<DOC> [107th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:81549.wais] THE DEBT COLLECTION IMPROVEMENT ACT OF 1996: HOW WELL IS IT WORKING? ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND INTERGOVERNMENTAL RELATIONS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS FIRST SESSION __________ OCTOBER 10, 2001 __________ Serial No. 107-96 __________ 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 81-549 WASHINGTON : 2002 ___________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 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 MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California PATSY T. MINK, Hawaii JOHN L. MICA, Florida CAROLYN B. MALONEY, New York THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland BOB BARR, Georgia DENNIS J. KUCINICH, Ohio DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois DOUG OSE, California DANNY K. DAVIS, Illinois RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts JO ANN DAVIS, Virginia JIM TURNER, Texas TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois CHRIS CANNON, Utah WM. LACY CLAY, Missouri ADAM H. PUTNAM, Florida DIANE E. WATSON, California C.L. ``BUTCH'' OTTER, Idaho ------ ------ EDWARD L. SCHROCK, Virginia ------ JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont ------ ------ (Independent) Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations STEPHEN HORN, California, Chairman RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois DAN MILLER, Florida MAJOR R. OWENS, New York DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California J. Russell George, Staff Director and Chief Counsel Henry Wray, Professional Staff Member Mark Johnson, Clerk David McMillen, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on October 10, 2001................................. 1 Statement of: Engel, Gary T., Director, Financial Management and Assurance, U.S. General Accounting Office; Richard L. Gregg, Commissioner, Financial Management Service, Department of the Treasury; Claude A. Allen, Deputy Secretary, Department of Health and Human Services; William D. Hansen, Deputy Secretary, Department of Education; and Leo S. MacKay, Jr., Deputy Secretary, Department of Veterans Affairs........... 5 Letters, statements, etc., submitted for the record by: Allen, Claude A., Deputy Secretary, Department of Health and Human Services, prepared statement of...................... 55 Engel, Gary T., Director, Financial Management and Assurance, U.S. General Accounting Office, prepared statement of...... 7 Gregg, Richard L., Commissioner, Financial Management Service, Department of the Treasury, prepared statement of. 47 Hansen, William D., Deputy Secretary, Department of Education, prepared statement of........................... 69 Horn, Hon. Stephen, a Representative in Congress from the State of California, prepared statement of................. 3 Mackay, Leo S., Jr., Deputy Secretary, Department of Veterans Affairs: Prepared statement of.................................... 78 Reponse of the DVA to the written statement of Vietnam Veterans of America, Inc............................... 92 Maloney, Hon. Carolyn B., a Representative in Congress from the State of New York, prepared statement of............... 101 THE DEBT COLLECTION IMPROVEMENT ACT OF 1996: HOW WELL IS IT WORKING? ---------- WEDNESDAY, OCTOBER 10, 2001 House of Representatives, Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10:02 a.m., in room 2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Present: Representatives Horn, Maloney, and Ose. Staff present: J. Russell George, staff director and chief counsel; Bonnie Heald, deputy staff director and director of communications; Henry Wray, professional staff member; Mark Johnson, clerk; Jim Holmes, intern; David McMillen, minority professional staff member; and Jean Gosa, minority clerk. Mr. Horn. The Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations will come to order. Today we will examine the Federal Government's progress in implementing the Debt Collection Improvement Act of 1996. The act greatly enhanced the Government's ability to collect its non-tax-related delinquent debt. When these debts become more than 180 days delinquent, the law requires that they be referred to the Treasury Department for collection. Under the Debt Collection Improvement Act, the Treasury is empowered to offset other Federal payments to the debtor, such as tax refunds. The Treasury may also take other collection actions, including the use of private collection agencies. This is known as cross-servicing. The subcommittee has had a longstanding interest in insuring that the government fairly and effectively collects debts that are legitimately owed to it. This summer the subcommittee surveyed 27 of the government's major departments and agencies to determine how well they were implementing the Debt Collection Improvement Act. Clearly, there has been progress in some areas. The Treasury Department's Financial Management Service is working hard to carry out its responsibilities under the act and has achieved some positive results through its offset program. During fiscal year 2001 the Treasury Department collected $3.1 billion in delinquent debt, compared to $2.6 billion in the preceding year, fiscal year 2000. The subcommittee's survey also found that most Federal agencies are making progress in referring most of their delinquent debt to the Treasury Department; however, major challenges remain. Five years after enactment of the Debt Collection Improvement Act, not 1 of the 27 agencies complies with the law's basic requirement, that all eligible debts be referred to the Treasury Department's Financial Management Service as soon as they become more than 180 days delinquent. Agencies are referring less than 10 percent of their debts within the 180-day timeline. Most of the debts have been delinquent for years by the time agencies refer them to the Treasury. Equally troubling, several agencies, including the Departments of Agriculture and Health and Human Services, have yet to refer large amounts of their delinquent debt for collection. Another problem is that agencies may be misapplying provisions of the law that exclude certain debts from referral, such as debts involved in bankruptcy or other legal proceedings. The General Accounting Office found that some agencies made errors affecting hundreds of millions of dollars in exclusions. This problem should have long ago had far- reaching consequences since that one-half of all Federal non- tax delinquent debt has not been referred to the Treasury for collection. In fiscal year 2000, that amounted to more than $30 billion. In addition, many agencies are taking much too long to implement procedures to garnish the wages of delinquent debtors and to report the delinquencies to credit bureaus. Without these reports, Federal agencies have difficulty complying with the law's requirements that bars delinquent debtors from receiving Federal assistance, including certain loan programs. There are at least two underlying reasons for the slow progress in implementing the act. Many agency management systems are beset by basic weakness that severely limits their ability to conduct day-to-day operations, including keeping track of their debt. According to the General Accounting Office, some agencies simply have not made debt collection a high priority. Today we want to discuss ways to improve this situation. I am encouraged that our witnesses include three Deputy Secretaries of Cabinet-level departments. President Bush has given each of these Deputy Secretaries responsibility for overall department management. That is a good step toward giving debt collection and other chronic management challenges the high level of the attention that is needed. Unfortunately, we were expecting four Deputy Secretaries today, but late last evening the Deputy Secretary of the Department of Agriculture, James Moseley, informed us that he would be unable to testify. Given the Department's abysmal record in collecting its delinquent debts, we will hold a separate hearing on a later date that will focus exclusively on the Department of Agriculture. [The prepared statement of Hon. Stephen Horn follows:] [GRAPHIC] [TIFF OMITTED] 81549.001 [GRAPHIC] [TIFF OMITTED] 81549.002 Mr. Horn. I welcome all of our witnesses today and look forward to their testimony. As I think many of you know how this works, but for the newcomers this is an investigating subcommittee of Government Reform, and if you will stand and raise your right hands. [Witnesses sworn.] Mr. Horn. The clerk will note that both the presenters and the staff have taken the oath. We thank you very much for coming, and we noted some of the progress that is occurring, and we will start with Gary Engel, the Director, Financial Management and Assurance, U.S. General Accounting Office, part of the legislative branch headed by the Comptroller General of the United States. We are delighted to have you here, Mr. Engel. STATEMENTS OF GARY T. ENGEL, DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; RICHARD L. GREGG, COMMISSIONER, FINANCIAL MANAGEMENT SERVICE, DEPARTMENT OF THE TREASURY; CLAUDE A. ALLEN, DEPUTY SECRETARY, DEPARTMENT OF HEALTH AND HUMAN SERVICES; WILLIAM D. HANSEN, DEPUTY SECRETARY, DEPARTMENT OF EDUCATION; AND LEO S. MACKAY, JR., DEPUTY SECRETARY, DEPARTMENT OF VETERANS AFFAIRS Mr. Engel. Mr. Chairman and members of the subcommittee, good morning. I am pleased to be here today to discuss our work on selected agencies' implementation of key aspects of the Debt Collection Improvement Act of 1996, which was developed under the leadership of this subcommittee. It is essential that agencies be accountable for putting effective practices in place to maximize the collections of billions of dollars of non-tax delinquent debt owed to the Government. The DCIA provides agencies with important tools to achieve this objective. Since its passage 5 years ago, our message has been clear and consistent. If DCIA's benefits are to be more fully realized, improvements are necessary in agencies' implementation efforts. We are encouraged by the significant progress that Treasury's Financial Management Service is making in implementing its offset program, especially in the tax refund area. During each of the last 3 years, FMS reports having collected over $1 billion of non-tax debts through tax refund offsets. While there has been important progress such as this, unfortunately our work over the past several months at selected agencies has not allayed our concerns about the lack of priority agencies have placed on implementing DCIA. DCIA makes available specific means to collect delinquencies. These include, for instance, FMS' centralized debt collection program known as ``cross servicing.'' But for these efforts to be successful, agencies must fully and promptly identify and refer all delinquent debt. While DCIA requires such referrals, this is not always the case, as billions of dollars of eligible delinquent debts are still not being referred. The three agencies we reviewed have experienced problems in this area. For example, USDA's Rural Housing Service may have understated by about $348 million the amount of direct single family housing loans reported as eligible for referral to Treasury's offset program as of September 30, 2000. Also as of this date, the agency had not referred any direct single family housing loans for cross-servicing, primarily because of systems limitations. USDA's Farm Service Agency did not have a process or sufficient controls to adequately identify and report eligible farm loans to FMS as of September 30, 2000. In addition, the Farm Service Agency has lost and continues to lose opportunities for maximizing collections. For example, it does not refer co-debtors on direct farm loans to FMS for offset. HHS' Center for Medicare and Medicaid Services had not referred, as of September 30, 2000, about $4.3 billion of eligible debt, primarily related to Medicare overpayments. While it is encouraging that the Agency reported subsequently referring about $2 billion of these delinquencies, most debts were referred late in the fiscal year. Referrals were limited during most of the year primarily due to debt referral system problems and a lack of monitoring of contractor referrals. Our work took a broader look at two other important aspects of DCIA that also warrant substantially greater emphasis: implementation of administrative wage garnishment and the barring of delinquent non-tax debtors from obtaining Federal financial assistance. Since 1993, Education has been garnishing wages under separate authority from that granted by the DCIA; however, none of the nine major agencies we surveyed were exercising their authority under DCIA to administratively garnish up to 15 percent of a delinquent non-tax debtor's disposable pay until the debt is fully recovered. This is disappointing in light of the fact that experts have testified before this subcommittee that wage garnishment can be an extremely powerful debt collection tool. Although FMS has recently been working with its private collection agency contractors to incorporate the administrative wage garnishment into the cross-servicing program, none of the agencies we surveyed had authorized FMS to use this important tool. Regarding DCIA's debtor bar provision, concerns have been raised in the past about debtors that were delinquent on more than one Federal debt. We continue to have such concerns, because none of the key data sources we reviewed currently provide the all-inclusive and permanent data that is needed to ensure that delinquent debtors are denied additional Federal financial assistance. Many challenges lie ahead for agencies to successfully implement certain provisions of DCIA. While we are encouraged by corrective actions being taken or planned by the agencies we reviewed, some of these actions are not scheduled to be fully implemented until years in the future. Agencies must place a greater sense of urgency on managing the delinquent debt collections. Toward this end, we plan to recommend corrective measures that can be taken by the agencies covered by our study. