May/June 2009
Government Access: As Budgets Tighten, Collections Expand for Agencies that Pass Security
Government collections has driven to the forefront of the economic recovery debate. Some suggest a return to RTC, the Resolution Trust organization formed by the government to bail out the assets held by the prior financial institution meltdown of savings and loan companies. The RTC birthed the debt buying industry, which forms the basis for the resolution of the current toxic assets of subprime mortgages. As the government wrestles with what these assets are worth, experienced debt buyers wait patiently to bid on them. These assets have value — just not the value the banks imagined them to have.
Government collections has come a long way since the days of the RTC. As the government bails out financial institutions, it is up to experienced collectors — lovingly called the accounts receivable management industry — to bail out the government. Indeed, the government will be looking to collectors for a decent return on its investments. Fortunately, there is a precedent of success. Student loan collections, municipal fine collections and other government agency collections pre-dated the IRS private collection initiative. After political wrangling all the way to the taxpayer advocate, IRS private collections were eliminated. As with previous private collection concerns, the fear was greater than the danger.
It's business processing outsourcing (BPO) at its core. The agencies with the experience to collect these accounts have the systems and security in place to protect the information better than the government. Moreover, they have the business process experience to know how much effort to apply to each account. Their business depends on it.
Over the years, Collection Advisor has had the privilege of interviewing the who's who of government collection executives: Jerry Hogan, CEO of Financial Asset Management Systems in Atlanta; Thomas Kratzenberg, JD, CPA, CEO of Keystone Municipal Collections in Irwin, PA; and Vito Ruggiero, COO of Flexible Financial Corporation in Peckville, PA, to name a few.
The topic at the forefront of every headline, news story, talk-radio commentary and even entertainment news show is the dismal state of the economy. The assumption is that the need for collection assistance will be on the rise. In this issue, we focus on the current trend in government collections. We gleaned information from three experts in the field to learn more about this faction of the collection industry. They are John Kahn, Chief Financial Officer of Financial Asset Management Systems Inc. in Atlanta, GA; Pauline Kussart, president of the H.E. Stark Agency Inc. in Madison, WI; and Paul Thomason, president of the goverment collections department of Credit Watch Services Inc., headquartered in Dallas/Fort Worth, TX.
Collection Advisor: What government collection services do you offer?
John Kahn: Financial Asset Management Systems, Inc. (FAMS) is a third-party collection agency and has collection programs with local, state and federal governments. The primary government services sector collection programs handled by FAMS are: city and county fines and fees; state tax and child support arrears; and federal student loan collections.
Pauline Kussart: We collect on the state, county and local levels. We collect fines, fees, forfeitures and other such receivables from a clerk of courts (circuit or superior level) office or a municipal court. We also do parking citations, library fines, emergency medical service charges and self-pay receivables as a result of health care services provided by a government-owned healthcare provider. We also do subrogation work, collect on worthless checks and unpaid permit receivables and collect charges incurred because of negligence — for instance, if a fire department is called out to control a grass or forest fire caused by carelessness. We collect general inmate charges, process server fees, public defender fees and electronic monitoring fees, Guardian ad Litem fees, personal property taxes and real estate property taxes, restitution owed to a government agency, rental assistance loans and other such economic development loans in default, unpaid utility charges and unpaid animal shelter invoicing. The list continues to grow as more and more government agencies and departments are realizing just how much we can help them meet their budgets, clear their books and enforce a consequence. With our help, government agencies are beginning to turn that corner from being completely service-oriented to combination service- and business-model operations.
Paul Thomason: We offer collection services to state and local governments to recover delinquent fees, damage claims, taxes, returned checks, child support and fines. We also recover fees, tuition and returned checks for state-supported schools.
Collection Advisor: What are the challenges of government collections?
Kahn: FAMS works closely with its government services sector clients. It can take a long time to set up and implement programs for government clients as they may have unique I.T., security, reporting and/or work standards that must be adhered to as part of their collection program. It is important to remember that those who are "debtors" to non-government clients are "voters" to government clients. That relationship needs to be respected in working to resolve the outstanding debt.
