<DOC> [106th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:71742.wais] OVERSIGHT OF THE IMPLEMENTATION OF THE DEBT COLLECTION IMPROVEMENT ACT ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS SECOND SESSION __________ JUNE 8, 2000 __________ Serial No. 106-216 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform ---------- U.S. GOVERNMENT PRINTING OFFICE 71-742 WASHINGTON : 2001 _______________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: (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 ROBERT E. WISE, Jr., West Virginia ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania JOHN L. MICA, Florida PATSY T. MINK, Hawaii THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio Carolina ROD R. BLAGOJEVICH, Illinois BOB BARR, Georgia DANNY K. DAVIS, Illinois DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts ASA HUTCHINSON, Arkansas JIM TURNER, Texas LEE TERRY, Nebraska THOMAS H. ALLEN, Maine JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois DOUG OSE, California ------ PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont HELEN CHENOWETH-HAGE, Idaho (Independent) DAVID VITTER, Louisiana Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director David A. Kass, Deputy Counsel and Parliamentarian Lisa Smith Arafune, Chief Clerk Phil Schiliro, Minority Staff Director ------ Subcommittee on Government Management, Information, and Technology STEPHEN HORN, California, Chairman JUDY BIGGERT, Illinois JIM TURNER, Texas THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania GREG WALDEN, Oregon MAJOR R. OWENS, New York DOUG OSE, California PATSY T. MINK, Hawaii PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California J. Russell George, Staff Director and Chief Counsel Randy Kaplan, Counsel Bryan Sisk, Clerk Michelle Ash, Minority Counsel C O N T E N T S ---------- Page Hearing held on June 8, 2000..................................... 1 Statement of: Cloyd, Barry G., vice president, sales and marketing, C.B. Accounts, Inc.; chairman, government services program, American Collectors Association, Inc....................... 76 Engel, Gary T., Associate Director of Government Wide Accounting and Financial Management Issues, Accounting and Information Management Division, General Accounting Office, accompanied by Kenneth Rupar, Assistant Director........... 8 Gregg, Richard L., Commissioner, Financial Management Service, U.S. Department of the Treasury................... 45 Jackson, Yvette S., Deputy Commissioner for Finance, Assessment and Management, Social Security Administration.. 67 Powell, Edward A., Jr., Assistant Secretary for Financial Management and Chief Financial Officer, Department of Veterans Affairs........................................... 56 Letters, statements, etc., submitted for the record by: Cloyd, Barry G., vice president, sales and marketing, C.B. Accounts, Inc.; chairman, government services program, American Collectors Association, Inc., prepared statement of......................................................... 80 Engel, Gary T., Associate Director of Government Wide Accounting and Financial Management Issues, Accounting and Information Management Division, General Accounting Office, prepared statement of...................................... 11 Gregg, Richard L., Commissioner, Financial Management Service, U.S. Department of the Treasury, prepared statement of............................................... 49 Horn, Hon. Stephen, a Representative in Congress from the State of California, prepared statement of................. 3 Jackson, Yvette S., Deputy Commissioner for Finance, Assessment and Management, Social Security Administration, prepared statement of...................................... 70 Powell, Edward A., Jr., Assistant Secretary for Financial Management and Chief Financial Officer, Department of Veterans Affairs, prepared statement of.................... 59 Turner, Hon. Jim, a Representative in Congress from the State of Texas, prepared statement of............................ 6 OVERSIGHT OF THE IMPLEMENTATION OF THE DEBT COLLECTION IMPROVEMENT ACT ---------- THURSDAY, JUNE 8, 2000 House of Representatives, Subcommittee on Government Management, Information, and Technology, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Members present: Representatives Horn, Turner, Owens, Ose, and Maloney. Staff present: J. Russell George, staff director and chief counsel; Randy Kaplan, counsel; Bonnie Heald, director of communications; Bryan Sisk, clerk; Elizabeth Seong, staff assistant; Will Ackerly and Chris Dollar, interns; Michelle Ash and Trey Henderson, minority counsel; and Jean Gosa, minority assistant clerk. Mr. Horn. The Subcommittee on Government Management, Information, and Technology will come to order. The Debt Collection Improvement Act of 1996 created a process for Federal departments and agencies to collect tens of billions of dollars in delinquent non-tax related debts owed to the Federal Government. These delinquencies arise from a variety of Federal loan programs for home buyers, small business owners and students. The delinquencies also stem from agency overpayment made to Federal beneficiaries and vendors. This law created a variety of tools and programs designed to improve the Federal Government's dismal record of collecting its delinquent debts. The act centralized the debt collection process by requiring that Federal departments and agencies refer debts that are over 180 days delinquent to the Department of Treasury for collection. At a 1995 hearing to consider this legislation, our subcommittee learned that the Federal Government was owed almost $50 billion in non-tax related debts. Despite enactment of the law, however, that debt grew to $59.2 billion by the end of fiscal year 1999. The Treasury Department's Financial Management Service operates two programs aimed at collecting delinquent, non-tax related debt, an offset program and a cross-servicing program. Under the offset program, the Federal payments, including salary and benefit payments, can be intercepted to satisfy delinquent debts, such as defaulted home loans or small business loans. The Treasury Department's cross-servicing program allows the Department to collect directly from the debtor, or refer the debt to a private collection agency. For these programs to work, however, agencies must refer their delinquent debts to Treasury in a timely fashion. That's not always the case. The Department of Veterans Affairs, for example, has referred only 1 percent of the Department's eligible delinquent debts to the Department's cross-servicing program. The Social Security Administration has referred none of its eligible delinquent debts for cross-servicing collection. Today we will hear from witnesses who represent these agencies, as well as witnesses representing the Treasury Department's Financial Management Service who will discuss the implementation of the debt collection program. The General Accounting Office will also present the results of its comprehensive study of the cross-servicing program which was requested by this subcommittee. As part of this study the GAO reviewed the Treasury Department's efforts to promote timely debt referrals by Federal agencies. General Accounting Office investigators also reviewed the Department's allocation of delinquent debts to private collection agencies. In addition to our Government witnesses, we have a representative of the private collection agencies that are working with the Government in its debt collection effort. [The prepared statement of Hon. Stephen Horn follows:] [GRAPHIC] [TIFF OMITTED] T1742.001 [GRAPHIC] [TIFF OMITTED] T1742.002 Mr. Horn. We welcome our witnesses and we look forward to their testimony. And I now yield to the gentleman from Texas, the ranking member, Mr. Turner, for his opening statement. Mr. Turner. Thank you, Mr. Chairman. We know that billions of dollars in non-tax debt are owed to the Federal Government. Recognizing that our collection practices were inadequate, this subcommittee under the leadership of Chairman Horn in 1996 passed the Debt Collection Improvement Act. This law expanded existing tools and established new tools to assist the Government in collection of debt. I certainly want to commend the chairman, who's due much credit for the work that has been done in this area. Chairman Horn has been very diligent in trying to provide the Federal Government with greater capacity to collect debt. I also would like to commend the leadership of my colleague from New York, Congresswoman Carolyn Maloney, who has continued in her efforts, initiated back with the chairman, as the ranking Democrat on this subcommittee, in an effort to improve our debt collection practices. As a result of their efforts and the efforts of many people who are in this room today, we are beginning to reap the benefits of a more centralized debt collection system. Within the last 3 years, the Federal Government's centralized debt collection activities at the Financial Management Service has begun to work. In fiscal year 1999, increased management attention by program agencies and improved use of debt collection tools by the Treasury resulted in major advancements in our debt collection efforts. Collection by the Treasury on non-tax debt for the year totaled $2.6 billion. Tax refund offset collections totaled $2.6 billion as well. That is an increase of more than $570 million over 1998. So far this year, we've collected $2.4 billion in non-tax collections through the offset of income tax refunds. Clearly, there has been improvement in the Government's debt collection efforts, and I commend the Treasury and the agencies for their work. However, as we will hear, many challenges remain ahead of us. I am concerned to learn many agencies have not done a thorough job of referring all of their eligible debt to the FMS for collection activities. Additionally, the delinquent debts agencies refer to FMS are generally much older than the 180 days required by law, and therefore makes recovery more difficult. Questions have also arisen concerning the manner in which FMS is referring debts to the private collection agencies under contract with the Government. As a part of our oversight responsibility, this subcommittee is meeting today to discuss Federal agency implementation and compliance with the Debt Collection Act. It is my hope that as a result of this hearing we will be closer to meeting our goal of having an efficient, effective and equitable Federal debt collection system. Again, I commend the chairman for his focus on this issue, and I welcome each of our witnesses here today. [The prepared statement of Hon. Jim Turner follows:] [GRAPHIC] [TIFF OMITTED] T1742.003 [GRAPHIC] [TIFF OMITTED] T1742.004 Mr. Horn. I thank the gentleman, and you'll be hearing about his legislation in the months ahead. And I now yield to the gentleman from New York, Major Owens, for an opening statement. Mr. Owens. No statement, Mr. Chairman. Mr. Horn. OK, thank you very much. You know, I think most of you have been here before. But the process here is that when we introduce you along this agenda line, your full written statement is automatically part of the record. We would like you to summarize that position in about 5 