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions. Mr. Horn. Thank you very much, Mr. Engel. That's very helpful. [The prepared statement of Mr. Engel follows:] [GRAPHIC] [TIFF OMITTED] 81549.003 [GRAPHIC] [TIFF OMITTED] 81549.004 [GRAPHIC] [TIFF OMITTED] 81549.005 [GRAPHIC] [TIFF OMITTED] 81549.006 [GRAPHIC] [TIFF OMITTED] 81549.007 [GRAPHIC] [TIFF OMITTED] 81549.008 [GRAPHIC] [TIFF OMITTED] 81549.009 [GRAPHIC] [TIFF OMITTED] 81549.010 [GRAPHIC] [TIFF OMITTED] 81549.011 [GRAPHIC] [TIFF OMITTED] 81549.012 [GRAPHIC] [TIFF OMITTED] 81549.013 [GRAPHIC] [TIFF OMITTED] 81549.014 [GRAPHIC] [TIFF OMITTED] 81549.015 [GRAPHIC] [TIFF OMITTED] 81549.016 [GRAPHIC] [TIFF OMITTED] 81549.017 [GRAPHIC] [TIFF OMITTED] 81549.018 [GRAPHIC] [TIFF OMITTED] 81549.019 [GRAPHIC] [TIFF OMITTED] 81549.020 [GRAPHIC] [TIFF OMITTED] 81549.021 [GRAPHIC] [TIFF OMITTED] 81549.022 [GRAPHIC] [TIFF OMITTED] 81549.023 [GRAPHIC] [TIFF OMITTED] 81549.024 [GRAPHIC] [TIFF OMITTED] 81549.025 [GRAPHIC] [TIFF OMITTED] 81549.026 [GRAPHIC] [TIFF OMITTED] 81549.027 [GRAPHIC] [TIFF OMITTED] 81549.028 [GRAPHIC] [TIFF OMITTED] 81549.029 [GRAPHIC] [TIFF OMITTED] 81549.030 [GRAPHIC] [TIFF OMITTED] 81549.031 [GRAPHIC] [TIFF OMITTED] 81549.032 [GRAPHIC] [TIFF OMITTED] 81549.033 [GRAPHIC] [TIFF OMITTED] 81549.034 [GRAPHIC] [TIFF OMITTED] 81549.035 [GRAPHIC] [TIFF OMITTED] 81549.036 [GRAPHIC] [TIFF OMITTED] 81549.037 [GRAPHIC] [TIFF OMITTED] 81549.038 [GRAPHIC] [TIFF OMITTED] 81549.039 Mr. Horn. We now have Richard L. Gregg, Commissioner, Financial Management Service, Department of the Treasury. He's done a wonderful job over the years. Mr. Gregg, we're glad to have you here. Mr. Gregg. Thank you, Mr. Chairman. Thank you and members of the subcommittee for inviting me this morning to provide an update on the Financial Management Service's implementation of the Debt Collection Improvement Act of 1996. Your strong personal support, together with this subcommittee's support, has helped the Treasury implement this successful, government- wide debt collection program. During the 3\1/2\ years I have been at FMS, we have developed an efficient, flexible, and expandable debt collection program that maximizes collections for the Federal Government and meets the needs of our partners. Having successfully followed this strategy, we have collected nearly $12 billion in delinquent debts since the enactment of DCIA. Three factors have contributed to this progress. First, FMS has established a strong program foundation, anchored by an effective payment offset program and a growing cross-servicing operation. Second, the FMS staff has successfully expanded the capabilities of the collection systems and has worked with program agencies to improve their debt portfolios. And, third, the amount of delinquent debt that agencies referred to Treasury for collection has steadily increased. This morning, Mr. Chairman, I will describe the significant new elements of our program, as well as update you on some that are near completion. Before I cover those points, however, I'll briefly speak about debt collection and its connection to the advanced refund credit payments, commonly referred to as the ``tax rebate program.'' Beginning in mid-July of this year, FMS spearheaded the dispersement of check payments to taxpayers, a project of major proportion. As the program draws to a close this fall, approximately 100 million payments will have been dispersed. Using a very robust and flexible offset system, FMS has offset the rebate payments to the Treasury offset program to collect delinquent Federal and State debt. More than $470 million has been collected to date, with over $260 million of that total coming for past-due child support obligations. For fiscal year 2001 Treasury has collected $3.1 billion in delinquent debt, using all of our collection tools. Of this amount, $1.6 billion represents collections of past-due child support, $1.4 billion represents delinquent Federal non-tax debt, and $52 million was collected through cross-servicing. Attached to my statement is a chart showing the progress we have made in debt collection over the past 6 years. I will now outline several initiatives that have contributed to increased collections. In March 2001, as required by DCIA, FMS began offsetting the payments of Social Security beneficiaries who owed delinquent non-tax debts. We have just completed the phase implementation, and more than $5 million has already been collected. Mr. Chairman, the smooth implementation of the program is due to the cooperation and strong support FMS has received from the Social Security Administration. Also, as authorized by the Taxpayer Relief Act of 1997, FMS and IRS launched a continuous Federal tax levy program in July 2000 to collect delinquent Federal tax debts from individuals and businesses that received Federal payments. Presently, IRS levies vendors with payments that are dispersed by Treasury and individuals receiving OPM retirement payments and Federal travelers. Payments are being reduced continually by FMS at a rate of 15 percent. To date, more than $16 million has been collected, and our accomplishments and success for the levy program, which is just getting started, can be attributed to the excellent working relationship between FMS and IRS. Last year at the June 2000, oversight hearing I reported that seven States were participating in the program to offset Federal income tax refunds to collect delinquent State income tax debt. Twenty States are now participating in the program, and participation by additional States will be coming along in the following months. More than $118 million has been collected thus far, with $94 million having been collected in this calendar year, alone. In August of this year, FMS began implementation of the administrative wage garnishment process. Under this process, FMS issues wage garnishment orders, directing a private sector employer to withhold amounts from employees' wages. Those amounts are forwarded to FMS and are, in turn, sent to the Federal agency to which the delinquent debt is owed. Private collection agencies under contract with FMS are playing an integral role in the implementation. FMS views this tool as one with much potential and one that should be used in conjunction with other collection tools when those other tools have been unsuccessful. So that agencies can take full advantage of FMS' centralized processes and establish safeguards, we encourage them to use administrative wage garnishment through Treasury's cross-servicing program. Earlier, I stated that payments to vendors and Federal Government retirees and Federal travelers are currently subject to tax levy. More recently, in September, the program was expanded to include Social Security payments. IRS will now begin notifying certain Social Security recipients who owe delinquent Federal tax debts that their payments will be levied continuously at a rate of 15 percent. In addition to the IRS notice, FMS will send a notice to these recipients each month that a payment is being levied. At the same time, IRS is currently working on a process to ensure that tax levy does not cause an undue hardship for lower-income SSA recipients. Another important enhancement to our debt collection program which began last month is a fully automated system to centralize the offset of Federal salary payments. The first payments offset were the salary payments processed by the Department of Agriculture's National Finance Center. The program will be expanded to include the salary payments from Department of Interior, Department of Defense, Postal Service, and VA. In addition to collecting Federal non-tax debt and delinquent child support debts, we will also in the near future be able to collect tax debts by levying Federal salaries. Assisting the Department of Defense in offsetting DOD vendor payments will also enhance debt collection. This feature has great promise, and working with DOD we plan to implement this offset program next year. Barring delinquent debtors from obtaining Federal loans and loan guarantees is a high priority for FMS and Federal agencies with loan authority. FMS is currently developing a system that will allow lending agencies to access information from the FMS delinquent debtor data base so that government loans are not made to previously identified delinquent debtors. The data base is designed to complement existing sources of information available to agencies, and system implementation is expected next year. I would also note that the current contract with private collection agencies expired September 30 of this year. The awarding of this new contract that went into effect October 1 is a culmination of many months of meticulous work. FMS followed a very methodical plan that included the solicitation of input from collection agencies, market research, proposal presentations, fee negotiations, and system testing. Finally, as required by the DCIA, the annual report on debt collection activities of Federal agencies was recently submitted to Congress. Mr. Chairman, this concludes my remarks. I'll be happy to answer any questions you or members of your subcommittee may have. Mr. Horn. Thank you very much, Mr. Gregg. I appreciate that presentation. [The prepared statement of Mr. Gregg follows:] [GRAPHIC] [TIFF OMITTED] 81549.040 [GRAPHIC] [TIFF OMITTED] 81549.041 [GRAPHIC] [TIFF OMITTED] 81549.042 [GRAPHIC] [TIFF OMITTED] 81549.043 [GRAPHIC] [TIFF OMITTED] 81549.044 Mr. Horn. We now have one of the first Deputy Secretaries, the Honorable Claude A. Allen, Deputy Secretary, Department of Health and Human Services. I know you probably have a lot on your hands and you've got a very dynamic Secretary, and I'm sure you are probably working 23 hours a night, but it is--when I talked to him the other day--and Scott was his legislative liaison--he says, ``He's up all night.'' So I suspect the Deputy Secretary is also. So we're glad to have you here. Mr. Allen. Thank you, Mr. Chairman. It's a privilege to be here with you. Thank you for the opportunity to testify on behalf of the Department of Health and Human Services concerning our implementation of the Debt Collection Improvement Act of 1996. We have made a great deal of progress, yet we face some unusual challenges due to the structure of some of our largest programs. HHS is a unique Federal agency, responsible for the health and well-being of all Americans, and our programs and operating systems are grounded in the principles of taking care of our citizens first and foremost, while remaining accountable to the taxpayer to recover moneys due the Federal Government. In general, as the custodian of nearly $400 billion in outlays annually, HHS has instituted a policy of pursuing debts owed aggressively. It is key to our overall financial management philosophy to insure the public's moneys are spent only for their intended purposes. Our policies have helped us to record steadily increases in debt collections from $10.1 billion in fiscal year 1996 to $15.3 billion in fiscal year 2000, with more than $10.1 billion recovered as of June this year. In child support enforcement programs, HHS has been in the forefront of the challenge to ensure that children receive the financial support they deserve from non-custodial parents. The child support enforcement program is a very successful Federal/ State partnership effort aimed at fostering family responsibility and promoting self-sufficiency by ensuring that children are supported financially and emotionally by both parents. Among the program's enforcement tools is the Federal tax refund offset program. Under this program, tax refunds owed to non-custodial parents are intercepted and sent to the State child support agency to pay the non-custodial parent's past-due child support debts. Since the program began in 1982, more than $13 billion in past-due child support has been collected, and more than 16 million tax refunds have been intercepted. In 2001, tax refund offset collections for the child support program have exceeded $1.5 billion, and this is a new record. Our HHS accounts receivables for approximately 4 percent of all moneys owed to the Federal Government. This amounted to over $10 billion last year. Nearly all this amount was made up of moneys due from health insurance companies, hospitals, and other healthcare providers. Loans account only for 6 percent of the $10 billion, and make up a very small part of the HHS portfolio. The Secretary and I are personally committed to addressing these challenges and to modernizing Medicare's financial systems in order to strengthen the management of accounts receivable and to allow more timely and effective collection activities on outstanding debts. At the Centers for Medicare and Medicaid Services, our largest agency, accounts for 85 percent of the Department's receivables. CMS understands that its auditors and the General Accounting Office continue to raise legitimate concerns regarding CMS' contractors' financial reporting, particularly the status of the contractors' accounts receivable. In large part, these concerns can be attributed to the design of the financial management system of the Medicare system and Medicare program, which relies on outdated, single-entry accounting