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Improving Financial Management

ADOPT GOOD BUSINESS PRACTICES

FM11: Strengthen Debt Collection Programs

Background

The federal government would be able to collect an additional $2.5 to $10 billion over the next five years by strengthening its approach for pursuing seriously delinquent debt. Lending and collection programs could be improved substantially and a fairer financial presentation could be made if agencies: --were provided with incentives to cover the cost of collection and allowed to share in the additional recoveries;

--could fully use other agencies on a reimbursable basis and/or collection agencies to hold down the growth of delinquent debt;

--were provided with expanded authority and flexibility to use special assistant U.S. attorneys, agency counsel, or private counsel to litigate delinquent debt; and

--were required to re-evaluate their allowances for doubtful accounts.

The federal government was owed about $241 billion in non-tax debt at the end of 1992, of which $47 billion was delinquent [Endnote 1]. The Debt Collection Act of 1982 and OMB Circular A-129 require agencies to establish an aggressive but fair program to collect delinquent debt and establish mechanisms "to collect and record payments and provide accounting and management information for effective stewardship."

Each year, thousands of borrowers from the federal government default on loans from programs administered by a variety of federal agencies. After engaging in their own collection efforts, including referral to private collection contractors, the use of the salary offset program for delinquent Federal employees, and the tax refund offset program, certain agencies refer unpaid debts to the Department of Justice for collection. Justice attorneys also sue to collect unpaid criminal and civil fines and assessments.

Need for Change Most agencies perform routine servicing of debt adequately, collecting about $87 billion in fiscal year 1992 [Endnote 2]. However, their performance in collecting seriously delinquent non-tax debt in a timely manner is very poor. Agencies consider the collection of debt as a secondary function to loan origination and other program functions. In addition, they do not have the systems and staff to pursue delinquent debt. The following are examples of the current obstacles facing program agencies attempting to collect delinquent debt.

--The missions of program agencies are to provide services to their clients. Program staffs, therefore, are sensitive to their clients' needs and reluctant to press for repayment of debt. Agency staffs have excellent knowledge and skills for delivering the program; they do not always have the skills or training to track and collect debt in a timely fashion. Although agencies are required to refer debt more than six months past due to contractors, the average age of debt referred to collection contractors exceeds two years [Endnote 3].

--Because resources are scarce, many agencies have not made the necessary investments in specialized debt collection systems, equipment, and personnel. There is no reward for most agencies for collecting debt, i.e. increased debt collection does not easily translate into increased program budget authority. One exception is the Department of Veterans Affairs (VA), which was given the flexibility to cover its administrative costs from debt recoveries. VA increased its medical care cost recovery from $23.9 million in fiscal year 1987 to $520 million in fiscal year 1993. The pivotal factor in this accomplishment was the establishment of the Medical Care Cost Recovery (MCCR) Program and the gradual expansion of its authorities. Although VA has been authorized by statute to cover certain costs since 1986, collection remained relatively low until the MCCR Program was expanded in 1990 to allow administrative costs to be funded for the succeeding year from the current year's collections [Endnote 4]. A similar example is at the Department of Education where the use of collection revenues to pay expenses associated with collections is authorized under the Higher Education Act. The Department has used this authority to pay private collection agency costs. All other debt collection costs are funded out of Education's operating budget. The idea of using collection revenues to pay expenses associated with collections could also be expanded to franchising or cross-servicing debt collection activities. Given the various sizes of agencies and staffing patterns, debt servicing could be handled by clusters of agencies working together or by franchising to establish a critical mass of expertise.

--Restrictions prevent the use of private collection agencies for the recovery of taxes and tariffs as well as debt from certain loan programs. For example, Farmers Home Administration has been prohibited by provisions in appropriations laws from using private collection agencies. Referral restrictions also exist on the Social Security Administration (SSA), Customs Service, and IRS debt.

--Department of Justice has exclusive authority for litigation of most delinquent debt cases. The U.S. Attorney's financial litigation units recovered $345 million in non-tax debts last year out of an inventory of approximately $6 billion. Critics of the U.S. Attorneys' debt collection activities contend that the U.S. Attorneys' Offices attach low priority to debt collection because it is less glamorous than their criminal and civil caseload. To improve its efforts in debt collection, Justice has a pilot program involving the use of private debt collection counsel currently ongoing in eight judicial districts.

When agencies extend credit to individuals who are already delinquent on another federal debt, these new loans are likely to result in future losses. The Credit Alert Interactive Voice Response System (CAIVRS) is a Department of Housing and Urban Development (HUD) system used to screen new HUD loan applicants through telephone access of a database of debtors delinquent on HUD loans. CAIVRS has been immensely successful and should continue to be expanded by adding the delinquent debtors of other federal agencies to the database, and by making the CAIVRS system available to other agencies for the screening of their loan applicants.

The success of the VA's MCCR Program is an example of how recoveries could be improved if an agency's administrative costs are funded by the recoveries. Collection activities would further improve if the agency could share in any additional recoveries and could use some of these recoveries for other purposes. Also, full and consistent participation by all agencies in an automated loan screening system such as CAIVRS is needed to realize the maximum savings.