minutes so we can have a dialog between the Members and the witnesses and among the witnesses as to how we might improve the act and what we're doing either on the Hill and in the administration. And all witnesses, since this is a Government Reform Subcommittee, all witnesses have to take the oath in order to testify. So if you will stand, raise your right hands. And if there's any backup assistance, have them stand, too. Clerk will take their names. So let's get all the oaths at once. OK, we have one, two, three, four, five backup, one, two, three, four, five, six witnesses. [Witnesses sworn.] Mr. Horn. The clerk will note all have affirmed. And make sure we have the names. Thank you very much. And we will now start with Gary T. Engel, the Associate Director of Government Wide Accounting and Financial Management Issues of the Accounting and Information Management Division of the U.S. General Accounting Office, which are the eyes and ears of the legislative branch in both programmatic and fiscal matters and now debt matters. Mr. Engel is accompanied by Kenneth Rupar, the Assistant Director. Mr. Engel. STATEMENT OF GARY T. ENGEL, ASSOCIATE DIRECTOR OF GOVERNMENT WIDE ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY KENNETH RUPAR, ASSISTANT DIRECTOR Mr. Engel. Mr. Chairman and members of the subcommittee, good morning, thank you. It is a pleasure to be here today to discuss our review of Treasury's progress in implementing the cross-servicing provision of the Debt Collection Improvement Act of 1996. As you know, OMB has designated implementation of this legislation, which this subcommittee was highly instrumental in passing, one of the Government's priority management objectives to modernize and improve Federal financial management. You asked that we address the effectiveness of Treasury's use of the cross-servicing tool, which involves the transfer of non-tax debt over 180 days delinquent to Treasury's Financial Management Service. I will briefly focus on four issues. First, the success of FMS' program significantly depends on agencies identifying and promptly referring eligible debt. While FMS has taken several steps, including various outreach efforts, to encourage agencies to refer eligible debt, thus far the results have been limited. Since inception of the program in September 1996 through May 1999, almost half of the dollar amount of referred debts were over 4 years delinquent. Industry experience shows that the likelihood of recovering amounts owed decreases dramatically as debts age. The old adage that ``time is money'' is very relevant in the debt collection area. Collection possibilities are also hampered by the low percent of debts eligible for cross-servicing. Of the $59.2 billion of delinquent debt reported as of September 30, 1999, about 89 percent has been excluded from cross-servicing requirements. FMS reported that through April 2000 only $3.7 billion has been referred to it since inception of the program. Even when agencies referred debts, the debts were not always valid or legally enforceable, and thus not eligible for cross-servicing. Based on our analysis of 200 delinquent debts referred to FMS, we found 22 debts that were invalid or involved debtors that were either deceased or in bankruptcy. The second issue in question involved the Treasury's cross- servicing process for collecting referred debts. Treasury has established standards for agencies wanting to be a debt collection center and has granted certain agencies waivers or exemptions which allow them to perform collection activity for certain of their own debts. In addition, three agencies applied to Treasury to be governmentwide debt collection centers. But, Treasury determined that these agencies did not have the needed capabilities, so they were denied approval. As such, today, FMS is the sole operator of a governmentwide cross-servicing debt collection center. FMS' center had well developed standard operating procedures. But, our tests showed that its staff did not always follow them. For 96 of the 200 debts we reviewed, we found no evidence that FMS' collectors tried to contact the debtors who did not respond to demand letters. For 29 of the 46 demand letters in our sample that were returned as undeliverable, FMS' debt history files contained no evidence that FMS' collectors performed the required skip tracing to locate the debtors. Contributing to these results were some large influxes of debts that were received by FMS during our test period. Concerning collection agreements, we selected and reviewed 78 compromised debts and typically found no evidence that FMS collectors adhered to key requirements, such as analyzing the debtor's ability to pay before agreeing to the compromise amount. FMS also often did not adhere to repayment agreement timeframes. Despite a 3-month repayment limit, the terms of 30 of the 32 compromise agreements that we reviewed exceeded the limit, on average by 54 months. The third issue you were interested in involved how FMS distributed debts to private collection agencies. FMS intended its methodology for such distributions to be performance based. Distributions were generally made biweekly by placing all available debts into a pool and systematically distributing them. Our analysis of FMS' distribution of debts to PCAs from February 1998 through February 2000 showed that 1 of the 11 PCAs had received a significantly higher percentage of the debts with smaller balances. This PCA also received a significantly higher percentage of the total number of debts that were less than 1 year delinquent. One contributing factor to these distribution results was that the debts within the distribution pools were generally not homogeneous. Collection industry experience, as well as FMS' collection experience, have shown that collection rates are generally higher on less delinquent debts and those with smaller dollar balances. Finally, fees charged by FMS to referring agencies have not covered FMS' estimated fiscal year 1999 cross-servicing costs. Based on our analysis, cross-servicing collections would have to be over seven times as much as that for fiscal year 1999 for this program to operate on a break-even basis. In summary, for FMS' cross-servicing program to become a fully implemented and mature program, challenges lie ahead that FMS as well as agencies must overcome. These challenges are magnified since, as delinquent debt ages, the likelihood of collection diminishes. To assist in addressing these issues, we plan to issue a report with recommendations. Mr. Chairman, this concludes my testimony. I would be pleased to answer any questions. 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Well, we appreciate the thoroughness with which you've looked at this matter, and we do look forward to any further recommendations you want to make. Next is Richard L. Gregg, the Commissioner of the Financial Management Service of the Department of the Treasury. STATEMENT OF RICHARD L. GREGG, COMMISSIONER, FINANCIAL MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE TREASURY Mr. Gregg. Mr. Chairman and members of the subcommittee, thank you for giving me the opportunity to update you on the progress of the Financial Management Service in implementing the Debt Collection Improvement Act of 1996. As always, FMS is grateful for the subcommittee's support for its governmentwide debt collection program. I am pleased to report that during this past year, FMS has continued to make significant strides in carrying out the provisions of this landmark legislation. The Treasury Department is firmly committed to the successful operation of the governmentwide debt collection. Federal debt collection is a highly complex and ever expanding program, one that requires active participation and support from Federal program agencies, States and private collection agencies. In addition to carrying out the requirements of the DCIA, in January, FMS began collecting State income tax debt as mandated by the 1998 IRS Restructuring and Reform Act. Next month, FMS will initiate the continuous tax levy program as authorized by the 1997 Taxpayer Relief Act, to collect delinquent Federal tax debt. FMS developed these important programs, I might add, in conjunction with undertaking an intensive 2 year effort that successfully modified FMS' mission critical systems for a smooth and uninterrupted transition to the year 2000. Mr. Chairman, FMS has moved swiftly on each of these major collection initiatives and has concurrently implemented appropriate administrative safeguards and controls. Nevertheless, challenges do lie ahead. This morning, I will provide a status report on FMS' debt collection efforts using the Treasury Offset Program [TOP], and the cross-servicing program, including the important contract work of private collection agencies. Finally, I will discuss our most recent program enhancements aimed at increasing future collections. As I reported last year, the Tax Refund Offset and Treasury Offset Programs were successfully merged in January 1999. For calendar year 1999, collections through the offset of income tax refunds totaled $2.6 billion, an increase of more than $570 million over 1998. An increase of this magnitude in such a short period of time, I believe, represents a most impressive achievement. This calendar year to date, we have collected almost $2.4 billion. This figure includes almost $1.3 billion in delinquent child support payments and $1.1 billion in non-tax debt collections. Collecting $1.3 billion in overdue child support debts, Mr. Chairman, is a reflection of Secretary Summers' commitment to supporting our children and strengthening American families. The dollar amount of delinquent debt referred to TOP by the program agencies continues to increase. As of September 1999, $31.3 billion in Federal delinquent debt was eligible for referral. And as of May 31 of this year, $25.4 billion, or 81 percent of that amount, has been referred. This represents an increase of $16.6 billion in referrals since 1997. The TOP Customer Assistance Center, located in Birmingham, AL, provides toll-free telephone customer service 7 days a week. During peak workload periods, up to 100 center representatives answer questions regarding tax refund and other offsets and provide agency contact information. The center has already responded to more than 2 million phone calls during the 2000 tax season. Furthermore, FMS prides itself on its track record of timeliness, fairness and balance in responding to all inquiries. Mr. Chairman, I will now discuss the newest addition to the TOP system, the State income tax debt offset program. This program entails offsetting Federal income tax refunds to collect delinquent State income tax debt. Since launching the State income tax program in January of this year, seven States including Delaware, Illinois, Iowa, Kentucky, Maryland, Missouri, and New Jersey have referred $362 million in delinquent State income tax debts. As of May 31, 2000, collections have exceeded $20 million and participating States have been greatly enthusiastic and see enormous potential for growth. Additional States will be added as they become ready. Under cross-servicing, agencies refer debt to FMS for collection that have been