systems. This is why Secretary Thompson is modernizing Medicare's financial systems to increase the efficiency and accuracy of the financial reporting in accordance with standard government accounting practices. CMS is moving to implement a new, integrated accounting system that will meet all Federal information technology and financial management requirements, including the financial activities of its claims processing contractors. Since Secretary Thompson learned just how old and outdated Medicare's accounting systems are, he has made modernizing them a priority. In order to improve Medicare's fiscal accountability to beneficiaries and taxpayers, we recently announced a long-term project to combine Medicare's many outdated accounting systems into one single unified system that will better ensure that the program pays correctly and enhances the management of debt. The project will be piloted and implemented in phases during the next 5 years, ultimately creating a seamless, modern accounting system of Medicaid. Full implementation is projected for the end of fiscal year 2006. CMS has two main types of debt--Medicare secondary payment debt and non-MSP debt. The debt collection procedures used by CMS vary based on the type of debt and are closely tied to the relationship CMS has to the debtor. The vast majority of non- MSP debts are provider, physician, and supplier debt. In these instances, CMS typically has ongoing relationships with the debtors and may recoup the overpayment or the debt directly from the provider, the physician, or supplier by offsetting their future Medicare payments. On the other hand, MSP debt is comprised of claims that CMS paid initially and then subsequently determined that Medicare should have been the secondary rather than the primary payer. MSP debt is not as easily recouped as non-MSP debt, since MSP debt involves debtors with whom Medicare does not have an ongoing claim payment relationship. These debtors are typically insurers, employers, and third-party administrators. CMS has taken aggressive actions to address concerns with its debt referral processes by implementing pilot projects for debt at selected Medicare contractors and regional offices. As a result of the pilot, the agency referred nearly $2 billion in total delinquent debt by the end of fiscal year 2000 and exceeded the agency's referral goal of 25 percent of all eligible debt by $500 million. Due to the overwhelming success of the pilot project, CMS made them a permanent requirement for all contractors. CMS is also addressing the issues regarding past debt collection efforts and has taken several concrete actions to improve its debt collection processes and to ensure that its debt collection efforts are consistent with DCIA. The systems and ad hoc spreadsheets used by Medicare's contractors have not always produced data that were adequately supported and, as a consequence, the agency's auditors have had difficulty validating the accounts receivable balances. Our new accounting measures will address these concerns. In addition, it is important to note that CMS has issued enhanced policies and procedures for debt reporting and DCI debt referral to all CMS contractors and regional offices. These procedures allow the agency to refer more debt more quickly to address concerns set forth in the GAO's report. To date, CMS has referred more than $4 billion of the eligible $6 billion in delinquent debt, as required by the DCIA. The DCIA requires the referral of delinquent debt for cross-servicing by the Treasury Department for offsetting with Federal payment. In these areas, we are proud to say our performance continues to improve. HHS established its own centralized administrative operations, the program support center, as the central debt management organization for the HHS in 1996 as a matter of efficiency and cost-effectiveness, and subsequently PSC was designated by Treasury as a debt collection center for certain types of HHS health-related-- healthcare debt. We have made significant improvement in referring delinquent debt to PSC for collection, to Treasury for cross- servicing, and to the Treasury offset program for collection, and the rate for all types of delinquent debt referrals for HHS has increased by an average of 23 percent from fiscal year 1999 to fiscal year 2000. In addition, while our greatest challenge has been identifying and referring healthcare debt, we have referred a total of 60 percent of the eligible healthcare debt, or approximately $4 billion, through fiscal year 2001. We have met our performance goals, and since the DCIA was passed in 1996 we have referred more than $4 billion. We will not stop there. By the end of fiscal year 2002 our goal is to refer 100 percent of eligible delinquent debt. In conclusion, HHS has made significant progress in managing its receivables, from increasing its collections to focusing efforts on analyzing delinquencies and increasing its referrals for cross-servicing and offset. The actions we are taking and improvements we are making are essential in achieving our long-term goals to continue to meet the requirements of DCIA. HHS continues to strive for full collection of all debt that's owed to the Department on behalf of the American taxpayers. And I will be happy to answer any questions that I can take at this time or get back to you with any additional information you may require. Mr. Horn. Well, thank you very much. [The prepared statement of Mr. Allen follows:] [GRAPHIC] [TIFF OMITTED] 81549.045 [GRAPHIC] [TIFF OMITTED] 81549.046 [GRAPHIC] [TIFF OMITTED] 81549.047 [GRAPHIC] [TIFF OMITTED] 81549.048 [GRAPHIC] [TIFF OMITTED] 81549.049 [GRAPHIC] [TIFF OMITTED] 81549.050 [GRAPHIC] [TIFF OMITTED] 81549.051 [GRAPHIC] [TIFF OMITTED] 81549.052 [GRAPHIC] [TIFF OMITTED] 81549.053 [GRAPHIC] [TIFF OMITTED] 81549.054 [GRAPHIC] [TIFF OMITTED] 81549.055 Mr. Horn. I know you have another meeting, and we want to get in a lot of questions, so we're going to move right along, and after the last presenter we'll then get to general questions. Mr. Allen. Thank you. Mr. Horn. So the Honorable William D. Hansen is Deputy Secretary of the Department of Education. He's got another live wire as Secretary, since I worked with him a few weeks ago at the Bret Harte School in Long Beach, CA, and he had about 800 little kids and parents included. It was quite a wonderful occasion. So I'm sure you've got a lot of things to keep your schedule busy. Let us start with the debt collection, because I know you have some problems. Mr. Hansen. Mr. Chairman, thank you, and thank you for your leadership on this issue. It is a privilege to be before your committee this morning. And I would like just to start out by saying that this is Secretary Paige's top priority in the Department, improving the management activities within the Department. On April 1st he created a Management Improvement Team to identify what the critical issues are that were precluding the Department from getting a clean audit for the last several years and to also see what we need to do to get the Student Financial Aid Programs off the General Accounting Office's high risk list, which they have been on for the last 10 years. These are two of our top five management priorities, and everything we are doing is centered around rectifying those two long-term problems. In terms of debt collection, let me just break down for you from our two categories of debt, student loan debt accounts for about 99 percent of all of our outstanding debt, and our institutional other administrative debt comprises of the last 1 percent. It is important to keep the size and scope of this to mind. We have $180 billion of outstanding guaranteed student loans in the Federal Family Education Loan Program, another $75 billion in outstanding direct student loans, so it is an outstanding portfolio of over $250 billion, with 9 million additional loans and $35 billion of new loan volume being let this year. The activities that we are about do center around these two programs. It is important to note, as well, that these programs are programs that are entitlement programs. They go out to borrowers who are not necessarily creditworthy, and so that makes the collection of these loans much more difficult than a normal commercial loan. We do have a parent loan program, which credit checks are required, and those who were in default on previous student loans are also not eligible for additional loans. We also, in this process, need to work closely with our colleges and to keep them accountable for their default rates, and institutions that have had high incidents of student borrow defaults have been removed from the programs. And, in fact, an initiative was started back in 1989, and since that time 1,000 institutions have been terminated from the loan program's eligibility because of their high default rates. A couple of tools that have been put into place recently have been helpful to us, as well. The 1998 amendments to the Higher Education Act lengthened the period in which lenders attempt to bring loans back into repayment from 180 days to 270 days before the loan is classified as being in default. The 1998 amendments also provided more borrower flexibility in repayment options and flexibility and other incentives, including the timely repayment. They could use electronic payment debiting. Many of our lending partners have already been initiated in these reforms, and we believe that these changes will also prove beneficial in helping to keep borrowers in repayment. However, we remain concerned with the continued rising cost of college and the resulting increase in borrower indebtedness that we are seeing. The implementation of the Debt Collection Act and other initiatives to improve student loan collections have gone a long way toward improving the effectiveness of collecting unpaid student loans. Just a couple of months ago, in May, the Department of Treasury granted Education a permanent exemption from the transfer requirements of the DCIA for defaulted student loans, and we want approval to continue to service our own internal student loan debts because of our successful track record. Moreover, the Department's leadership and success in implementing a number of debt collection mechanisms over the years has led to their inclusion in the Debt Collection Improvement Act. A couple of examples are: 20 years ago we started using private collection agencies; 15 years ago the IRS tax refund offset was initiated; and, as was mentioned earlier, the administrative wage garnishment has been used for the last 6 years. These tools have allowed us to collect over $5 billion in defaulted loans in just the last 5 years. The Department began using the private collection agencies 20 years ago. We presently have 22 collection agencies under contract. These collection agencies are evaluated and rated according to the overall service that they perform, as well as their ability to collect the debt. They receive additional incentives, both monetary and in new placements. Over the last 24 months, private collection agencies have generated over $650 million in collections, and they are also very helpful in working with us with our litigation referrals with the Justice Department. In fact, in the last 2 years we have receipts of over $54 million from these types of recoveries. We also have been using the Treasury offset and have been referring eligible debts to the IRS for tax refunds since 1986. In fiscal year 2000, there were $16 billion in past-due accounts that had been referred to Treasury, and in fiscal year 2001 we expect recoveries to exceed $1 billion. On the administrative wage garnishment area, we also have been conducting this authority granted to it under the Higher Education Act years ago. We are currently attempting to collect over 150,000 defaulted loans through garnishment, and we've also, since 1997, collected $370 million through this activity. Another important tool that Congress passed in December 1999 was the National Directory of New Hires. We had been working for 17 years with the Internal Revenue Service to match delinquent and defaulted student loan records with current addresses, and this has been very helpful, and we likewise needed this new tool to work with the Department of Health and Human Services with their National Directory of New Hires. Mr. Ose [assuming Chair]. Mr. Hansen, if you could summarize here---- Mr. Hansen. OK. Mr. Ose [continuing]. That would be great. Mr. Hansen. We've also collected, just in this fiscal year, $100 million from defaulted borrowers. We've also been using the Federal salary offset and credit bureau reporting activities to help us to make sure that we are notifying the intent and referral of Department reports to the defaulted borrowers. We also are looking at some possibilities of loan sales on our defaulted loan portfolio. In terms of our institutional and administrative debts, this is 1 percent of our debt, and we are also--94 percent of all of our institutional administrative debts are now eligible for cross-servicing to the Treasury, and we anticipate that we will be 100 percent there very quickly. Mr. Chairman, thank you for this opportunity to testify before you today, and we appreciate the leadership of this subcommittee and look forward to answering any questions that you may have for us. Mr. Horn. Thank you. [The prepared statement of Mr. Hansen follows:] [GRAPHIC] [TIFF OMITTED] 81549.057 [GRAPHIC] [TIFF OMITTED] 81549.058 [GRAPHIC] [TIFF OMITTED] 81549.059 [GRAPHIC] [TIFF OMITTED] 81549.060 [GRAPHIC] [TIFF OMITTED] 81549.061 [GRAPHIC] [TIFF OMITTED] 81549.062 [GRAPHIC] [TIFF OMITTED] 81549.063 Mr. Horn. Dr. Mackay. Mr. Mackay. Thank you, Mr. Chairman. It