Agencies know that many of the receivables on the books are not going to be collected. Yet, for various reasons, they do not feel comfortable writing the debt off. Agencies seem to equate writing the debt off with not trying to collect it. They fail to understand that writing the debt off does not mean that the agency cannot continue collection activities. Many agencies do not develop and record a meaningful allowance for doubtful accounts. For example, the IRS net receivables at the end of fiscal year 1992 were $28 billion [Endnote 5] After a financial audit the General Accounting Office (GAO) determined that the net receivables number was about $22 billion [Endnote 6]. This example points out that agencies need to do a better job estimating the allowance for doubtful debt so that a fair presentation can be made on their financial statements and reports to Treasury.

Federal loan programs should be managed in a way that empowers agency managers and recognizes both the similarities and differences among the government's many direct and guaranteed loan programs. OMB, in consultation with the Federal Credit Policy Working Group, should ensure that agencies have the governmentwide policies and tools necessary to effectively manage their programs. OMB should recognize that the agencies should have the flexibility to implement the policies and use the tools in the manner most appropriate for each loan program. Thus empowered, managers should be held accountable for the results of their programs, rather than the extent to which they use particular tools or techniques to achieve the results.

To avoid unnecessary losses and efficiently collect any debts owed the government, agencies should adopt strategies that would be expected to do the following:

--For credit extension, follow central guidance for tools that are applicable governmentwide. OMB should approve exemptions when justified.

--For servicing and collecting debt, adopt the most effective approach for each loan program by developing meaningful loss mitigation procedures and by using available debt collection tools in a timely and efficient manner. Agencies should also look for opportunities to consolidate, cross-service, or contract out activities.

--For uncollectible debt, implement write-off policies that provide for determining in a timely, cost-effective manner whether delinquent debt is uncollectible and for writing off the uncollectible debt as quickly as possible.

Agencies that attain their established goals and can show productivity improvements that result in cost savings by reducing losses or increasing collections should be eligible for "gainsharing," that is, retaining some portion of their collections. ACTIONS 1. Enact legislation to allow (a) debt collection activities to be funded by the revenues generated from collections and (b) the agencies to keep a certain percentage of any increased collection amounts, primarily for improvements in debt collection as well as other agency priorities. (3)

2. Enact legislation to increase agencies' access to private collection contractors by eliminating any restrictions. (3)

3. Expand agency litigation for debt collection through the special assistant U.S. attorney process. (1)

The Attorney General should appoint special assistant U.S. attorneys in other federal agencies based on debt collection workload.

4. Establish a credit management function. (1)

Agency heads should separate the debt collection function from the loan making function by establishing a credit manager in the Chief Financial Officer organization. This action should ensure that greater attention is given to the debt collection function and should provide stronger internal controls for the program. The credit manager should be certified by an approved federal or private accreditation program. This function could also be a candidate for franchising (cross-servicing among agencies).

5. Expand the Credit Alert Interactive Voice Response System. (2)

The Director of OMB should ensure that CAIVRS is expanded and used by federal agencies to ensure that potential borrowers under federal direct and guaranteed loan programs have resolved tax and non-tax debt before receiving additional federal credit. Legislation should be enacted to overcome regulatory and statutory limitations on participation in CAIVRS, including use of delinquent tax and non-tax debt.

6. Improve estimates for the allowance for doubtful accounts. (1)

Agency chief financial officers should improve their allowance for doubtful accounts estimates to provide accurate and timely data for audited financial statements as required by the Chief Financial Officers Act of 1990 and for quarterly reports to the Treasury.

7. Establish performance agreements on each major loan and debt collection program. (2)

The key element in the new approach to federal credit management and debt collection should be the negotiation, between each agency and OMB, of performance agreements for each major loan and debt collection program. Basic agreements should be established and then updated annually. Agreements should include a description of the agency's strategies for using debt collection tools for each of its major programs.

The negotiated performance agreements should identify quantifiable program results and financial management performance indicators to which program managers would be held accountable. Goals established in the performance agreements should be specific to each loan and debt collection program, in recognition of the differences in risk for each program. The accuracy of the reported results should be attested to by auditors as part of the audits of financial statements of these programs.

Cross-references to Other NPR Accompanying Reports Department of Justice, DOJ04: Improve Department of Justice Debt Collection Efforts.

Endnotes 1. U.S. Office of Management and Budget, "Status Report on Credit Management and Debt Collection," Washington, D.C., August 1993, p. 1.

2. U.S. Office of Management and Budget, "Options to Improve Performance for Federal Debt Collection," June 1, 1993. (Draft paper.)

3. Ibid., page 6.

4. U.S. Department of Veterans Affairs, "Medical Care Cost Recovery," Department of Veterans Affairs Annual Report (Washington, D.C., 1992).

5. U.S. Office of Management and Budget, "Chief Financial Officer Annual Report," Fiscal Year 1992, Note 2, Federal Tax Receivables, Washington, D.C. 1993.

6. U.S. General Accounting Office, Financial Audit: Examination of IRS' Fiscal Year 1992 Financial Statements (Washington, D.C.: U.S. General Accounting Office, June 1993).

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