delinquent for more than 180 days. Upon receiving debts for cross-servicing, FMS' Birmingham Debt Collection Center attempts to collect the delinquent debt by using a variety of approaches, including demand letters, telephone followup and administrative offset. If, at the end of 30 days, the debt has not been collected or a repayment agreement has not been negotiated, it is referred to 1 of the 11 private collection agencies on FMS' contract. Since the establishment of this program in September 1996, $63.4 million has been collected and repayment agreements total $160.4 million. As of May 31 of this year, fiscal year to date, total collections are $28.6 million, which is more than the $23.5 million that was collected in all of fiscal 1999. Currently, 62 percent, or $3.95 billion of the $6.4 billion of delinquent debt eligible for cross-servicing has been referred to FMS. This represents an increase of approximately $2 billion in referrals over fiscal 1998. Progress in increasing referrals has been slow; nevertheless, FMS will continue to press and encourage agencies on this front and we expect further progress. Attached is a report on the 10 agencies with the largest dollar amounts eligible for cross- servicing. Private collection agencies are an integral and critical part of the cross-servicing program. Referring debts to the 11 PCAs under contract with the Treasury Department allows these agencies to bring their unique expertise, systems, and techniques to the cross-servicing program. These specialized skills and methods have not been, nor should they be, replicated by FMS' cross-servicing operation. The contract for the services of private collection agencies is, first and foremost, performance based. FMS continues to work diligently to ensure that the terms of the contract are met. As the members of the subcommittee are aware, the process by which delinquent debts are distributed by FMS to the PCAs has been the subject of some debate. While FMS is agreeable to considering alternative distribution procedures for future contracts, complying with the terms of the current contract, administering the contract efficiently, and maximizing collections are, without question, FMS' primary goals. As I stated earlier, all FMS debt collection programs include safeguards and controls. FMS monitors the actions of private collection agencies with call monitoring and onsite reviews. Private collection agencies collected $14.9 million during fiscal year 1999, and as of May 31 of this year, collections total $13.6 million for this fiscal year. Additionally worth noting are the efforts of private collection agencies in working with debtors to negotiate repayment agreements, resulting in agreements totaling $30 million fiscal year to date and cumulatively $71.3 million. At this point, Mr. Chairman, I will focus my remarks on FMS' other new collection initiatives. FMS is moving forward on the implementation of the program to offset the remaining Federal salary payments. Based on the results of a test match conducted by FMS, between $48 million and $80 million can be collected through the offset of Federal salary payments. Beginning in March 2001, we expect to implement a phase-in of the Federal salary offset program. With respect to the offset of Social Security benefits, FMS estimates that annual collections will be between $37 million and $61 million. While FMS is currently prepared to move forward on implementation, we have been advised the by Social Security Administration that they will not be ready until February 2001. We will continue to meet with them to resolve implementation issues. On July 1, 2000, FMS and IRS will launch the continuous tax levy program. Under the provisions of the Taxpayer Relief Act of 1997, the IRS is authorized to collect overdue Federal tax debts from individuals and businesses that receive Federal payments by levying up to 15 percent of each payment until the debt is paid. Initially, IRS will levy vendor and Federal retiree payments disbursed by FMS, with the levy of Federal salary and Social Security benefit payments to follow. At full implementation, GAO projects annual collections of $478 million from the tax levey program, with an estimated annual collection of $312 million from levies of Social Security benefit payments. Although FMS has made the necessary preparations to move forward with the tax levy program, as of this date, we have not received a commitment from SSA on an implementation date. In addition to sharply reducing debt collections, the delay in implementing the programs to offset benefit payments and to levy benefit payments has significant consequences for overall operations of the program. Specifically, it will result in an $8 million reduction in reimbursable income to FMS for fiscal year 2001. Mr. Chairman, in conclusion, FMS' governmentwide debt collection program continues to experience solid growth. The dollar amount of collections has increased in all program areas, with total collections from fiscal year 1998 to the present amounting to $7.1 billion. FMS is making headway in increasing the delinquent debt referrals by program agencies. Furthermore, amounts projected to be collected by expanding the offset and cross-servicing programs to include tax levy, benefit offset, salary offset, and administrative wage garnishment should result in significant increases in collections of debt owed to the Federal Government. The efforts to date of FMS in the governmentwide debt collection arena clearly demonstrate our firm commitment carrying out the express intent and purposes of the DCIA. Again, thank you for the opportunity to testify. I would be happy to answer any questions. [The prepared statement of Mr. Gregg follows:] [GRAPHIC] [TIFF OMITTED] T1742.039 [GRAPHIC] [TIFF OMITTED] T1742.040 [GRAPHIC] [TIFF OMITTED] T1742.041 [GRAPHIC] [TIFF OMITTED] T1742.042 [GRAPHIC] [TIFF OMITTED] T1742.043 [GRAPHIC] [TIFF OMITTED] T1742.044 [GRAPHIC] [TIFF OMITTED] T1742.045 Mr. Horn. Thank you very much, Commissioner. We appreciate that. There will be a few questions when we get through the panel. The next witness is the first of the agency witnesses. Edward A. Powell, Jr., is Assistant Secretary for Financial Management and Chief Financial Officer of the Department of Veterans Affairs. Welcome. STATEMENT OF EDWARD A. POWELL, JR., ASSISTANT SECRETARY FOR FINANCIAL MANAGEMENT AND CHIEF FINANCIAL OFFICER, DEPARTMENT OF VETERANS AFFAIRS Mr. Powell. Thank you, Congressman. Mr. Chairman and members of the subcommittee, it is my pleasure to testify on behalf of the Department of Veterans Affairs [VA] regarding VA's implementation of the Debt Collection Improvement Act [DCIA] of 1996. As a former banker and business owner, the issue of receivable collection is one I know to be of critical importance. It is clear the most important time to collect a receivable is during the first 90 days of its life. We have initiated a coordinated effort in VA directed at receivables management to consolidate all debt collection activity, with the exception of the vendee home loan program, into our Debt Management Center in Minneapolis, MN. VA has reduced its outstanding receivables from $4.7 billion at the end of fiscal year 1991 to $3.3 billion as of the end of fiscal year 1999. Much of VA's success in benefit debt collection can be attributed to the DMC. Utilizing all available tools, including benefit and salary offset, credit bureau reporting and private collection agency referrals, compromises and litigation, write-offs and the Treasury's Offset Program. DMC has become the cornerstone of our debt management effort. Even though we have reduced our outstanding debt by 11 percent last year, we continue to emphasize the importance of debt management. How we deal with our debt is in large part determined by the different types of debt generates. Of the $3.3 billion debt outstanding at the end of fiscal year 1999, $1.1 billion was delinquent and $937 million was more than 180 days delinquent. $1.96 billion of the $3.3 billion outstanding are active vendee home loans. A vendee loan is a mortgage which is generated by the sale of foreclosed property under the Home Loan Guaranty Program. These mortgages are not delinquent debts per se, but assets of VA. Periodically, we package and sell vendee loans to the private markets, which eliminates the mortgage and any obligation owed to the Government. The remaining program debt is comprised of compensation and pension overpayments, defaulted home loans, which by the way are generally in transition to the vendee loan home program, readjustment benefit overpayments and receivables for the provision of medical care and services. My staff works closely with the Department of the Treasury's Financial Management Service to implement the provisions of the DCIA. We have worked with FMS to revise the report on receivables due from the public so it will provide better information on the implementation and effectiveness of the DCIA requirements, not just for VA, but for all Federal agencies. Last year we worked with FMS to refer most of eligible debt from VA to them for offset and to develop the programming and processes needed to refer those same debts for cross-servicing. VA has been a long time participant in all available administrative offset programs, including tax refund offset, Federal salary offset and benefit offset, and has effected many interagency matching programs. We continue to actively pursue Federal salary offset pending its inclusion in the TOP. Of the $937 million debt that was more than 180 days delinquent at the end of fiscal year 1999, approximately $329 million was eligible for TOP and $460 million was eligible for cross-servicing. Many debts are eligible for both administrative offset and cross-servicing. The debts not eligible for referral for TOP or cross-servicing are exempt for a variety of reasons, including debt in bankruptcy or foreclosure proceedings, debt in VA's mandatory waiver/ appellate process, and debt statutorily barred from referral. As of December 8, 1999, VA referred $250 million for TOP. By the end of this fiscal year, VA expects to implement the new automated file formats required by Treasury and to be in compliance with the offset referral requirement of the DCIA. To date, VA's cross-servicing referrals to Treasury total $4 million worth of debt from the health professional scholarship program. We targeted these debts for referral because they are among the most collectible of VA's debts and the easiest to refer. Thus far, Treasury has collected approximately $225,000 of the $4 million referred since May 1998. The DMC currently houses approximately 80 percent of VA debt over 180 days delinquent and eligible for cross-servicing. This debt will be referred for cross-servicing in September 2000 when Treasury and the DMC will have completed the development of automated processes needed to update each other's databases. This has been a joint effort between us and Treasury and is progressing well. Although it is taking longer than we had hoped to refer the bulk of our portfolio for cross-servicing, we have continued to refer our debts for the Treasury offset program and for Federal salary offset, both of which have historically