is, indeed, my pleasure to appear before you today regarding the Department of Veterans Affairs implementation of the Debt Collection Improvement Act of 1996. VA's CFO and staff has worked with all VA elements to take the necessary steps to ensure steady improvement toward full compliance with the law's requirements. On June 8, 2000, before this subcommittee, VA testified to significant progress in referring eligible debt to the Treasury offset program. Today I am pleased to inform you that next month's final records for this fiscal year will reflect that VA has met its goal of referring more than 90 percent of eligible debt to TOP and the cross-servicing program. We have made a great effort to reduce the establishment of debts and to collect those that have been established. At the end of fiscal year 1996, for example, the year in which the DCIA was enacted, VA had $4.2 billion in total receivables, of which $2.4 billion was delinquent debt. As of September 30, 2000, VA has $3.8 billion in total receivables, and $1.4 billion in delinquent debt. Of the $1.4 billion, $341.3 million was attributable to direct home loan mortgages held by VA; $328 million to compensation and pension overpayments; $139.5 million to defaulted guarantee home loans; and $46.7 million to readjustment benefit, which is educational overpayments; $545.4 million was attributable to charges for medical care and services. The bulk of the last mentioned amount owed to VA's medical care collection fund is comprised of claims filed with third-party health insurers. These claims are not referable to Treasury for cross-servicing or administrative offset because they are not some certain amounts owed. VA has participated in the tax refund offset program since 1987. It collected $335 million from 1987 to 1999, when the tax refund offset program became part of the TOP program. At the end of fiscal year 2000, VA had $328.7 million in delinquent debt eligible for TOP referral. We referred $220.5 million, or 67 percent. By the end of the third quarter fiscal year 2001, we had referred $324.7 million, or 93 percent of funds eligible for referral. Based on the latest information from the Treasury Department, VA referred $390.9 million as of August 31, 2001. For the cross-servicing program, VA had $263.4 million in delinquent debt eligible for referral at the end of fiscal year 2000. We referred $45.5 million or 17 percent. At the third- quarter mark of 2001, VA referred $238.8 million, or 87 percent of eligible funds. According to the Treasury Department, VA referred $255.1 million as of August 31, 2001. Data for 2001 we are confident will show that over 90 percent of eligible debt was referred. VA and the Treasury Department continue to explore the efficacy of referring VA's first party medical debts for cross- servicing. The nature of these debts makes the cross-servicing program especially problematic and expensive. Since such referral does not now appear to be cost effective, we must determine whether to incur the expense of developing the automated processes necessary to refer all eligible first party debt. VA is also in the process of amending its regulations to comply with the revised Federal claims collection standards. The amended regulations will include authorizing administrative wage garnishment. We will use this new debt collection tool in conjunction with the Treasury cross-servicing program. VA has had an automated collection system in place since 1975. VA's Debt Management Center in St. Paul, MN, has operated since 1991 and employs every collection tool available to Federal agencies. The DMC uses automated payment processing and collection systems, benefit and salary offset, credit bureau reporting, private collection agency referrals, compromises, litigation, write-offs, and referrals to Treasury's administrative offset and cross-servicing program. This concludes my opening statement. I appreciate the opportunity to appear before you to discuss VA's progress in implementing the DCIA. I will be happy to answer any questions you or members of the subcommittee may have. Thank you, Mr. Chairman. Mr. Horn. Thank you, Dr. Mackay. [The prepared statement of Mr. Mackay follows:] [GRAPHIC] [TIFF OMITTED] 81549.064 [GRAPHIC] [TIFF OMITTED] 81549.065 [GRAPHIC] [TIFF OMITTED] 81549.066 [GRAPHIC] [TIFF OMITTED] 81549.067 [GRAPHIC] [TIFF OMITTED] 81549.068 [GRAPHIC] [TIFF OMITTED] 81549.069 Mr. Ose. Mr. Allen, if I recall, you have to leave at 11, right? Mr. Allen. Yes, Mr. Chairman. Mr. Ose. OK. We're going to pay a little special attention to you here first. Mr. Allen. Thank you very much. Mr. Ose. Mr. Allen, over at HHS your debt--excuse me, the delinquent debt has increased from about $4.1 billion in 1996 to $6.1 billion in 2000, roughly a 50 percent increase. Do you have any sense of why this has happened and what can you do to turn this around? Mr. Allen. Mr. Chairman, the major reason for the increase of debt that we see in HHS primarily focuses on the Centers for Medicare and Medicaid Services. As the GAO report identified, much of it focuses primarily on our system issues that we need to address. We knew that we had some problems with our system and the challenges there, and the solution that we've come up with and one way to try to address this is we've purchased some off-the-shelf software as part of our healthcare integrated general ledger accounting system, or what we call HIGLAS project. Until this project is fully operational, we plan to continue our performing manual interventions to ensure the accuracy and integrity of the debt management process. We also know that there are other issues that GAO identified, and we are working on trying to resolve those, as well. Mr. Ose. In terms of the off-the-shelf software for the general ledger, you expect that to be fully operational by when? Mr. Allen. I believe that we're looking at getting it operational by the end of 2005, but let me make sure--I'll confirm that--it's the beginning of 2006. Mr. Ose. And if I understand correctly, you have taken that software and you're using it, testing it in one place and then you're going to expand the system? Mr. Allen. That is correct. We want to test first and then expand. Focusing on the accounting systems has been a part of Secretary Thompson's agenda from the very first day coming into office. CMS has been working with, I believe, 30-year-old software, which is unheard of, and so a part of that is clearly trying to get a unified system that can accomplish the many tasks that CMS is tasked with trying to---- Mr. Ose. Where are the tests being implemented or run right now? Mr. Allen. I don't have the specific regional offices. We have two parts of it. The part A program is currently being implemented in Palmetto, and part B of the program is in New England. Mr. Ose. Do you have any status report on how it's going? Mr. Allen. As I understand it, it is going very well. In fact, we are looking to expand the program beyond those two regions. We have a plan to do that as we're bringing it up. I can get you an update, would be glad to provide that for the record for you to give you more details on that for you. Mr. Ose. I would appreciate that. Mr. Allen. Yes. Mr. Ose. I do want to know what the schedule is in terms of where does it go next. Mr. Allen. Certainly. Mr. Ose. Because I can tell you we get calls. Mr. Allen. We'll be glad to provide that for the record. Mr. Ose. I appreciate that. Let's see. Mr. Hansen, over at Education does the Department have--how does the Department measure its success in terms of identifying delinquent debt and improving its collection? Mr. Hansen. We have a number of measurement tools. We first, in terms of using the Government Performance and Results Act, have quantifiable goals that we set into place, and we also, from a manager's perspective and a departmental perspective, put performance measures into place for each of our loan collection agencies, and those measurements are both to reward them financially, but also reward them with potentially additional work. Those are benchmarks based on the type of collection activity they incur. Mr. Ose. I want to make sure I'm clear on the kinds of loans you're talking about. DOE would be--these are either the direct student loans or loans that have been purchased from third-party origination sources? Mr. Hansen. We have two different student loan programs. Students can only get one. The program is such that the college has to determine which college they participate in, whether it's the old guaranteed student loan program, which is called the ``Federal Family Education Loan Program,'' or the Direct Loan Program. Most of our activities right now in this effort are on the Direct Loan Program, because those are debts that we hold directly, as opposed to the loans that are guaranteed and held by the private sector. We do have loans that, when the private sector has exhausted the work with the guarantee agencies and the private lenders and they go into default and then come back to the Department, we will then take those defaulted loans and work with our debt collection agents to go after those defaulted loans. Mr. Ose. In terms of the time table for reporting of direct student loans, are you complying with the 180-day requirement for referral? Mr. Hansen. We are. Mr. Ose. In terms of the third-party-generated or the guaranteed loans, are you able to comply with the 180-day? Mr. Hansen. We are, although the 180-day requirement is-- we've received a waiver from Treasury to collect these loans directly ourselves, so those loans aren't going into the CROSS program over at Treasury. Mr. Ose. And your testimony mentioned that you had disqualified 1,000 institutions from granting or participating in the guarantee student loan program. Why was that? Mr. Hansen. Because they had high default rates. In 1989, the Department took administrative action to cutoff schools that had default rates over 25 percent for 3 consecutive years. Congress passed that into law in 1990, and it has been a very helpful tool for the Department to use to drive default rates down and put accountability on the college campuses, as well as, with our private collection partners. Mr. Ose. In terms of the Direct Student Loan Program--and I'm not picking on you--I just want to make sure I've got this correct. In terms of the direct student loan program, how much--say last year or the year before--was referred to Treasury as delinquent? Do you have that number? Mr. Hansen. We don't transfer. Mr. Ose. You do it directly? Mr. Hansen. We do it directly, and that's---- Mr. Ose. OK. Mr. Hansen [continuing]. What I mentioned in my testimony is that we have the permanent waiver from---- Mr. Ose. How much in the last 2 fiscal years did you end up having to deal with as delinquent loans on the Direct Student Loan Program? Mr. Hansen. The default rate of the Direct Loan Program this year was a little over 6 percent, and last year was almost 7 percent. And those are the loans that go into default that we will put into our own debt collection system activity. We're still---- Mr. Ose. Is that the $70 billion portfolio or the other? Mr. Hansen. It's the $70 billion portfolio. Mr. Ose. OK. Mr. Hansen. And, frankly, the Direct Loan Program is only about 6 or 7 years old, so I don't think we've really seen the full impact yet on what the requirements are going to be upon the Department for that, because a lot of the loans that were made in 1994 and 1995 to freshmen and sophomores, they may just be entering repayment now and may not be into a mode of default, so I think the program is maturing about this point and I think we will have a lot more evidence in the next year or two on what type of default issues may arise from the program. Mr. Ose. And, just to make sure that I'm clear, if you've got the $70 billion loan program, it's 6 or 7 percent of the loans that are coming due within that portfolio, so it's not 6 or 7 percent of $70 billion, it's 6 or 7 percent of that portion of the $70 billion that comes due that year? Mr. Hansen. Correct. The way the default rates are calculated is on an annual cohort of loans, and there are about $10 billion of new direct loans that have been made for the last couple of years, and that's our projection for the next couple of fiscal years, so there's $10 billion of new loans being made for kids going to our college campuses this year. Those loans will not get back into the default---- Mr. Ose. I understand. Mr. Hansen [continuing]. Pipeline until--we are currently holding about $70 billion in its--I'd have to get the number for you for the record on how many of those loans are actually in default and recovery right now, but the rate on an annual basis has been about 6 or 7 percent of the overall portfolio. Mr. Ose. Not of the cohort, but of the overall portfolio? Not of that segment that comes due that year, but of the overall portfolio? Mr. Hansen. But it is in the overall portfolio, a lot of those loans are not yet in repayment, so it is kids who are still in school, so---- Mr. Ose. Correct. You understand my question? I'm trying to figure out 6 or 7 percent of $10 billion, or is it 6 or 7 percent of $70 billion, and what I hear you saying is it's 6 or 7 percent of that cohort that comes due each year, rather than the total portfolio. Mr. Hansen. Right. There's about $10 billion of the $70 billion loans that are out there that are in repayment status, so the default rate of 6 or 7 percent would be based---- Mr. Ose. On that $10 billion. Mr. Hansen [continuing]. On the $10 billion that are in repayment. Mr. Ose. OK. Thank you. Now, for the deputies here, I want--this is a general question. Does it seem as if any of your