Kussart: One of the biggest challenges is being able to accept the bureaucracy that comes with partnering with government agencies. There tend to be more layers of authorization or approvals before a contract can be signed or work referred. Another challenge is meeting the exceptional requirements government agencies insist on. For instance, many require a current affirmative action plan. In addition, insurance requirements are usually higher than those of other industry sectors. Government agencies may also require an annual full-scale audit of your financials, which is a very expensive process. That excludes some smaller collection agencies right from the get-go. Government agencies always want to work with local vendors. If you are not local and you win the contract, you may be required to open an office in that jurisdiction. I have not responded to many RFP's for this reason alone. Lastly, government agencies like reports more often than the private sector. Customized reporting formats and delivery compliance can be a challenge if you are not adequately equipped electronically.
Thomason: Government collections present the same challenges as any other collections as far as locating and contacting debtors. In addition, there is a political element to government collections. Every debtor is a constituent and has some political influence. You have to be aware of the governmental entity's image with the voters and the news media. No government official wants to be on the evening news with complaints about collection activities.
The other challenge is that many government accounting systems are not designed to handle regular accounts receivable. You are often dealing with information systems that are inadequate, or poorly designed for the collection process.
Collection Advisor: What constraints, beyond the FDCPA, do you face?
Kahn: As a professional collection agency, our company does not see the FDCPA or other relevant laws or regulations as constraints. We are a member of the collection industry's professional association ACA International and abide by their code of ethics and standards of operation. Government clients are particularly concerned about their agency's regulatory reputations and may make this a higher priority than other clients.
Kussart: Because of the varied kinds of debts government agencies have, compliance with HIPAA, GLB, FCRA AND FACTA is critical. The government agency you are working with might pose other constraints, such as subcontracting. You may be required to subcontract out a percentage of the work to a diversity-certified collection agency or a disadvantaged business enterprise. This creates more work and monitoring without any gain for the primary agency. On the flip side, though, some government agencies do not allow any subcontracting.
Thomason: All government agencies are now very concerned about protecting their constituents' privacy. SAS 70 compliance is becoming more important with government collections. In addition you are dealing with "public funds," so various entities have their own regulations regarding what you can do with settlements, payment arrangements, credit reporting, suits, etc. It is important to have a good understanding of each entity's policies on these issues.
Collection Advisor: What additional security do you require?
Kahn: Our security requirements are stringent. We invest in personnel and data security requirements to protect us as well as our clients.
Employees have to pass credit and criminal background checks and are drug-tested before being hired. Some of our federal government work requires that the staff involved obtain security clearances. This is in addition to FAMS' own background checks and can involve completion of in-depth questionnaires followed by FBI investigation and verification. Our facilities have video surveillance, and all collection phone calls are recorded. Employees have photo ID badges, and our facilities have electronic access controls that require a badge swipe to gain entry. We also reserve the right to perform random searches of employees as they enter or exit our facilities. We restrict levels of access to our I.T. systems, and our managers are responsible for monitoring our employees in addition to a variety of system-based controls. These include data-access controls based on job function that are contained within our BFrame collection software, as well as additional network-based security software and hardware from specialist network security vendors such as vmSight and Tripwire. This includes two-factor authentication to restrict access to sensitive data. Our clients may also remotely monitor the employees working on their program, as well as conduct onsite auditing. We have zero tolerance for security violations and prosecute violators.
Kussart: Again, because you are dealing with some of the same kinds of debts as in the private sector, our security measures are tight and consistent no matter what kind of debt we collect.
Thomason: We comply with the HIPAA regulations because we do medical collections and apply the same standards for all accounts. We believe that SAS 70 will be required for the future and are working to become compliant.
Collection Advisor: What technology helps you and what do you find exciting about recent technology advancements?
Kahn: We constantly review technology advances and tools to help us become more efficient and effective for our clients. We invest in frequent upgrades to our IT/IS infrastructure and in software and automation tools. Our largest single expense is payroll. Any technology that enables us to be more efficient and effective in using our staff is exciting to us. We recently installed Voice Over Internet Protocol (VIP) telephone systems with call recording features in all of our call centers. This has proved to be invaluable in helping us ensure quality assurance and in training our staff.