proven to be highly effective external sources for collection of VA debt. The subcommittee should know that the Debt Management Center is a highly efficient and effective operation which already executes all the functions required of a cross-servicing center. The DMC has generated an average of approximately $10 of cash collections for every dollar of operating cost. The DMC's recent collection rates for overpayment debts are approximately 67 percent for compensation and pension debt and over 95 percent for education debt. We believe the DMC collects a high percentage of debt before it becomes seriously delinquent. As for the remaining 20 percent of eligible VA debt not managed by the DMC, VA staff and Treasury's FMS staff are now determining how we can best achieve referral. We are also considering whether VA should request the Secretary of the Treasury to exercise his authority to exempt most of this debt from the referral requirements, since it may not be cost effective to refer certain VA types for cross-servicing. For example, VA's first party medical debts are especially problematic and expensive to refer, as explained in my full written statement. The first party medical debt and the debt management of the DMC comprise most VA debt potentially eligible for referral. Therefore, once the DMC has referred its debt in September, VA will be over 90 percent compliant with the cross-servicing requirements of the DCIA. The remaining debt is made up of a few smaller benefit programs not managed by the DMC, and miscellaneous VHA debt such as vendor debt, employee debt and non-Federal sharing agreement debt. We plan to refer all appropriate debt for cross-servicing during the fiscal year 2001. This concludes my statement, and I will be happy to answer any questions that the subcommittee may have. [The prepared statement of Mr. Powell follows:] [GRAPHIC] [TIFF OMITTED] T1742.046 [GRAPHIC] [TIFF OMITTED] T1742.047 [GRAPHIC] [TIFF OMITTED] T1742.048 [GRAPHIC] [TIFF OMITTED] T1742.049 [GRAPHIC] [TIFF OMITTED] T1742.050 [GRAPHIC] [TIFF OMITTED] T1742.051 [GRAPHIC] [TIFF OMITTED] T1742.052 [GRAPHIC] [TIFF OMITTED] T1742.053 Mr. Horn. Thank you very much. We appreciate that presentation. And we now move to the next agency and that's going to be represented by Yvette Jackson, the Deputy Commissioner for Finance, Assessment and Management of the Social Security Administration. Ms. Jackson. STATEMENT OF YVETTE S. JACKSON, DEPUTY COMMISSIONER FOR FINANCE, ASSESSMENT AND MANAGEMENT, SOCIAL SECURITY ADMINISTRATION Ms. Jackson. Thank you, Mr. Chairman and members of the subcommittee. Thank you for the opportunity to come here today to discuss the Social Security Administration's efforts to implement the Debt Collection Improvement Act of 1996 that I will refer to as the DCIA. We particularly appreciate your leadership, Mr. Chairman, and that of this subcommittee, in enactment of this legislation which has enabled SSA to improve our debt management program. As you will see, we have already implemented a significant number of debt collection improvements. We will implement five more debt collection tools in the year 2001. When we finish with these tools, we will turn our attention to the remaining provisions to be implemented. The public's trust in the Social Security program is absolutely critical. Even a perception of a lack of program integrity can threaten this trust. SSA is dedicated to program stewardship and program integrity. We must remain vigilant if we are to fulfill our role as capable stewards of the public trust. SSA has undertaken significant initiatives over the past several years to prevent and detect Social Security program overpayments. Our stewardship responsibilities require that we recover as much of the debt owed as possible. We have a high degree of success in collecting debts owed by people on the rolls, achieving a collection rate of more than 90 percent. If the debtor is no longer on the rolls, the tools provided by the DCIA give us the enforcement capability we need to collect from delinquent debtors. SSA has made substantial progress toward implementing the debt collection tools authorized by the DCIA, as well as other legislation enacted during the 1990's. This has greatly improved SSA's ability to collect its debt. In January 1992, we began receiving our first collections from the tax refund offset in which debts are recovered directly from Federal tax refunds before the refunds are sent to taxpayers. We expanded the tax refund offset twice, in 1995 and again in 1998, to add new classes of debtors, such as SSI debtors, and to make use of the Treasury offset program which allows us to collect delinquent debts from Federal payments in addition to tax refunds. These tools have resulted in collections of $370 million. In 1995, we began using credit bureau locator services to help track down delinquent debtors who moved and left no forwarding address. And in 1998, we began reporting our delinquent Social Security debtors to credit bureaus as a way of inducing them to repay their debts and therefore clear their credit records. To date we have located more than 200,000 debtors using the credit bureau locator services. We have been busy over the last year developing the debt collection tools that we think will have the most payoff. Our choices are governed by deciding which tools will give us the most return earliest in the process of collecting the debt. Of course, for the last few years, much of our systems resources were devoted to the year 2000 changeover during which SSA reviewed all of its systems supported by more than 35 million lines of in-house computer code and all vendor products. We accomplished this changeover without additional resources. In January 2001, we will implement mandatory cross program recovery or the collection of an SSI debt from the debtor's Social Security benefits. We estimate that it will yield about $175 million in extra collections over the next 5 years. Also in January 2001, we plan to implement two additional tools to collect delinquent SSI debts. These tools are administrative offset, which is the collection of a delinquent debt from a Federal payment in addition to a tax refund, as well as credit bureau reporting. In February 2001, SSA, in partnership with the Financial Management Service, plans to implement benefit payment offset. This is the reduction of Social Security benefits to collect delinquent debts owed to other Federal agencies. While this tool will not contribute to SSA's debt collections, it will benefit the Federal Government by enabling the Treasury Department to collect an estimated $40 million to $60 million in delinquent debt. Treasury estimates that about 400,000 Social Security beneficiaries per year will incur a reduction of their benefits as payment toward another Federal debt. We have been working with the Financial Management Service since July 1998 to develop a program that gives maximum collections at minimum cost to the Federal Government. As you can imagine, we had many issues to resolve, such as concerns about adequate notification of Social Security beneficiaries who will incur an offset. We want to make sure that the right people are offset for the correct amount. We also want to ensure that the people who are offset under this program understand why it is happening and who they can contact if they have questions. We have worked out these issues with the Financial Management Service and our agencies are in the final phase of our development of our payment benefit offset. In less than 1 year, we expect payment benefit offset to start generating debt collections for the Federal Government. In June 2001, we plan to implement administrative wage garnishment, a DCIA authorized tool, as one more tool for collecting delinquent Social Security and SSI overpayments. In addition, we will focus on another DCIA provision, Federal salary offset. Treasury plans to incorporate Federal salary offset into the Treasury offset program after the third quarter of fiscal year 2001. We will also implement another DCIA provision, Treasury's cross-servicing program, in which Treasury acts as a debt collector for Federal agencies. An important aspect of cross- servicing involves the use of private collection agencies which is on our list of debt collection tools to implement after we finish the tools that are currently being implemented. Interest charging is another provision of DCIA that we plan to implement. Our priorities are such that we will begin developing interest charging as early as the year 2002. While interest charging is a valuable tool, we believe it will yield collections in the form of voluntary payments by people who will perceive it as something to avoid. In conclusion, our agency has accomplished much in implementing the new debt collection tools authorized for us. SSA is committed to implementing the provisions of DCIA and other relevant debt collection laws. Our record of achievement in implementing the tax refund offset, administrative offset and credit bureau reporting shows our commitment to debt management. Thank you for the opportunity to testify before you today. I will be glad to answer any questions that you may have. [The prepared statement of Ms. Jackson follows:] [GRAPHIC] [TIFF OMITTED] T1742.054 [GRAPHIC] [TIFF OMITTED] T1742.055 [GRAPHIC] [TIFF OMITTED] T1742.056 [GRAPHIC] [TIFF OMITTED] T1742.057 [GRAPHIC] [TIFF OMITTED] T1742.058 [GRAPHIC] [TIFF OMITTED] T1742.059 Mr. Horn. Thank you, Commissioner. That's very helpful. Our last witness this morning is Barry G. Cloyd, the chairman of the Government Services Program for the American Collectors Association, Inc. STATEMENT OF BARRY G. CLOYD, VICE PRESIDENT, SALES AND MARKETING, C.B. ACCOUNTS, INC.; CHAIRMAN, GOVERNMENT SERVICES PROGRAM, AMERICAN COLLECTORS ASSOCIATION, INC. Mr. Cloyd. Thank you, Chairman Horn, subcommittee members, good morning. My name is Barry Cloyd, and I am vice president of sales and marketing for C.B. Accounts, Inc., which is a private debt collection agency based in Peoria, IL. I appear before you this morning as chairman of the Government Services Program [GSP], which was formed in 1996 to promote active participation by debt collectors in developing new collection opportunities in the specialized area of Government collections and to assist members serving Government entities. GSP is part of the American Collectors Association [ACA], which is an international trade association comprised of 5,000 credit and collection organizations and companies. The Association's mission is to help members comply with a strict code of ethics and applicable State and Federal laws and regulations through a variety of means, including educational material, seminars, research, legislative updates and guidance with individual problems. On behalf of all ACA members, who represent approximately one half of third party collection agencies in the United States and their 65,000 employees, I want to express our appreciation to you, Mr. Chairman, for holding this hearing and for giving us the opportunity to present this statement. As you are well aware, Chairman Horn, the Debt Collection Improvement Act, which is Public Law 104-13, affects private collection agencies [PCAs], and the services they provide. The act was designed to accomplish three goals: maximize collection of delinquent debts owed to the Government by ensuring quick action to enforce recovery of debts and the use of all appropriate collection tools. No. 2, minimize debt collection costs by consolidating related functions and activities and utilizing interagency teams. No. 3, rely upon the experience and expertise of private sector professionals to provide debt collection services to Federal agencies. Now, PCAs work very hard to return money to Government agencies that could otherwise be lost. And most financial management, FMS contractors, are ACA members. Since the first Government contracts were placed with private collection agencies shortly after the Debt Collection Act of 1982, literally billions of dollars have been collected, including more than $3.2 billion for the Department of Education from fiscal year 1986 to the present. PCAs continue to improve the amount that they return to the Government, which of course also benefits American taxpayers. PCAs collected $265 million in fiscal year 1998, and in fiscal year 1999, they returned $536 million. And so far through 9 months in fiscal year 2000, PCAs have collected $445 million and look well positioned to surpass last year's record. We would hope that DOE's success could be replicated by the Department of Treasury's FMS contract. The FMS, which has been working with PCAs since March 1998 reported that PCAs have collected slightly more than $30 million for the agency according to figures tallied through April 30, 2000. In addition, referrals of accounts total 272,127, with a value of more than $4 billion for those accounts. The important work of this subcommittee in fashioning the DCIA under your able leadership, Mr. Chairman, has been very significant. But we would respectfully suggest several modifications that we believe would allow PCAs to return more money to the Government and ultimately to the taxpayer. In preparing this testimony, ACA asked member agencies that had been under contract with FMS to provide suggestions for improving the implementation of and compliance with the DCIA. Those contractors suggested three important improvements for achieving better results from the DCIA relating to timeliness and number of accounts that are referred, current delays in resolving accounts, and the inefficiency of multiple contractors contacting the same debtor. First, we feel that accounts aren't being referred to PCAs on a timely basis. In order to maximize collection of delinquent debts, Federal agencies must comply with the DCIA and forward to the Department of Treasury all non-tax debt that is more than 180 days delinquent. At this time many accounts which ACA members receive are far more than 180 days old, so the ability to collect on them is greatly decreased. And as the old saying goes, which was echoed earlier this morning, time is money, and that saying couldn't be more appropriate for today's hearing. There is a direct correlation between the time a debt is turned over to a debt collector for collection and the amount of dollars that are recovered. Simply put, the longer a debt remains unpaid, the less likely recovery becomes. And per a recent Price Waterhouse survey, as well as my association's research, we find evidence for those statements. If an account is referred to a collection agency when it is 180 days past due, it has a much better chance of being collected than if it's referred, say, 2 or 3 years later. A debt that is 181 to 210 days delinquent has a 23 percent chance to be collected. But for items that are more than 421 days past due, the ability to collect decreases to 4 percent. Now, these results, which show how time affects debt collection, were backed by a portfolio analysis conducted by Price Waterhouse which found that only 1 percent of debts are collectible after 2 years of delinquency. Obviously, time plays an important role in the recovery of these debts. And another important factor to consider is approximately how many referring agencies are participating in the referrals of delinquent debt to the Department of Treasury. According to some estimates of ACA members that contract with Government agencies, the number of participating referring agencies is only around 40 percent. According to a June 5, 1998 General Accounting Office report, literally $26.4 billion of reported non-tax debt over 180 days delinquent has not been referred to Treasury and was unlikely to be referred in the near future. While our members feel that Treasury within its current boundaries is doing a very commendable job, they realize that the Department doesn't have the necessary power to enforce the DCIA. Accordingly, we believe that Treasury must be given enforcement power to bring non-participating referring agencies into compliance with the act's provision, stipulating that all non-tax debt over 180 days old be referred to Treasury for collection. Bringing more accounts to our members in a more timely manner will only work to the advantage of all parties involved. And this would clearly help the Government attain one of those goals of the act, to ensure quick action on recovery of debts. To be perfectly frank, the sooner PCAs receive delinquent accounts, the sooner they will be able to return delinquent money to Government agencies. Second, multiple contractors contacting the same debtor is of course inefficient. Another modification we respectfully suggest concerns the transfer of accounts. Now, we believe that multiple debts for the same debtor should be consolidated and placed with only one contractor. Placing a debtor's various debts with different contractors through the same or different referring agencies, which is currently the process, is unproductive. It's also confusing for debtors, because many different contractors are contacting them, which some debtors even interpret as harassment. Now, we strongly recommend that FMS adopt an account referral policy that consolidates all transfers for the same debtor and places them with a single contractor. We also suggest that any additional debts that are referred to FMS for these debtors should be flagged and referred to that same contractor so all of the debts can be maintained together. Very common practice, particularly in private and State sectors. Based on our members' extensive experiences, consolidating the debts would provide a much better chance to resolve that debt, as well as reduce the possibility of a complaint. And third, there are unnecessary delays in resolving accounts. PCAs must undergo a cumbersome process when seeking account information from referring Federal agencies. And as such, PCAs would like the authority to approve repayment agreements, and compromise directly with a referring agency. PCAs desire this direct contact with referring agencies, especially in regard to compromises, to ensure that cases will get resolved in a timely manner. As a case in point, if a debtor says that he or she has just entered a payment arrangement with a referring agency, the PCA would be able to quickly verify that claim and speed up the process. Several contractors have mentioned that it currently takes up to 6 months to resolve accounts, which makes the accounts more difficult to collect. The expedience a PCA can offer in this situation results in efficiency as well as good customer service, which is a primary focus of the very successful education contract. Contact with referring agencies would also result in debtor sensitivity and likely a higher percentage of collectible debts. Overall, resolving debts more quickly will allow PCAs to collect and return money sooner to Government agencies. If the recommendation for direct compromises with referring agencies cannot be met, we respectfully suggest that Federal agencies be strongly encouraged to respond on a more timely basis to inquiries they receive from PCAs via Treasury. We believe these changes, as well as the others I have mentioned earlier, would provide several benefits to both PCAs and to the Federal agencies they collect on behalf of. The improvements we recommend would meet the goals of the DCIA to maximize collection of delinquent debts allowed to Government agencies by ensuring quick action on accounts, and minimize collection cost through consolidation. In addition, we believe that these changes would promote increased competition among PCAs that contract with Government agencies. At the current time, we believe that healthy competition is not being fostered among contractors due to incomplete data and unequal distribution of accounts. By making the changes that ACA suggests, referred accounts would be distributed more evenly by volume and better partnerships would result. Thank you very much, Chairman Horn and subcommittee members, for the opportunity to present this testimony. I will be happy to answer any questions you may have. [The prepared statement of Mr. Cloyd follows:] [GRAPHIC] [TIFF OMITTED] T1742.060 [GRAPHIC] [TIFF OMITTED] T1742.061 [GRAPHIC] [TIFF OMITTED] T1742.062 [GRAPHIC] [TIFF OMITTED] T1742.063 Mr. Horn. Well, we thank you, thank you for coming and making that perspective. We now go to the questions and answers. We're going to have 5 minutes per member, alternating the membership between the majority and the minority. I will first yield 5 minutes for questioning to the ranking member, Mr. Turner of Texas. Mr. Turner. Thank you, Mr. Chairman. Mr. Engel, I want to address a portion of your testimony. It's pretty clear that we are collecting more of our outstanding Government debt. That's the good news. The bad news seems to appear on page 4 of your statement, and I believe you shared this with us in your oral presentation, which says the FMS has not covered its cross-servicing costs through related fees collected and is not likely to do so in the near future. Based on FMS' own estimated cross-servicing costs and using the current fee structure, and FMS fiscal year 1999 collection experience, we determined that collection volume would need to rise over sevenfold to put this operation on a full cost recovery basis. In common language, what are you saying there? Mr. Engel. What we're talking about there is that under the act, distribution centers such as FMS are allowed to charge fees to the referring agencies. Typically they'll charge 3 percent if the debt that comes in ends up going to a private collection agency and there's a collection on it. If instead FMS collects on those funds, they charge the referring agency 18 percent. What we were saying is that we went through and calculated, based on FMS' estimated costs to run the cross-servicing program, which for fiscal year 1999 was about $11 million, based on that and their collection experience as to which percent was collected by the private collection agencies and themselves, and using the fees that they charged at that time, that in order to cover the $11 million of costs, they would have to have about $173 million of collections, which was well more than what they actually collected during a year. Mr. Turner. So are you saying we're losing money on this deal? Mr. Engel. Well, not in total as it relates to collections coming in and total for the