Departments fully comply with DCIA key requirement of referring the eligible debt to Treasury as soon as it becomes more than 180 days delinquent? Part of that problem, for instance, in Education is we've got the guaranteed loans, and maybe they need to go through the process. What can we do or what can your Department do to bring or to get yourselves back into full compliance, and how long will it take, Mr. Allen, given the time constraints you're facing. Mr. Allen. Thank you, Mr. Chairman. I think what we have done at HHS is--and, again, focusing primarily on Centers for Medicare and Medicaid Services has the largest portion of delinquent debt that we have to go after. They've made some adjustments in their 5-year plan. Initially, the largest part of our problem has been dealing with the backlog, and that has been the biggest concern of dealing with the backlog so that we could refer that debt, delinquent debt. What has happened is that the Department's 5-year plan, which was covered primarily through fiscal year 2004, has been accelerated, and CMS has decided to obtain compliance with DCIA by the--with the goal of 100 percent referral by the end of fiscal year 2002, and to achieve this goal what we've done is we've begun to analyze, to review, and refer the backlog of debt that we have, and our plans also include identifying all the eligible delinquent debt and to refer it by the end of fiscal year 2002, and once that is completed we will be up-to- date with the DCIA requirements. Mr. Hansen. We're also working on internal regulations that cover our collection activities, and we signed an agreement with Treasury back in 1997, and we will be continuing to update that on whatever needs we have, but I do think 94 percent of our debt collection activities are over right now at Treasury. Mr. Ose. Dr. Mackay. Mr. Mackay. VA has a long history of working with the Treasury Department and enjoys relatively high rates of referral in both the TOP program and cross-servicing--93 percent in TOP for fiscal year--as of the end of the third quarter, we anticipate that will hold up for the whole year, and we'll be over 90 percent with respective cross-servicing. A lot of that is attributed to the development of automated processes. That was part of the delay with respect to the cross-servicing program. We had data base incompatibility. We had to work through with Treasury stacking our referrals in 5,000 file increments in order to accept that. We, during the course of fiscal year 2002, will let a series of regulations that are in accordance with FCCS and take advantage of administrative wage garnishment. There are some certain hardy perennials that may keep us from getting to 100 percent, however. We had a pilot program this year with regard to first-party debt, which is the copayment that veterans will owe us for non-service-connected care in our medical centers. During that pilot, we referred some $1.1 million worth of first-party debt in the cross- servicing program, and Treasury was only able to collect a little under 1 percent of that, so we are examining now to see if it will be worth it in terms of cost efficiency to move to an automated process if the collection rates are going to be that low. Also, there are some several small benefit programs and other miscellaneous debt that's largely concentrated in the Veterans Health Administration, about $40 million that is currently being readied for transfer in cross-servicing. It's a question there of we've concentrated on the big areas, the big chunks of debt first, and we're just now getting to those. We expect to see over 97 percent of eligible TOP debt referred in fiscal year 2002, and we have a target of 95 percent of cross-servicing eligible debt to be transferred in fiscal year 2002, so we are at a very high level--not 100 percent, but a high level in both programs with respect to the debt that's eligible, and we--with the exception of the hardy perennials, as I call them, we expect to continue to improve in fiscal year 2002. Mr. Ose. One of the questions that always comes up is, frankly, you all make the loans and then you end up referring them to Treasury in some cases for collection. What is it that the Departments could do to minimize the amount of referrals to Treasury? I mean, we've got a whole bunch of other stuff we want Treasury to do, so to speak. How do we, frankly, get the agencies to collect the delinquent debts or minimize them before they end up being referred to Treasury? Mr. Hansen. Mr. Hansen. That's a very good question, and I think that the activities that we've been about with the wage garnishment and the IRS withholding, the authorities that I mentioned to you at the new hires data base from HHS that we have, being able to extend the time period for lenders to try to carry these loans from 180 to 270 days, those are the types of things that we have been trying to do to make sure that every tool we have in working with our lender partners, working with our other Federal tools, that we are able to only tap a very minimal pool that goes into--for collection purposes. And---- Mr. Ose. How long have you had--I'm unclear on something. These tools that you just mentioned, you're implementing those or you're discussing implementing those? Mr. Hansen. The new hires data base was passed by Congress in December 1999. This is the first full year of implementation of that. Mr. Ose. And what kind of results have you had? Mr. Hansen. We've--just in this year, our initial numbers are that we've brought in $100 million in that program. Our estimates are $10 billion over the next 10 years. Mr. Ose. And the new hires is essentially if someone comes to work for the Federal Government there's an automatic check on whether they have outstanding debt? Mr. Hansen. No. It's more of using the HHS data base to cross-check any of the outstanding millions and millions of student loan borrowers to track them down. It's the same type of thing we do with the IRS offset. The other tool that I just mentioned was passed in the 1998 amendments of the Higher Education Act, expanding the time from 180 days to 270 days that the lenders have. That has also been proving very successful for us, and we've implemented that over about the last 18 months, so those two tools are building on all of the other tools. Mr. Ose. So the one effort has generated $100 million? Mr. Hansen. Correct, in just this fiscal year. Mr. Ose. And then the extension of time from 180 to 270 days, this resulted in what? Mr. Hansen. I don't have the number. It has reduced the default rate, but it is kind of one of those things where it's--we can't really quantify it because it is a number that we know that lenders are--our overall default rate has come down this last year from about 6.9 percent to 5.6 percent, so that's where we're seeing those activities, with the overall default rate coming down. Mr. Ose. Dr. Mackay, how about over at VA? Mr. Mackay. We have a Debt Management Center which functions as an enterprise, part of an enterprise fund, and so it has a service ethic, and starting over 10 years ago, in 1991, actually, or 10 years ago, it has been making use of a pretty full panoply of tools, from an automated collection system, as I mentioned in my testimony, to automated payment processing. It has a professional staff, benefit offset, Federal salary offset, the use of cavers and---- Mr. Ose. The question I really have, though, is: Is it working? I mean, is it actually working in terms of collecting these delinquent debts? Are these steps that VA has taken---- Mr. Mackay. No, these--this is an actual functioning, up- and-running center---- Mr. Ose. OK. Mr. Mackay [continuing]. In St. Paul, MN. Where we have some difficulty or where we have some issues--and it was highlighted in a recent GAO report--is with respect to third-party health insurance payments, where we have a--it's a quasi-medical, legal and administrative process where these medical services are performed for veterans in our medical centers. It's non-service-connected conditions and we have recourse through their insurance program. There we have some---- Mr. Ose. Your earlier comment was that you had $1.1 million [sic] outstanding from that particular function, of which you were collecting about 1 percent. Mr. Mackay. No, that's first-party payment, and that was a pilot program that we had in order to try to cross-service that a bit. Mr. Ose. OK. Mr. Mackay. This is about $545 million that's owed to our medical care collection fund. That's the gross amount. Mr. Ose. Is this of a subvention nature, or is it just a direct copayment kind of thing? Mr. Mackay. No, it's of a subvention nature. This is recourse against a health insurer. And there we have had some performance issues, some management issues, several of which were highlighted in a recent GAO study. We have a decentralized system where each individual medical center, because of familiarity with the patient records and the case, is a billing entity. We need to centralize that. We need to improve markedly our billing times, documentation, coding, and billing, and we also need to emphasize net collection. Many times, with respect to third-party payments like this, the gross amount needs to be tempered with how much is possible and how much you would expend in pursuit of realizing certain net collections, so that is an area where we are attacking. I feel like--and I think the record bears out--that we have availed ourselves of just about all of the methods and tools that are available to go after debt that's associated with our benefit payments, the entitlements that the Veterans Benefits Administration puts out--compensation of pension, direct home loans, loan guarantee. Where we have issues, where we need to improve our debt collection and we have not organized ourselves to go after it in a coordinated way, is in the healthcare side. Mr. Ose. On that---- Mr. Mackay. Both with respect to first party, and especially with third-party payors. Mr. Ose. On that $545 million third-party issue, how much was it last year? Mr. Mackay. I'd have to---- Mr. Ose. My real question is: Is the number growing or is it shrinking? Mr. Mackay. Well, we had an accounting adjustment that makes the figures year-to-year hard to compare, but it is fairly stable. Mr. Ose. You don't know, do you, whether it's going up or down? Mr. Mackay. No. It's fairly stable from this year to last year. There was an accounting---- Mr. Ose. What does ``fairly stable'' mean? Mr. Mackay [continuing]. Adjustment 2 years ago. Mr. Ose. Does that mean---- Mr. Mackay. It means it's about a half a million--it's about a half a billion dollars, Congressman. Mr. Ose. And it's staying at that level? Mr. Mackay. The gross collections. One of the things to understand is these are--each one is a case. Mr. Ose. I understand. Mr. Mackay. You come in. You have medical care. There are issues of coding. There are issues of---- Mr. Ose. I actually worked on insurance. I was on a board of directors of an insurance company. Mr. Mackay. OK. Well then you understand that---- Mr. Ose. Right. Mr. Mackay. Yes, the better figure would be net collections, and no, we don't have a good idea of what our net collections will be of that $545 million in gross outstanding debt. Mr. Ose. So we don't know whether we're improving or static or going backward in terms of the overall backlog, if you will. Mr. Mackay. If you would allow me, I'd have to submit something that would be---- Mr. Ose. All right. That would be fine. Mr. Mackay [continuing]. More detailed. Mr. Ose. That would be fine. I would appreciate that. That would be helpful to me. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] 81549.070 [GRAPHIC] [TIFF OMITTED] 81549.071 [GRAPHIC] [TIFF OMITTED] 81549.072 Mr. Ose. Mr. Engel and Mr. Gregg, we're not ignoring you. I just had some questions I wanted to ask your--before I come to you, I do have one more for Mr. Hansen. That is--the higher education limits in 1998 provided the Education Department the ability to verify with IRS income information submitted by applicants for student assistance, and the question--what we're trying to do is make sure that they were eligible. However, we're not aware on this side of the dias that this provision has yet been implemented, largely due to a variety of legal or practical issues. What progress has the Department made in resolving this? Mr. Hansen. Mr. Chairman, this is an important tool for us. We've included it in our management plan that we released to the Congress. We'll be talking about it again in a couple of weeks. It was also referenced in the President's budget that was submitted in April for fiscal year 2002. We have been working with Treasury on this issue, and we've agreed to conduct some statistical study of tax filers in the year 2002. This is--there are reporting requirements on it, a document called the FAFSA--it's the Federal Aid for Financial Student Aid. This is what 20 million student aid applicants have to fill out every year for a Pell Grant or student loan. Mr. Ose. You're the guy that came up with that? Mr. Hansen. We're trying to improve it. I've got six kids, myself. We're trying to improve it. But one of the most important pieces of this is there are income questions on the FAFSA that are supposed to be pulled right off of the IRS in terms of income, and so what we're trying to do is to, in the aggregate, to do some data matches to see if this will be a helpful tool for us or not. I think in our preliminary suggestions they're telling us that it will be a helpful tool for us, and GAO has been working with us, as well, on this issue. Mr. Ose. Is it GAO that sets that up, or are you more working with the Department of