies to review their progress in implementing the provisions of the DCIA. The reviews are focussed on assessing compliance with debt referral requirements, accuracy of portfolio management and reporting, and agency measures for minimizing accrual of new delinquent debt.

CLOSING

Full implementation of the DCIA is a complex undertaking requiring coordination with numerous Federal and State agencies, development of new systems, and their integration with existing debt and payment systems. The Price Waterhouse report emphasized the potential for significant collections through comparing each debt mechanism: 1) Tax Refund Offset; 2) Cross-servicing; and 3) Administrative offset. Based on an analysis of this data, it was shown that the Tax Refund Offset process had the greatest potential to increase collections. In addition, Congressional guidance emphasized that efficiencies could be gained through a merged offset program. We therefore focused our attention on 1) The successful merger of the Treasury Offset Program with the Tax Refund Offset program; 2) Making needed improvements to the Tax Refund Offset process; and 3) Establishing the cross-servicing program and the Private Collection Agency Contract. With the Tax Refund Offset merger now complete and the PCA Contract in place, we are channeling our efforts to the expansion of the administrative offset program, to include state income tax debt, federal tax levy, and additional payment streams.

Although we clearly have much left to do, we have made significant, measurable progress in fulfilling our responsibilities under the DCIA. The regulatory framework to implement DCIA is in place, Tax Refund Offset and Treasury Offset collections have increased dramatically and operate under a common system, child support referrals and collections have significantly risen, and cross-servicing program enhancements, including PCA collections, have yielded steadily increasing results. In light of future system enhancements, new program developments, and agency outreach efforts, which Commissioner Gregg will discuss in greater detail in his testimony, we fully expect this upward trend in collections and referrals to continue leading to a vibrant debt collection program at FMS which will serve all Federal agencies. .