Federal Government and just what FMS' costs are. However, we only know what FMS' costs are for this program, you'd have to add to that agency costs. But what we're talking about is for their program itself, what it's costing them to run the program, the fees that they're charging, whether the fee rates could be increased or their costs could go down, something would have to happen for them to be able to break even and it would have to happen in quite a large amount, as we said, sevenfold, the collections would have to be. Mr. Turner. Well, do we need to consider some adjustments in the fees that are charged? Or are we simply considering those appropriate and the only answer is to increase the volume to show the agency's paying its way? Mr. Engel. Actually, FMS has had a contractor look at this area, not just in the cross-servicing. And there are some suggestions to consider increasing the fee rate. However, I think an important point to make is again that as we pointed out, much of the debt that's coming over is extremely old by the time it comes over. And as the American Collection Association representative has said, you can expect a very small fraction of those dollars to be collected because they are so old. So unless we start getting more current debts coming over from the agencies, it will be very difficult for FMS to generate the collections that would be needed to cover those costs. So I'd say a fee increase may be something to consider, but the fees would have to be increased, I think the one study that was done, one of the fees would have to increase from the 18 percent they currently charge to 106 percent, which would be more than you're even collecting, which is obviously unrealistic. Mr. Gregg. If I might, Congressman Turner, may I respond to that? From my perspective at FMS, there's a couple issues. First of all, we're still rolling out this program. As I indicated in my testimony, we're about halfway there in the amount of referrals coming into cross-servicing. So that's one element. And as part of that element, there's a lot of cleanup work that's going on within FMS and with the private collection agencies on just how good some of that debt is. Now, in many cases, we don't collect a fee, but it actually is a benefit to the Government, because there's a lot better information on what's collectible and what's a good debt and what's not a good debt. So that's part of our process. The other thing from my perspective, is that our overall debt collection program, not just at the cross-servicing. And if you look at the total amount that we brought in last year, of $2.6 billion, and we're spending about $30 million, the return is great. Whether or not we should charge an additional fee or higher fee in cross-servicing, I'm not sure. We have to be careful not to go overboard there. But that's really part of the whole process. It's tied in very closely with our top system. From my perspective, just to look at the cross-servicing and the fee income you are only looking at part of the picture. Mr. Turner. Thank you. Thank you, Mr. Chairman. Mr. Horn. We'll have 5 minutes, I yield to myself for the purpose of questioning, and then we'll have Major Owens. This is directed to Commissioner Gregg. A few agencies, including the Department of Veterans Affairs, have applied to the Treasury to be debt collection centers. However, their applications have been denied. Currently, the Financial Management Service is the only agency with this status. Why were these agency applications denied? Mr. Gregg. The primary reason that they have been denied is based on our own reading of the DCIA, plus hearings that have taken place over the last 3 years. I think it was clear to us that a high standard had to be established in order to be debt collection centers. And we, in looking at different applications that we did receive, tried to apply those standards and make up our own determination whether or not we thought that they would either for their own debts or for governmentwide debts be an organization do an outstanding job. That's really the threshold that we set. We want someone who can do a good job. In some cases, we did authorize agencies to continue the work that they'd been doing, because we felt that they were doing well. For example, the Department of Education, has done, in my view, an outstanding job in collecting delinquent student debts and they continue to perform that work. In other cases, we didn't feel that agencies really had their act together, if you will, in coming to us. Because when we started asking questions about how well they were doing on their own debts, at least in some cases, they couldn't give us the information that made us comfortable that they'd be able to continue that role. So the standard has been high. And that we also have refined the process which was taking way too long when the program first started, to expedite it and set some clearer standards on what our expectations are. Mr. Horn. Well, I guess I want to ask the question here, what do you have to do to have a governmentwide debt collection center in the future if all of these applications have been turned down? Mr. Gregg. I think first of all it's to demonstrate that you can do an excellent job. I think it's a responsibility of the agencies to demonstrate to us and show that they can do that. The other thing is that this program is still in its early stages. And we're not opposed to granting additional debt collection centers, whether it's for their internal debts or for governmentwide debts. At the same time, there is an obligation on us as performing this governmentwide function to look at it very broadly. That's what we try to do. There's also an issue of first of all, walking before you run. The walking part is, have only half of the cross-servicing debt referred to us. And the process of going through that I think is very beneficial. Also, some of the debt we get is very old. I think if an agency came to us and made a very strong case and a good case to be a debt collection center for their own debts or for others, maybe we would approve it. Mr. Horn. Secretary Powell, how do you feel about the VA application to become a debt collection center, and do you think it was appropriately denied? Mr. Powell. I'm reminded I'm under oath, is that correct? Mr. Horn. That's right. [Laughter.] Mr. Powell. What Mr. Gregg has said, I don't take a great deal of exception with when we first applied. We've come a long way from that point, I think as evidenced in my testimony. I do think there's a case to be made for continuity in the collection efforts for some of these debts, as we heard. There is an issue of having multiple contact points disrupting the continuity. The VA in particular, as you know, is fairly sizable relative to most of the departments. We have significantly improved our debt collection efforts. We feel we are fully capable of being an effective debt collection center. TOP delay for us is really a software issue. It's not a lack of willingness on our part to comply. I think Treasury does a credible job. We have no argument with the effort that they make, especially on these very old debts. I think the point is well taken that as this program evolves, you'll see the process become more effective. I know from many arguments and discussions within CFO Council, there is a real problem distinguishing those debts that are collectible from those which actually should be written off, removing them from the Government's balance sheets as you would do in the private sector. I think over time, it would be appropriate for VA to reapply and make the case for certification as a debt collection center. That will take a natural course, and hopefully we will receive a favorable ruling. Mr. Horn. Well, do we know, Commissioner Gregg, the degree to which someone has to redo their denial? I mean, is it the supervision of the employees, if they haven't been trained yet, or just what is it that turns people down? Now, the aging debt you and I have talked about, because that to me is, I just can't believe it. But when they tried the first IRS bit, before the law, well, the law had just started, and they gave us several year old debts. Now, I'd like to know from GAO who's got most of the old debts. Is it the FMS, the Financial Management Service in Treasury? Is it some of the agencies that are just letting it accumulate? And we all agree, I think, the evidence shows that when you have ancient debt, don't expect to collect very much. Because everybody thinks it's a grant by that time, certainly if you're in the Department of Education, and they forget it's a loan. So what's your feeling on looking at it? Mr. Gregg. Well, as it relates to the debts that have been referred over to FMS, they do have a significant portion that is extremely old, as I had pointed out. Mr. Horn. So they're dumping it on the Treasury, you're saying? Mr. Gregg. Yes. Most of what is coming over to FMS is very old debt. Now, as far as how much debt is still sitting at the other agencies that have not yet been referred over, I can't really speak to the age of those. I don't know. Mr. Horn. Well, how do you feel, Commissioner Gregg? I mean, are you the dumping ground for the aged debt? [Laughter.] Mr. Gregg. Well, it goes with the territory. I think that you can't make progress in this area unless you go through what we're going through. If you have I don't know how many years of having debt sit there and some agencies take a very aggressive stand on collections, others not, and then pass the DCIA and expect a magical transformation, I think we'd all be misleading ourselves. I think from my perspective, whether it's considered a dumping ground or not isn't so important. But it's to look at the debt, figure out whether there is documentation actually go after the debt. In some cases that isn't there, and in some cases there are delinquencies that weren't identified. So I think it's an important process. And as I envision it, in the next few years, when we get through this and agencies are able to send their debts to us that are delinquent, 180 days and do that quickly, then we'll be looking at a different picture. And I think this is, from my own view, something we have to work through. Mr. Horn. Well, I've overtaken my time here. But we might have an exchange in writing, for at this point in the record, without objection. I now yield 6 minutes to Major Owens, the gentleman from New York for questioning. Mr. Owens. When you collect debts, where does the money go, the money you've collected, what do you do with it? Mr. Gregg. It does back to the agencies. Mr. Owens. The agencies get the money back? So they have a great incentive for you to collect debts. Mr. Gregg. Well, it goes back, but I'm not sure that they can use it in their ongoing appropriations. It goes back so they can clear out their books. But I think for the most part, maybe with some exceptions, it goes back into the general fund of the Treasury and there may be some exceptions to that. Mr. Owens. Which is it now? It's an important question. Does it go to the general fund or can they just recycle it and spend it? Do they have any incentive for collection of debts? Mr. Gregg. It really does depend on the