Treasury and the IRS? Mr. Hansen. We're working with Treasury, but GAO has pointed out that this can be a helpful tool for us. And, in fact, we are going to pilot eight schools in fiscal year 2002/ 2003, and those eight schools have been identified, and so we'll hopefully have some information at the end of this school year to share with the subcommittee. Mr. Ose. All right. Of the 20 million students who are involved in the loan program at those eight schools, how many are involved? Mr. Hansen. I would have to get that information to you. Mr. Ose. Mr. Gregg, how about it? Is that--I mean, over at Treasury--you're at Treasury, right? Mr. Gregg. Yes. Mr. Ose. You're Treasury. Is that going to be a useful tool? Mr. Gregg. Well, they're working primarily with IRS on that, not FMS. Mr. Ose. Not Financial Management. OK. Mr. Gregg. But I think it will be another step in the right direction. Mr. Ose. Mr. Engel, you're over at GAO. What do you think? Mr. Engel. I'm not familiar with that particular recommendation, but it sounds like that would be an effective tool. Mr. Ose. One question that I do have that just stands up and screams to be asked, so I'm going to ask it. In terms of your portfolios, there's so much that you write off every year. I mean, it's uncollectible, period. When the agencies make that determination, do you report that relief of debt or that extinguishment of debt to the IRS for tax purposes? Mr. Hansen. We do, but we--sometimes we'll even hold debt for as long as 15 years because of these tools that we have available to us with the IRS offset, with wage garnishment, but if and when the point comes that we cannot do anything further with that debt, that is our last recourse, and that is to turn it over to the IRS so it is then deemed as taxable income on that person's tax form. Mr. Ose. In the Education Department, how many such situations have been finalized? Mr. Hansen. I'll have to get that for the record, Mr. Chairman. It's not a large number, because we really try to do everything on the front end, as you asked previously, so that we don't get to that point, but I'll get the number to you for the record. Mr. Ose. The reason I asked the question is that if you are 15 years into a borrowing, there's a certain timeline that drags on your tax returns. I don't have to keep mine longer than, I think, 7 years, even though I've got a mini storage full of them, but at some point or another we've kind of lost the statute of limitations on some of this stuff. Is that the case? I see people behind you shaking their heads. Mr. Hansen. There is no statute of limitations for these. Mr. Ose. OK. And so we get our--we actually get the referral over at IRS, and then IRS is free to go ahead and---- Mr. Hansen. Correct. Mr. Ose [continuing]. Amend somebody's return accordingly? Mr. Hansen. Right. Mr. Ose. OK. Is that the case over at VA, also? Mr. Mackay. Yes, sir. We use a very similar methodology to write off debt--refer to IRS, and they'll issue a 1099. And, of course, in cases where the debtor--we have evidence that the debtor is deceased or the debt is cleared in bankruptcy, obviously we write-it-off at that point. Mr. Ose. Can you discharge income tax liability through a bankruptcy? Does anybody know the answer to that question? Mr. Mackay. No, I don't know. Mr. Ose. Well, we'll find out. We'll find the answer out to that question. All right. Commissioner Gregg, if you would, what more do you think FMS can do to get agencies to comply with the Debt Collection Act requirements, particularly the referral requirement? My concern here is the timely referral of delinquent debts to you so that you guys can move forward accordingly. How do we make that move or operate more smoothly? Mr. Gregg. Mr. Chairman, I think the--step back just for a minute. The first couple of years after DCIA was passed was-- not a lot of progress was made. I think in the last year to 2 years pretty good progress was made for most of the departments, and what we've done is sat down with each of the large CFO agencies and worked with them to set up a goal, and that was arrived at jointly, and then to have them work to reach that goal. And I think, both in the case of--for example, VA has come a long way since just a year-and-a-half ago, and it was a cooperative effort, the same with HHS and some others. So I think one of the things is the constant kind of working together. I think the periodic oversight hearings that we have has also helped. It has kept this on the forefront. So those would be the things that I think just keeping at it, from my perspective, because when we look at the referrals from a few years ago to what we have today, especially in the cross- servicing, they have improved quite dramatically. Mr. Ose. So are we making--are we getting closer to the 180-day timeline, or---- Mr. Gregg. That's really another question. I think one of the things that happened when DCIA was passed was that in the earlier referrals to us, both in TOP and cross-servicing, was that agencies were cleaning out their closets, and we got some real dregs, and we spent a fair amount of effort to work with our private collection agency to weed a lot of that debt out. In some cases the documentation wasn't there. In other cases it was just so old that the--despite all the tools that we have, the collection rates were not great. For cross-servicing, I think 60 percent of the debt right now is between 4 and 11 years old, and so that makes it very difficult to collect---- Mr. Ose. Four and 11 years old, or 4 to 11 years delinquent? Mr. Gregg. Four to 11 years delinquent. Mr. Ose. Now you understand why I'm interested in the 180- day referral. Mr. Gregg. And as we get--for example, right now we're getting, I think, 91 percent of the eligible debt referred to us for TOP and about 71 percent referred to us for cross- servicing. As that continues and as we get higher and higher percentages, then the age of the delinquent debt should decrease, and therefore increase the chances of collection. Mr. Ose. From a comparative standpoint, let's say the Bank of Walnut Creek had a delinquent debt, how long would it be before they refer it to collection? Mr. Gregg. I'm sorry. I didn't---- Mr. Ose. Let's say a private bank--pick one. I mean, I don't care which one you pick. How long would it be before they refer it to their collection department? Mr. Gregg. I don't know, but I expect not very long. Mr. Ose. Would it be 180 days? Mr. Gregg. Probably sooner than that, but I think at least within 180 days after delinquent they would have it there. Mr. Gregg. Well, what our analysis shows is that the agencies are referring less than 10 percent of their debt by the 180-day deadline--excuse me, less than 10 percent of their delinquent debt by the 180-day deadline, and I'm trying to figure out, if we can't get it identified and referred, we're just going to have more and more in the 4 to 11-year category. Mr. Gregg. I think that as the percentages continue to increase and we keep raising the bar each year with the agencies, then actually the age of the referrals will decline, as well. I can't guarantee that, but we certainly believe that will be the case. And I think the--from Treasury's perspective, for example, in the case of Education, they do a very good job, and what we would like is at the end of--after debt is 180 days delinquent, give it to us right away so then we have greater opportunities, either from our cross-servicing operation or for our offset, to get that collected, and that we continue to stress that and to work toward that. Mr. Ose. Do you have any information about how delinquent debt is valued as time goes by? For instance, a 30-day delinquent debt is worth $0.97 on the dollar, or 60-day delinquent debt is worth $0.92 on the dollar, just statistically? Mr. Gregg. I don't have that. I think it really depends on the portfolio so much that I wouldn't venture a guess. I think, for example, in the case of Department of Education, you could actually make a case that, at least for some period of time, the collection rate increases because the students get to a position where they actually have money coming in. Mr. Ose. That's a good thing, by the way. Mr. Gregg. Yes. I know that first-hand. In other portfolios I think that's not the case. So we did a study a number of years ago, or had PricewaterhouseCoopers do a study for us that looked at the collectability--didn't answer your specifically, but looked at the collectability of debt based on the age, and I can provide a copy of that for you for the record, but---- Mr. Ose. What were the conclusions? Do you recall? Mr. Gregg. I forget exactly, but it was--I think with the age of the debt, the average age of the debt, the collection rate of 2 or 3 percent--my memory is it was within the bounds of what they found in the private sector, but that was, like, 3 years ago and my memory is a little bit vague on that, but I can provide that for the record. But it was low. And actually I think we have been exceeding that rate for the last several years. Mr. Ose. But the agencies are still only referring 10 percent of the delinquent debt within the existing 180-day timeline? Mr. Gregg. I don't have that number right in front of me, but I do know that it is something that we need to improve and our collection rate would improve, as well. Mr. Ose. All right. Now, in terms of the referrals, is the 180-day timeline unrealistic in terms of referrals? Mr. Gregg. No, sir, I don't think it is. I think one of the issues that we had when DCIA was passed was that for many departments, not all, but for many departments debt collection was not a high priority, and just getting good data on what was in the portfolios, whether or not the records really supported the collection of debt, whether or not they had sufficient records, I think there was--and there still is going on, to some extent, a major cleanup. But I don't think that the 180 days is unrealistic after delinquent debt. Mr. Ose. Now, one agency refers debts to Treasury--and I'm sorry I don't have the name of the agency--oh, our friend Mr. Moseley. OK. One agency refers debts to Treasury once a year. I mean, clearly that's not compliant with the Debt Collection Act, so we will visit with Mr. Moseley about that. Mr. Engel. I have a little bit of information on those figures that you were looking for. Mr. Ose. Mr. Engel. Mr. Engel. Based upon a study that we had done last year and some statistics that were out in the industry, I believe the typical collection for 30 days delinquent is about 50 percent. Now, these are rough averages. When you get up to 300 days, it's about 20 percent. And then when you start getting out past a year, 400, it's more about 5 percent. It significantly goes down after about a year's worth of delinquency. Mr. Ose. So you lose--after 30 days you start losing about 3 percent a month in terms of value? Mr. Engel. That's about right. Mr. Ose. And that's off the face amount of the debt? Mr. Engel. Right. That would be off of the face amount. Mr. Ose. All right. Mr. Gregg. Mr. Chairman, one other point on that--it was just handed to me--we are working with OMB to provide information for each department on the referral and the age of the debt, and that's going to be taken up by the President's Management Council in the near future. We are pulling together information agency by agency. Mr. Ose. All right. Now, Mr. Engel, you made a comment that the agencies that you've reviewed have not given a high priority to implementing the Debt Collection Improvement Act provisions. What can be done, either on our side of the dias or yours, to encourage these agencies to give this debt collection a higher priority? And I'll tell you what my concern here is. It is if these programs don't work ultimately the taxpayers are going to say, ``Stop the program,'' and I don't want to get to that point, so how do we implement this stuff? Mr. Engel. Well, I think Mr. Gregg had mentioned a couple things. These hearings such as this do provide an opportunity for oversight and to put a little pressure on these agencies. Another thing, though, that should be considered is to see if we could identify some leading agencies that are doing an effective job, either whether they are primarily following the act's tools and using the act's tools, they've got a high percentage of amounts that are promptly being referred over for collection---- Mr. Ose. So you figure out their template and then you take it over to another agency? Mr. Engel. Basically I'm looking for establishing best practices that could then be used by the agencies that are having a little more difficulty. Hold them accountable to meet those best practices that come in through hearings such as this to monitor the progress that they're doing. Mr. Ose. What's the status of your best practice study? Mr. Engel. We haven't started one yet, but it may be difficult at this point to identify who those leading agencies are, but I think in some cases some of the members here-- Education in some areas I think does a good job. One thing that I wanted to point out as it relates to a lot of the percentages that we've heard today being thrown around, while I certainly think that the agencies should be commended on bringing those percentages up, which we've seen for the most part most of them have done, and Government-wide the same thing, I think we do have to sit back and put in perspective we are into the--past the 5th year of this act's implementation, and really the act calls for, after 180 days, for anything that you've labeled as eligible, which what we're talking about on these percentages has already been determined to be eligible, that those should all be sent over 