Kussart: We apply the same technology to government clients as we do to private sector clients. A collection agency absolutely has to have the ability to transfer files in a secure format. In addition, technology that allows clients and debtors easy access to their accounts meets that instant gratification need so many of us in the U.S. live by. Clients can access their accounts via a website and can pull any report at any time. Likewise, debtors can access their accounts and have many available payment options and methods at their disposal 24/7. Collection software technology and subsequent interfaces with other variables drive our profitability.
Thomason: The biggest problem with all collections, including governmental, is contacting debtors. The automated skip tracing, telephone advances and dialer programs that help with that contact are the most exciting. Most true collection work comes down to one collector talking to one debtor. Anything we can do to facilitate that connection is good for both.
Collection Advisor: Predict the future of government collections, especially the latest government initiatives for subprime mortgage toxic assets and the IRS private collections.
Kahn: Taxpayer government obligations will always exist, but there are greater than normal issues at the moment. Indeed, the current economic environment is still deteriorating, and there will probably be more bad news given continuing reports of increases in foreclosures, bankruptcies and unemployment. Consumer spending is down, and mortgage delinquencies are increasing at an alarming rate. The federal government recently backed toxic mortgage assets with a 93% commitment (intending to sell bonds to support the initiative); and the mortgage bankers and other financial institutions will be taking on a 7% investment. This might free up more money for lending and improve the economy overall, but the arrears still will need to be resolved. The government might have to form an entity similar to the Resolution Trust Corporation to liquidate foreclosed properties in the open market, or possibly allow lenders to use private auction companies to do this work. The initiative might very well result in additional collection work, though many debtors might not be able to make meaningful repayments in the foreseeable future. FAMS is a member of the ACA International Tax Fairness Coalition and was in favor of expanding the IRS Private Collection Agency pilot program, but the program has been terminated — despite two pilot program agencies that generated excellent collection results and higher-quality scores than the IRS's own staff. The IRS Private Collection Agency initiative was intended to supplement the IRS efforts to collect smaller-balance accounts owed by taxpayers. Even though the IRS is expecting to receive more funding for adding staff, our view is that the delinquent taxpayer liabilities that existed before the recession (over $300B) are only going to increase and huge amounts of unpaid tax debts will cease to be collectible because of the statute of limitations. We believe that tax fairness means everyone paying their share. When the government partners with the private sector and provides the proper oversight, the private sector can help promote the importance of individual accountability.
Kussart: I'm not versed enough to address the subprime mortgage issue as it relates to the government intervention of the toxic assets. What I do know is that we collect for some primary subprime lenders now, and it is a very tough market to recover. The debtors we reach realize they owe money but don't have any extra cash available to pay the debt. We are offering much deeper discounts or settlements on our subprime portfolio than on other types of debts. As a collection agency owner, I was very sorry to see IRS collection contracts pulled from the private sector. Those contracts created many well-paying jobs and returned millions of dollars to the federal government in terms of recoveries and additional income taxes on wages and corporate taxes — not to mention what those additional employees did to the local economy.
Thomason: Collections will continue expanding. As the need to fund growing government services without increasing taxes booms, governments will have to expand their outsourcing of collections. Governments are not equipped to collect their own delinquencies.
The mortgage bailout has huge potential for collections. Much like the RTC of the '90s, the government will end up with much more debt than it can handle. Outsourcing will be the only solution.
Collection Advisor: What collection innovations would you like to see?
Kahn: We would like to see more use of Internet and cellular-based communication tools in communicating with debtors. The culture of communication on a personal and professional level has changed immensely. Use of landline telephones in homes and businesses is dwindling. At the same time, collection industry costs are rising, partly due to lettering costs. Yet it was just announced that the U.S. Post Office lost $2.2M last year.
We would like to see the government be very thoughtful before passing further consumer legislation prohibiting or limiting communications via Internet or cellular-based communication tools.
Kussart: Collection agency owners need to be ever vigilant of costs. Our costs continue to rise daily, and we face another postage increase in May. Then there is the constant increase of group health rates, maintenance fees, supply costs, phone costs, equipment costs, etc.
And the fees we can charge tend to be diminishing, partly from competition, but also because of client demand. Clients want to keep more of what is collected, especially in this economy.
Thomason: The federal government needs to break up its accounts into smaller, more manageable pieces by increasing outsourcing. Placements thus far have been so large that no one agency can effectively handle them.