program. And I'll have to give you a specific answer in writing. Mr. Owens. Most of it goes to the general fund, doesn't it? Mr. Gregg. In some cases it does go to the general fund. But it has to go back to the agencies so they know the debt has been collected. In some cases, I think the agency can keep some of it. Mr. Owens. Does GAO know the answer to that question? Mr. Engel. Well, one thing I would add to that is that the amount that goes back to the agency is net of the fees that FMS charges the agencies. Mr. Owens. So they do have some incentive for cooperating in getting their debts collected, great incentive, the money goes back to them? Mr. Engel. The portion that they can apply toward the receivable itself, yes, they would want to have that money back. Mr. Horn. If I might help this question along, because I remember distinctly, we wanted to give an incentive, but I'm told that not too many agencies, if any, are taking that incentive, because they feel the appropriators will not give them the money for the next budget. And they don't really like that. So that's part of the problem, I think, and Major has his finger on the right one. And here's the Treasury with the general fund, they throw it in there, and the agency says, you know, I'd like to do it. We wanted an incentive for them to help improve the debt collection process and computing and everything else, telephones, you name it. Mr. Owens. Thank you, Mr. Chairman. Mr. Horn. You're welcome. Mr. Owens. Where do patterns of multiple debtors appear? What agencies is that like? Is that Agriculture, or do you have students who are multiple debtors in the Department of Education? There was a discussion of multiple debtors and how it's difficult to collect because several people will contact them. Where do those kinds of patterns appear? Mr. Gregg. Well, I think it can appear anywhere. There are 24 CFO agencies and what our colleague from the PCA was saying is that we will refer debt to them from agencies, say from Veterans Affairs or from somebody else. And that same individual will owe a debt to the Small Business Administration and we might send it to another PCA. Mr. Owens. Oh, you mean a multiple debtor across agencies? Mr. Gregg. Yes. Mr. Owens. You don't mean within? Because we've seen situations in the Department of Agriculture where people who are delinquent sit on the credit committees and they were allowed to get additional loans. I call those multiple debtors, and that's what I thought you were talking about, within an agency. Is it likely a student who's delinquent can get more loans for graduate or post-graduate education in the Department of Education? Mr. Gregg. Well, I can't speak for the Department of Education, but I do know that is an issue that's been addressed by this subcommittee, the concern that once you have a debtor, whether or not they can continue to get loans from the Government. Mr. Owens. In New York City, we have something called a VINDEX system, where it's highly computerized, and if you get a grant or a contract, it runs through there and they can spit out any debt you owe to any agency of the city and you're stopped from getting an additional contract. We don't have anything similar to that for the Federal Government, centralized checking system where a debtor would be picked up? I know it doesn't apply to the Pentagon, but normal agencies. Mr. Gregg. Probably the closest thing that we have is the references to credit bureaus, if in fact they were checked. Mr. Owens. Private sector credit bureaus? Mr. Gregg. No, for Government debts, if providing the debts were reported to credit bureaus and that tool was used by agencies systematically in granting loans. Mr. Owens. So Federal agencies do report debts to credit bureaus? Mr. Gregg. In most cases, yes. Mr. Owens. Is that required, that they must do that? Mr. Engel. There's a bar provision within the act that individuals that have a delinquent debt to the Federal Government are not supposed to be given another loan until they've cleared that delinquent debt. Mr. Owens. That's a gentleman's agreement or understanding or is that a law? Mr. Engel. That's in law. The agencies are responsible for reporting in information that can be used by other agencies such as through credit bureau reports. HUD has a system called KAVERS, where they also track information from agencies as to delinquent debtors, that agencies can go to and they should be going in and looking and seeing, before they give a new loan, does that individual have an outstanding delinquent loan to the Federal Government. If they do, under the bar provision, they should not be. Mr. Owens. They've broken the law, if the Farm Credit Committee gives a loan to someone who's delinquent, they've broken the law, is that correct? Mr. Engel. Yes, they've broken that provision. Now, there are a few exclusions, and I think disaster loans and, there's a couple type of loans that are excluded. But that is what's supposed to happen. Mr. Owens. Is it possible to get a list of persons or corporations who owe the Department of Agriculture more than $1 million? Can it be generated? A $1 million debtor, that's a pretty big debt, isn't it? Do some people owe as much as $1 million? Mr. Gregg. Congressman, the Department of Treasury would not have that. Treasury would not. The debts that we get from any agencies are by definition supposedly delinquent of 180 days or more. Mr. Owens. The Department of Agriculture would have it, right? Mr. Gregg. Yes. Mr. Owens. Is it possible to publicize those? Is there any provision of privacy rights that debtors have that would keep the public from knowing who owes large amounts of money? Mr. Horn. Well, that's a good suggestion, and Mr. Turner is drafting a bill now, you might want to do it. I think when we had this discussion before, the small farm area that I grew up in, if you didn't pay your taxes, the sheriff printed everybody who hadn't paid their taxes. So the next month, everybody paid their taxes. And I don't know whether that's done anywhere in the Government, where they've posted these. But what you're talking about, they're not the farmer that's really working his field, it's somebody that's got a loan out of them, which could be a ski lift, and those have known to be granted over in Agriculture, or it could be a mansion. With the mansion bit, it got me motivated to do something about it on these loans. Because this person in northern California had his mansion, defaulted on it, the right hand didn't know what the left was doing, went to Santa Barbara, rather tiny place, and they got another mansion. So I think you're on the right trail. Mr. Owens. Let me conclude with this line of questioning, I know I'm a little over my time. We've asked for documents in the past, and I'm not sure we've gotten them. We've been promised lists and summaries. But if it's possible to get a list of those who owe more than $1 million, more than $100,000, is there some how in this very computerized bureaucracy that we can get such lists? For the Department of Education, I'd like to know how many individuals, is there any individual who owes more than $100,000, more than $25,000? And how many individuals owe less than $10,000? If you look at the amount for the Department of Education, it looks like they're one of the big places where we have a lot of crime being committed in terms of people not paying their loans. But I think that represents many, many individuals at very low rates. Mr. Horn. In the law, let me just read you these two sentences, perhaps, section 37(2)(o)(e), dissemination of information regarding identity of delinquent debtors. A, the head of any agency may, with the review of the Secretary of the Treasury, for the purpose of collecting any delinquent non-tax debt owed by any person, publish or otherwise publicly disseminate information regarding the identity of the person and the existence of the non-tax debt. So they have the authority to do that. And I now yield to the ranking member, the gentleman from Texas, Mr. Turner. Mr. Turner. Thank you, Mr. Chairman. Mr. Gregg, your report makes it clear that you have noted the complaints made by the private collection agencies regarding the distribution of the account debts among the various 11 contractors. And we've heard the testimony today from Mr. Cloyd, who represents the association of private collection agents, and he has shared with us his concern not only about the distribution based on the size of the debt and the age of the debt, but he's also brought up the point that debts owed by one debtor ought to be referred to the same agency. Those seem like very sensible suggestions. And I noted a reluctance, Mr. Gregg, in your testimony, what I interpreted as a reluctance, to make these changes, when you said, and I'm reading here from your statement, while FMS is agreeable to considering alternative distribution procedures for future contracts, complying with the terms of the current contract, administering the contract efficiently and maximizing collections are without question FMS' primary goals. Now, it seems to me that if one of your goals is to maximize collections, you're going to have to keep the 11 private contractors who are out there on the playing field trying to collect these debts happy with the rules of the game. And it seems to me that it would be appropriate if what I'm hearing is correct, that all of the contractors agree that the current distribution of account of debts is unfair, that we would all be better off if we revised that distribution system immediately and corrected that problem and renewed the enthusiasm that I suspect may be lacking in these 11 contractors to collect the debts of the Federal Government. Mr. Engel, what is your thought on that comment I made? Mr. Engel. Well, based upon our discussions with the 11 PCAs, what I think they were looking for was what we term as a proportionate mix of accounts being sent to them. In other words, taking a look at the different characteristics such as age of debt, maybe the dollar amounts of the debt, maybe the particular agency that is being referred over. And they felt that more competition would be in place if there was a proportionate mix, so that each of them would be getting some proportion of those different types of characteristics of debt. There was no problem with it being performance based and that the better performer be rewarded with more of the proportion. But I think they were hoping to get debts where they might have as many small type debts, or a proportion of small type debts which have generally been shown to be a little easier to collect, or the less delinquent debt, which again has been a little easier to collect. They'd like to get a proportionate mix of that, so they're standing on a similar ground to their competitor. Mr. Turner. Well, it's of course important to preserve the performance based incentives that we have in the system. But it seems to me that the distribution of accounts as suggested by the private debt collectors is not inconsistent, in fact may be supportive of the performance based incentives that we are trying to pursue. Do you think they're mutually exclusive? Mr. Engel. No. No, I'm not saying that. Mr. Turner. And do