100 percent. So 90-some percent is commendable, but when you're setting goals we really should be establishing goals that are making you compliant with the act. Mr. Ose. Thank you. Mrs. Maloney for 5 minutes. Mrs. Maloney. Thank you, Mr. Chairman. I really wish that Mr. Horn was here so that I could thank him. Together we authored the Debt Collection Improvement Act of 1996, and I'm greatly interested in the topic. This common-sense bill centralizes the Federal debt collection at the Department of Treasury and gave all agencies the tools needed to collect billions of dollars in delinquent non-tax debt. We are told now that agencies are breaking the law. Of the 27 agencies surveyed by the subcommittee, not 1 is complying with the act's basic requirements for referring 180-day delinquent debt to the Treasury Department, and I find this truly troubling. I do applaud the progress that has been made. During fiscal year 2000 the Federal Government as a whole collected $22.5 billion in non-tax delinquent debt, which represents a $5.2 billion increase over fiscal year 1999. However, delinquent fines and past-due other debts to the U.S. Government are still not being collected. Of the $31 billion in debt eligible for the administrative offset program, only $22.5 billion or 72 percent has been referred for offset, and this is C-minus work. The Debt Collection Improvement Act gave agencies the tools needed to clamp down on people who owe the Government money. In this time of fiscal uncertainty, C-minus work is unacceptable. The Federal Government must continue to aggressively improve its debt collection efforts. I understand one of the questions that Mr. Ose asked earlier is: How does the public sector compare to the private sector in debt collection? And that is that we just don't move as fast. Just from the testimony of Mr. Engel that I just heard, that as each day goes by the opportunity to collect becomes more difficult, so really the 180-day referral should be, you know, enacted. They should respond to it, because that increases the likelihood that we can collect it. [The prepared statement of Hon. Carolyn B. Maloney follows:] [GRAPHIC] [TIFF OMITTED] 81549.073 Mrs. Maloney. What can we do to get the agencies to send it over after 180 days? It's the law. They're just not doing it. So I'd like to know any ideas that you have. I am seriously considering introducing a bill that would add performance standards so that we could monitor this more carefully and possibly, you know, force agencies to comply. And if they didn't comply--let me just ask, are there any agencies here--GAO's here, right? Mr. Engel. Yes. Mrs. Maloney. Are all of you GAO? Mr. Engel. No. Mrs. Maloney. OK. Who is GAO? Mr. Engel. I am. Mrs. Maloney. OK. Mr. Engel, would your agency comply with the law if we were to deduct 5 or 10 percent from the Secretary's or executive level staff's salaries if improvements in debt collection practices were not made? I mean, how do we get people to comply with the law? Do we have to, you know, come in with some type of incentive or disincentive or sanction almost if they don't comply? What are your ideas on how we get them to comply? Do you think that a performance standards bill would help? What are your ideas? Mr. Engel. I think establishing goals and performance standards to monitor would probably be a step in the right direction. One of the problems that the agencies have faced--and we heard that from several of the witnesses here today--have been problems with systems, the inability of their systems to be able to capture the information, to allow it to refer over. Some of the agencies that we had performed work at, when the systems were developed they had not been developed to be compliant with DCIA. But, again, we're several years into this act by now. I think those systems type problems hopefully should be addressed by this point, but that could be one area where, again, as I was speaking--I think when you were coming in--where we were talking about establishing leading agencies. Maybe there are some agencies that have gone through the development stage of improving their systems to be DCIA complaint that could assist some others that are experiencing the problems. Mrs. Maloney. Anyone else like to comment? I mean, you said we should have goals and standards. We already to. The bill says 180 days, and your testimony said that after 180 days the degree or probability of collecting it becomes less and less and less, so the 180-day deadline is important. So if they don't have systems, what about letting them keep part of the money they collect? I mean, how can we get people to comply with the law, to, you know, run government like a business? Mr. Gregg. Mrs. Maloney---- Mrs. Maloney. I'm sounding like a Republican up here, Mr. Ose, but, I mean---- Mr. Ose. We'll take you. We'll take you. [Laughter.] Mr. Gregg. I have a---- Mrs. Maloney. But, you know, it seems to me like a simple thing. Somebody owes you money. I just know in the private sector when I owe somebody money they're on the phone. They don't even wait 180 days. Within a week they're after you. So, I mean, why don't we get a little more aggressive about it? And I thought we had standards in the bill, anyway. Any thoughts by anybody? Mr. Gregg. Mrs. Maloney, Dick Gregg from Treasury. I think a couple of things come to mind. One is that the--part of it is not only in terms of referring to us, but actually taking ownership of the debt. In the case of HHS and child support you have a real strong advocate there for debt collection because they can see where the money is going, which is kind of an interesting thing. I'm not saying that others--I think Education does an excellent job. But part of it is decentralized agencies without that same fervor for collection, and then referral. I think the idea that having some kind of clear and positive incentives for agencies that do well, that would be, like, one measure. I'm not sure what it would be, but it could--something that would actually get back to the parts of the agencies that do this work and not have OMB cut the rest of their budget if they get that award. I think, to me, that is just something that would actually help and be a positive incentive, because my own view is that agencies are, in fact, trying. Most of them are trying. But sometimes they are hampered by systems and just other priorities that get in the way, so I would personally favor some kind of a clear, positive incentive. Mrs. Maloney. Yes. Any other comments? Mr. Ose. The gentlelady's time---- Mr. Engel. I'll just point out one other thing. You know, the 180 days is what the law is saying you are required to send over those debts to Treasury to use some of these other tools, but you can send debts over prior to that. Debts could be sent over to use for tax refund offset, Administrative Wage Garnishment, which is one of the things we talked about today, could be used. None of the nine major agencies we surveyed was using that. So there are other tools that I think right now the agencies are not utilizing which they could be utilizing prior to even the 180-day delinquency period. Mrs. Maloney. Could I do a followup question? You know, but what we're seeing is that they're not--forget the prior. We're seeing they're not making the 180 day. Mr. Gregg, you came up with the idea of letting agencies keep part of what they collect for a goal that they think is important. Would you leave that up to the agency to come up with what the goal is, or would you have Congress dictate that, you know, Education goes into more student loans, or whatever, you know? Or would you--what are your thoughts on it? And then I yield back quickly to Mr. Ose, because I think it is a very important point that he raised. Mr. Ose. If the gentlelady will yield, there is a provision in the act for gain sharing in terms of recovery, and Mr. Gregg, if you'd like to expand upon that. Mrs. Maloney. Yes. Mr. Gregg. Yes. Actually, that's what I had in mind is to effectively use the gain sharing and to do--and have it administered. I think the responsibility there is with OMB--and to do that in a way that maybe sets one standard. It may be it can be as clear as any agency that meets the 100 percent goal of referring all debts within 180 days of being delinquent would be entitled to 5 percent of the debt that's--well, 5 percent of what has been collected or some measure of that. But I think that the authority is there and just, from my understanding--and it's not a real thorough understanding--is that in some cases where it has been used and OMB gave it with one hand and took it away with the other, so it didn't feel very good for the agency. Mrs. Maloney. OK. I hear you. Thank you. Mr. Ose. Mr. Gregg, in terms of that gain sharing authority, have any agencies attempted or perfected implementing that? Mr. Gregg. It is my understanding that SBA had some success with that for debt write-off, and that was a couple years ago. I don't--it's also my understanding that recently no--there hasn't been any success in using that with OMB, again, except for--well, in cases when it has been used, it was--end up reducing their regular appropriation by the same amount, but I can get more information on that and report back to you. Mr. Ose. But SBA, you're indicating, had or has a template or a program that they attempted to implement? Mr. Gregg. Yes, I believe that they had, and that was a year or 2 years ago where they got some funding that I don't think was offset by OMB. They got some funding for the write- off. Mr. Ose. Would you please forward that to us? Mr. Gregg. Yes. Mr. Ose. Track that down and forward that to us? Mr. Gregg. Yes, sir. Mr. Ose. I would appreciate that. I want to go back to a--we've been talking about, frankly, debt under the act that is considered eligible for referral. We have not yet talked about debt under the act which is excluded. One of the questions I have is whether or not the determination of exclusion is being properly applied. Mr. Engel, do you have any--has the--you guys made some recommendations about verifying the manner in which exclusions were made. Have your recommendations been implemented? Is the exclusion provision being properly applied? If not, how are we doing on it? Mr. Engel. OK. First off, yes, we did make some recommendations relating to verifying the validity of the information for exclusions being reported by the agencies. FMS has taken some steps. One thing they did was, on the agency's Treasury report on receivables beginning, I believe it was with fiscal year 2000, agencies are now--the CFO or an equivalent has to certify that the information in that report is accurate and complete. Now, that includes the exclusion amounts and the amounts reported eligible for referral. We still believe, though, too--and we had a recommendation we made last year and OMB and Treasury I believe are in process of looking at this--that OMB and Treasury work together to try to get the inspector generals to perform some level of independent verification of these exclusion amounts, whether it be part of their financial audits or some other process, because the significance of the amounts that are being excluded are, you know, a major portion of the debt that is outstanding. Now, in addition, this year, performing work for the subcommittee at the selected agencies, we went in to try to establish and do some testing of our own to see if agencies were having accurate reporting of their exclusions. At one agency, RHS, we could not perform that testing because they did not maintain the supporting documentation---- Mr. Ose. For the record, ``RHS'' is Rural Housing Service. Mr. Engel. Rural Housing Service. I'm sorry. Mr. Ose. Right. Mr. Engel. They did not maintain the supporting documentation for the exclusions that they had reported on the 9/30/2000 report. At the Farm Service Agency we were able to go in and, for several of the major exclusion categories--bankruptcies, foreclosures--we had actually performed a statistical test of four States that we had selected, the exclusion amounts that had been reported, and found at about a 50 percent error rate in the exclusions that were being reported. Many of these involved bankruptcies where the bankruptcy had already been discharged, in some cases years ago, so those receivables shouldn't even have been reported as a receivable and exclusion. They shouldn't have even been in the amount. We also found ones, though, that were going the other way where there were bankruptcies that were dismissed, and in that case those should now be eligible debts and should be being referred over to the Treasury. Mr. Ose. In other words, a borrower had filed a Chapter 11 or 13 or 7 or something, and the court had said, ``This is an inappropriate filing,'' and refused to certify? Mr. Engel. Yes. Mr. Ose. OK. Mr. Engel. The bankruptcy was being dismissed. Mr. Ose. Thank you. Mr. Engel. We also found foreclosures that had either gone through the foreclosure period and were no longer foreclosures but were still being shown as an exclusion for foreclosure. Our conclusion was there are concerns we have with the accuracy of the information being reported as exclusions by the agencies. While we did not perform a specific test over at the Center for Medicare and Medicaid because the HHS IG is in the process of completing a report which was going to cover work in that area, we did identify also over there some instances where exclusions were inaccurately reported. We found, again, dismissed bankruptcies that should have been not reported as exclusions any more. So we do have the concerns that we had raised last year. We believe there should be some level of independent verification performed to get a better idea as to how accurate this information that's coming over on these Treasury Report on Receivables is, given the significance of the amounts that are being excluded. Mr. Ose. Your sample size in these agencies--for instance, at HHS--was how big? Mr. Engel. At HHS, at the--not HHS. It was the Farm Service Agency, and it was 15 counties out of 123 counties, and we pulled a statistical sample of cases which totaled 263 cases, and concluded about a 50 percent error rate. Mr. Ose. Just a minute. We're getting organized here. All right. So you had about a 50 percent error rate on that particular sample. Is there any reason to think that the sample, itself, was reflective of the general portfolio? Mr. Engel. We feel it certainly is representative of the four States that we had selected. Mr. Ose. Which four States? Mr. Engel. Let's see--California, Texas, Louisiana, and Oklahoma. Mr. Ose. All right. Mr. Chairman, I'm going to venture in an area I might not ought to--that's proper English. But the people who are responsible for creating those portfolios, are they still in those agencies? Mr. Engel. Responsible for---- Mr. Ose. I mean, if we've got a 50 percent error rate in their portfolio, are the people making the decisions on the exclusions still making the decisions on the exclusions? Mr. Engel. As far as I know. Mr. Ose. What were the States? California? Mr. Engel. California, Texas, Oklahoma, and Louisiana. Mr. Ose. And this is the Farm Service Agency? Mr. Engel. Yes. Mr. Ose. There is another item here in the report that was prepared by committee staff, question No. 9 of the survey, ``Does your agency have a process for barring delinquent debtors from receiving further Government assistance?'' Three agencies responded no. Which agencies are those? Mr. Engel. That was not our survey. I'm not sure. Mr. Ose. Do we know the answer to that? Male Voice. Yes. Mr. Ose. All right. Thank you, Mr. Chairman. Mr. Chairman, if I might continue? Mr. Horn [resuming Chair]. Absolutely. Mr. Ose. Staff has indicated to me that the three agencies that do not bar delinquent debtors from further Government assistance are the Railroad Retirement Board, the Securities Exchange Commission, and the Social Security Administration. Do you have any information on the management practices dealing with delinquent debt at those three agencies? Mr. Engel. No, I don't. We did not look at those as part of this review. Mr. Ose. How might we go about establishing for these three agencies an effective means of offset so that other Federal agencies aren't extending assistance to delinquent debtors at these three agencies? Mr. Engel. If I understood the question that was asked, it was are they supplying the information that's necessary for other agencies when they are making loans to---- Mr. Ose. That would be the first step. Mr. Engel. Right. Mr. Ose. I would agree. How do you get that information disseminated to the other agencies? Mr. Engel. Well, under the act there are several sources that agencies can use. There's the credit bureau reports that that information should be referred to. I don't know those particular agencies whether there's some particular exclusion that would say they could not refer. I don't know of any, but the credit bureau reports, HUD's--the Housing and Urban Development has a system called ``cavers'' that also agencies can report into and lending agencies can look at to see if there's delinquent debts. And then another source will be here soon in the future, Treasury's Offset Program. They're going to have a debtor bar provision program which agencies will be able to go into and utilize to determine whether there is delinquent debts for someone that they're---- Mr. Ose. On Treasury's debtor bar program, you say it is going to be? Mr. Engel. Yes. Mr. Ose. What does that mean? Mr. Gregg. We'll implement that next year. Mr. Ose. When? Mr. Engel. I don't have the---- Mr. Ose. January or December? Mr. Gregg. Probably toward the end of the year. Mr. Ose. So we're talking about December 2002 for the Treasury to implement a debtor bar system. Mr. Gregg. The fourth quarter of the fiscal year. Mr. Ose. All right. So that would be what? I mean, I don't--I know calendar years, and I haven't yet made the adjustment to the Federal fiscal year. Tell me what month. Mr. Gregg. July and August, in that timeframe, September maybe at the latest. Mr. Ose. OK. Thank you, Mr. Chairman. Mr. Horn. Thank you very much, Mr. Ose, for conducting this hearing. I'd just like to know one or two things to the panel. Is some of the problems that other agencies have is not just not maybe knowing about the Debt Collection Act, but having their financial systems that don't seem to work? And should we have a basic software on how that's handled? And perhaps the financial management situation, you could do that. What do you think, Mr. Gregg? Should we get that kind of software that will--you know, you can move it over to your area, in particular? What can we do to improve that? Mr. Gregg. The complexity of the debt and the debt portfolios that are out there and the--not only the Debt Collection Improvement Act, but also dealing with tax levy and offsetting State tax, there's a lot of complexity, and I would--I think the interfaces, the automated interfaces that we have and that we continue to improve between us and the agencies actually allows them for the fairly easy transfer of debts to us. I don't think, you know, from getting debts to us, I don't think that's a major problem. It's the old mainframe applications that every agency or many agencies have, and they're trying to upgrade those and the difficulty of how much data is there, how flexible they are. I think that's a whole different area, and agencies are--including Treasury are all over the map on that and just how good information they have to figure out the age of the debt and manage it properly. Mr. Horn. When Mr. Ruben was Secretary of the Treasury, he took quite a feeling for this situation and urged the others in the administration to move that debt over to your fine operation. Have you had an opportunity with Secretary O'Neill to perhaps do the same thing with a letter from the Secretary of the Treasury? He's in pretty good stead with the President of the United States, and it wouldn't take much to move that debt over. Mr. Gregg. We haven't done that yet, but I think, having talked to Secretary O'Neill about some of the impediments that we have kind of generally within FMS, when we talked about some of the things we could do in debt collection, I think that would be something that he would be interested in doing. Mr. Horn. I think all of us in Congress would be interested. We thought we had a surplus going around here, and your collection of debt might help us a lot, and so I would think most Members of Congress who have, I don't know, 50 different projects they want to do, they will--should help us on this debt collection bit, or at least should not whine a lot. And where it sits out sometimes in agencies--and I understand that, and when I see students that can't quite get the loans back and farmers that lose the farm--I grew up on a farm, and I don't like to see that happen, but it happens, and the law is the law, so we need to move ahead. Is there anything else, Mr. Gregg, that we could do to get this thing moving a little more? Mr. Gregg. As I mentioned when you had to be away, Mr. Chairman, looking at it from my perspective, I realize that it has been 5 years now since the legislation was passed. At the same time, what you had was a pretty dramatic change, and regardless of how well or how poorly an agency might be doing in debt collection, it was theirs, and the thought of turning that over to another agency to handle wasn't the first thing that they wanted to do. I think there are--that has been dealt with. I think in the last couple of years we've made good progress, and we just need to keep raising the bar and, as I mentioned before, maybe working with OMB, having some kind of a very high standard and give some kind of incentive back to agencies that do an excellent job and keep that very simple. Maybe one measure that says, ``If you do this, you get X percent, and if you don't, then you don't,'' that would be something that I would encourage. We have---- Mr. Horn. I thought we had it in the act. Now, is it not in there? Mr. Gregg. It is in there. Mr. Horn. Yes. Mr. Gregg. It just hasn't been used very effectively. Mr. Horn. Yes, because that at least gives them a few percentages, and percentages can have millions, and in some cases billions, so that would be very useful. And it was the carrot to encourage all of the both independent Cabinet officers or the rest would see that it helps them, and especially in modernizing their software or hardware and computing. And so I would think the Secretary, in putting out a letter or something, might well underline that because it's just like reprogramming at the end of the year. There's a lot of things that always need to be done in an agency, and using some of that money, and that's how we got through the Y2K thing years ago, because the director of the budget and I agreed that you should--first, let's not sit around here for a year waiting to go through our processes, not alone OMB processes, but just getting the job done. And so I'm glad to know you have picked up on that percentage, because that would help. Mr. Gregg. Yes, sir. Mr. Horn. Is there anything any of you would like to make for the record that hasn't been asked, although I know we've kept you a lot this morning? Anything you want to comment? This is your chance? OK, Mr. Mackay, anything you want to add to this dialog? Mr. Mackay. No, sir, Mr. Chairman. I just appreciate the opportunity to come before the committee today. We at VA have worked very closely with Treasury, and I think that's reflected in our improvement over the last several years, and we intend to continue that track record. Mr. Horn. I must say I mentioned some of the other Secretaries that you worked for. You sure work for a dynamo in VA. He's the only one in my 10 years here that picked-up the phone and said, ``I have something I'm looking right at for the Long Beach veterans,'' about the structure out there on the earthquakes and all, and I'm going to sign-off on $15 million, I think it was, and that's the first time I ever had a Cabinet officer pick-up a phone, but he works, and he works it very well. Mr. Hansen, what--do you have any things we should know and help? Mr. Hansen. I do think, in responding to the previous conversation, I do think some type of what works or standards would be helpful to agencies, because I do know, from just my prior history and others, that sometimes agencies do need some direction in its activities. A lot of the things that I've testified about on what the Department has done on the wage garnishment and the IRS offset and the debt collection privatization activities were all done before any of this, and sometimes agencies may feel that they're a little bit at sea without having some overall coordination, so I think that would be very helpful to put out the best practices, and I think the question of the three agencies that weren't aware of this, I think there needs to be to put out the best practices and get the agencies' attention. There are also a number of things that I think most agencies that do in their own respective activities are--ours in collecting student loans, for example--this might be helpful, as well, for us to put together a what works booklet on--we have a very elaborate system of what we go through on our due diligence with our lenders, what we do with our guarantee agencies, what we do with our servicing companies before we even get to those points, so it might be helpful to construct that type of a what works document, as well, that could even preempt the need to transfer debt over to Treasury. Mr. Horn. Well, that's a good recommendation. There's a lot of work to be done if we are to be so successful in collecting the billions of dollars in delinquent debts that are owed to the American taxpayers, and I look forward to working with all members of the new administration to achieve that important goal, and I think we are going to move up the hearings, so we'll keep it moving so that everybody and all the ones that aren't here we can get them to come aboard the ship. I want to thank now the staff that has done this hearing today. J. Russell George, staff director and chief counsel, way down at the end there; and Bonnie Heald, deputy staff director and director of communications; and on my left, your right, Henry Wray, professional staff that worked on this one; and Mark Johnson, our clerk; and Jim Holmes, our intern; and David McMillen, minority professional staff; and Jean Gosa, minority clerk; and our court reporter is Mike Willsey. We appreciate your work. It is tough to get everybody's name and everything they've said right, and you all do it fine. So thank you very much. We are adjourned. [Whereupon, at 12:01 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.] [Additional information submitted for the hearing record follows:] [GRAPHIC] [TIFF OMITTED] 81549.074 [GRAPHIC] [TIFF OMITTED] 81549.075 [GRAPHIC] [TIFF OMITTED] 81549.076 [GRAPHIC] [TIFF OMITTED] 81549.077 [GRAPHIC] [TIFF OMITTED] 81549.078 [GRAPHIC] [TIFF OMITTED] 81549.079 [GRAPHIC] [TIFF OMITTED] 81549.080 [GRAPHIC] [TIFF OMITTED] 81549.081 [GRAPHIC] [TIFF OMITTED] 81549.082 [GRAPHIC] [TIFF OMITTED] 81549.083 [GRAPHIC] [TIFF OMITTED] 81549.084 [GRAPHIC] [TIFF OMITTED] 81549.085 [GRAPHIC] [TIFF OMITTED] 81549.086 [GRAPHIC] [TIFF OMITTED] 81549.087 [GRAPHIC] [TIFF OMITTED] 81549.088 -