you see any reason why the FMS should not proceed immediately to make that correction, to renew that enthusiasm and that incentive on the part of those 11 collectors? Mr. Engel. No, I think that your advice of getting together with the PCAs to get a agreement as to what characteristics, if they're going to go down this, or what characteristics the PCAs agree should be used, I think that has to happen first. Because you wouldn't want to go and start devising something that then again half of the PCAs don't agree, or the characteristics that should be there. Mr. Turner. If FMS yielded to the suggestions of the private collectors, do you see anything that we could possibly lose from the point of view of the Federal taxpayer by following their suggestions in the way the accounts are distributed? Mr. Engel. Well, it's hard for me to say that because of the distribution there's been less collections than there would have been if the distribution was done differently. Again, I think the belief is, it fosters more competition if you feel that you're getting your share of the debts, and as you pointed out, are going to try harder. Mr. Turner. Mr. Gregg, is there any reason why you can't proceed immediately to make these suggested changes to renew the fairness of the system as it's perceived by the debt collectors? Mr. Gregg. Yes, Mr. Turner, there are a number of reasons. First of all, this contract has been looked at six ways to Sunday. And from my perspective, the good news is that we're complying with the contract as agreed upon by ourselves and the 11 PCAs. That's very important. And it's been looked at very carefully. The other thing is that, as I had said in my opening statement, this is complex business. And we actually have a system set up for the way that debts are distributed today. And to change that, you don't just turn a switch, you have to go through and make programming changes. What I am willing to do, and we've been talking with the PCAs and with GAO, is to consider these suggestions when we renew the contract. Next year we'll have the opportunity to go out for bids again. And we will certainly consider all of these ideas in looking at how to structure this. I would like to make one point, however. And that is that I don't know whether you have all 11 PCAs that are unhappy with the way it's done. For those that are doing the best, I'm not so sure that they wouldn't think it's pretty good. But the other thing is that it's structured in a way where PCAs can actually improve their status. For example, back in the letter that the Department of Treasury sent you in October, one of the agencies, one of the PCAs listed there was at that time I think ranked No. 10 in how well they were doing. And currently, they're tied for first. And you have that, throughout the this fiscal year to date on how well the PCAs were doing. And I'm not suggesting that this is proof that a different kind of distribution methodology would be better. What I am saying is that it is complex. And the data that I have pulled, the PCA that was ranked first, and actually, this one's been ranked first since the beginning, it got out of the blocks very early, has the eighth highest average distribution of debt for this fiscal year, eighth highest distribution, average distribution of debt. The PCA ranked second has the 10th highest, 10 of 11. So again, I'm not saying that there couldn't be a correlation. But it is complex, and it's complex because we don't know which agencies are going to be referring debt to us at any given time. There's no schedule, as we had talked about earlier. We've been pushing to get debts, and suddenly a block of them show up. Part of our responsibility, and also something we talked about, is to move those quickly so that they don't age further. And that's one of the things we'll have to look at as we think about the new contract. We don't want to sit there waiting for a really good homogeneous blend of debts and let them age another 60 or 90 days. So those are the kinds of things that we would certainly want to consider as we prepare for this next contract. Mr. Turner. I think the complaint has been that the private collection agency that was ranked No. 1 was getting the smaller debts and the fresher debts. Let me just ask you if you'd be willing to do this. If all 11 collection agencies got together and came up with an agreement among themselves as to a fair system of distribution, would you be willing to sit down with them and try to implement that earlier than the renewal of a new contract? Because at some point, I think your agency needs to come to grips with this, or otherwise, we're going to start losing contractors. And I don't think that would be a healthy outcome, either. Mr. Gregg. I think that we have to be careful in doing that. This is a legal contract that we agreed to with the 11 PCAs. And I'm not sure that we know enough and really could move any faster than the renewal of the contract before we take these into consideration and see who, actually we don't even know whether these same 11 current PCAs will be the ones that win out in the next contract. Mr. Turner. Thank you, Mr. Chairman. Mr. Horn. I think you raised a very good question and we need to maybe hold further hearings on this. Commissioner Jackson, let me ask you this. According to Financial Management Service, the Social Security Administration has not referred any of its delinquent debts to the Treasury for cross-servicing as required by the Debt Collection Improvement Act. Can you explain why Social Security isn't cooperating with the law? Ms. Jackson. Mr. Chairman, soon after Treasury issued its guidelines for Federal debt collection center designations, the Social Security Administration did submit an application to be designated as a debt collection center. We made that application on May 30, 1997. We received notification of the denial of our request on May 10, 1999, some 2 years later. We then pursued a request to have some of our debts, specifically our SSI debts and our debts owed by former child beneficiaries exempted, and we did receive approval of that waiver request on November 15, 1999. So these are very recent decisions that we received. At that point in time, we were very much embroiled in dedicating almost all of our systems activities to preparing for the year 2000 rollover, and in fact, we were basically barred from any new systems activity until after the rollover period, which continued through February of this year. We have continued to work with FMS, have made commitments, and have worked out our various systems program requirements with them. We will be testing over the next 6 months for the benefit offset program, and we will be actually implementing that in February 2001. We have also set up meetings, including going down to the Birmingham Debt Collection Center with FMS later on this month. So we are proceeding, but much of our delay in moving forward was based on our waiting for the final decision from Treasury on our request to be designated as a debt collection center for our own debts. Mr. Horn. Let me ask Secretary Powell, the Department of Veterans Affairs has referred only 1 percent of its eligible delinquent debt to the Treasury for cross-servicing. Why is it taking so long for this debt to be referred? Mr. Powell. Congressman, I believe, as I commented, one of the problems we've had has been the computer interface issue. Like SSI, this effort that was interrupted by the Y2K moratorium. We now have a September 1 deadline that I believe we are working toward, in which case, at which time that will be resolved. We would anticipate at that point in time that the flow of data would be much improved and much more seamless. And we fully expect to be compliant with the law in the relatively near future. Mr. Horn. What will happen to the Veterans Administration debt management center when all of its delinquent debts are referred to the Treasury? Mr. Powell. Well, we wouldn't be referring to them debts under 180 days old. As I mentioned, when you were asking the question about our designation as a collection center, we are very active with our management of our debts. We do a number of things to get in touch with our debtors immediately after the first 30 days. We begin contacting them and we begin a process of calling and notification. And we do experiment with PCAs as appropriate in certain locales. We have a number of debts that are also not eligible for cross-servicing, such as medical claims, because of their lack of specificity. There's oftentimes a negotiated amount that ends up being paid by the insurance companies. And we have with Treasury come to an agreement that those would not be eligible for cross-servicing. So we will still have functionality, and as I indicated, hopefully we will prevail in our application as well at some future date. Mr. Horn. Any particular view on this, Commissioner Gregg? Mr. Gregg. The issue on the nimbleness of which Treasury was reviewing debt collection requests is accurate. When I got to FMS in 1998, that process had really bogged down. I think it was a matter of other priorities. We have taken steps to certainly streamline that and make some clear criteria for agencies referring debt. From our perspective on the cross-servicing, we'd just as soon not see any debt. The idea of, and I don't know what's going to happen, but the idea of over time the agencies being able to collect all this within 180 days is really what we're all interested in. To the extent that that can happen, then it needs to come to us and we need to get it to the PCAs as quickly as we can. Mr. Horn. Well, I don't want to rush this today, but I think the best way I've heard now about the couple of places where the law is not being implemented, and we ought to deal with that, and I think we ought to deal with early time for the collectors, very frankly. And I think in the next few months, we'll call another hearing and maybe with a few different debtors here, if you will. And we will get back to what Major Owens has brought up on the publicity bit, and see where we're going. So I'm going to have, as was mentioned earlier, Mr. Ose had a markup, Mr. Turner had another commitment, both majority and minority have some questions they'd like to ask, and we'd like them, without objection, at this point in the record. So we'd appreciate it when they send them to you, back in your office. I would like to thank the following people that set up this hearing, Russell George, standing there, just came in, staff director, chief counsel. Randy Kaplan, to my left, your right, has responsibility for this matter. And so you'll be hearing a lot from him, as counsel to the subcommittee. Bonnie Heald, director of communications; Bryan Sisk, clerk; Elizabeth Seong, staff assistant; Will Ackerly, intern; Chris Dollar, first day at work, I think, intern, highly paid by us, namely nothing. [Laughter.] And minority staff, Trey Henderson, counsel; and Jean Gosa, minority clerk. And we've had the pleasure of the official reporter, Ruth Griffin, and thank you all. And with that, we're going to adjourn this hearing, and we'll pick it up about 3 months from now. [Whereupon, at 12:12 p.m., the subcommittee was adjourned.]