59

as one of the root causes of system failures, In addition, as previously stated, the lack of
documented functional requirements is a major reason GTOP was not able to be tested.

Third, Treasury's DCIA Implementation Plan does not yet include all facets of the
administrative offset program. The most recent version of the plan, dated May 1, 1998,
includes the tasks and projected milestone dates involved with several of the key
processes. However, the plan does not include information on handling certain payment
types, such as payments made by NTDOs (other than USPS and DOD), miscellaneous
payments, and salary payments made by payroll offices other than USDA's National
Finance Center (NFO), for which Treasury makes the disbursement.” According to
‘Treasury officials, because of the priorities they have put on merging the administrative
and tax refund offset programs, processing salary payments from NFC, and processing
Social Security Benefit payments, they have not as yet devoted time to fully developing an
overall DCIA Implementation Plan.

We recognize that Treasury's current focus is largely directed toward consolidating
existing payment offset programs to improve efficiency and attempt to minimize the costs
of debt collection, which is an important objective of DCIA. In addition, the degree of
specificity associated with a particular facet of the program may vary depending on the
priority that Treasury assigns to it. However, a complete DCIA Implementation Plan is
critical to the success of Treasury's systems development efforts. Such a plan is needed
for Treasury management and others to effectively evaluate (1) how the development and
implementation of the overall system is progressing and (2) when corrective action is
needed to ensure that major slippages do not occur. Treasury officials have agreed to
more fully develop the DCLA Implementation Plan in the near future.

Fourth, Treasury has not yet completed a risk management plan. A risk management plan
is critical for the successful implementation of a systems development project because it
provides management and others the ability to focus their efforts on the areas that pose
the greatest risks. It also outlines the actions that Treasury will take to mitigate the risks
identified. Treasury officials stated that although they have not developed such a plan for
the overall system, they have developed a plan for the software development efforts. A
risk management plan takes on even more importance when tight time frames are
involved in a given effort because it outlines the actions that will be taken should the
project miss key delivery dates. Treasury officials agreed that an overall risk
management plan is needed and has projected completion in July 1998.

"During fiscal year 1997, NFC processed about 35 percent of the payroll transactions
processed by the 93 payroll offices that used Treasury Disbursing Offices for making
salary payments.

iL GAO/T-AIMD-98-195,


128

the contractor to provide electronic validation of trading partners as they register in the
‘Central Contractor Registration (CCR) database. This database will serve the
Department of Defense as a single point of collecting all of the required data elements
to conduct commerce (electronic and paper) with any trading partner — worldwide.
Registering and validating the existence of a business, its basic demographics and,
finally, assigning its DUNS® Number as a database key, is crucial tothe ability to
establish the first level of trust with a prospective trading partner. Benefits to
‘government include: validation that a business is ‘real’; reduced costs in the
maintenance of individual agency's proprietary vendor databases; and access to
accurate data for sourcing any procurement.

‘Once a database is used for sourcing and legitimizing a vendor, grantee or loan
recipient, monitoring changes and important business events that could impact our
trading parmers is crucial, especially in the world of electronic commerce. For
example, when D&B performed a Portfolio Analysis on the 315,000 vendors we
provided to DoD for a seed file for the Central Contractor Registration (CCR)
database, we found the following changes occurred between July and December of last
year: 15,000 had relocated, 476 had filed bankruptcy, 568 had gone out-of-business
land more than 3500 had a change in ownership.

‘Another example of how D&B monitors important business changes was found when
we did a sweep of our government activity database. Of the S46K debts worth over
$50 billion, over 73,000 or 13% of all actions are overdue, Of these overdue debts,
49% are owed by entities that have gone out of business. But the reporting agencies
‘continue to deliver us overdue debt data in each monthly file, The overdue debtors
include 1274 IMPAC card merchants representing almost $106 million worth of
overdue non-tax debt and the federal contractors who've been awarded contracts in
excess of $25K have an additional $495 million of overdue non-tax debt. When we
pulled the records of entities that had been assessed a federal tax lien, we found over
‘456,000 liens representing at least $8.8 billion were owed by federal contract or grant
awardees.

To sum up, the real power of D&B’s information can be demonstrated by case studies
we did for the Treasury Department and OMB to show the value of merging data
elements from over 100 sources into one place. While these are examples of real
companies and actual events, the actual names of the entities have not been disclosed.

Case: John Doe Enterprises defaults on a federally backed loan, This is quickly
{followed by the filing of a federal tax lien. Notwithstanding, a federal agency awards over
‘STIK ta contracts. Not satisfled with sald contractor's performance, the same ageocy
debars this company until the year 2000.

Case 2: After a federal loan to Smith Manufacturing is sent for collection AND the
‘company files Chapter 11 bankruptcy, six (6) federal agencies award Smith over $5
‘million in contracts.

Case.3: Even after Jones Corporation stopped paying on its federal loan, the same
‘agency granted another. Subsequently, Jones was named in both federal and state tax
Mens. This did not prevent a different federal agency from awarding over $200K in
contracts,

12)


25

Mr. Horn. Well, we appreciate that statement. I see the Under-
secretary got out of the traffic jam.

Thinking of you stuck on Pennsylvania Avenue reminded me
that I will face the San Diego freeway this evening after I land at
the airport. I don’t know if it is bumper to bumper here, but it is
bumper to bumper there, especially on Friday night. It goes on for
3 hours. I don’t know how long Pennsylvania Avenue’s lasts, Mr.

retary.

Mr. HAWKE. Thank you, Mr. Chairman, I apologize for the tardi-
ness.

Mr. Horn. You know the routine here. We have everybody here
take the oath, so, if you will just stand.

[Witness sworn.]

Mr. Horn. The clerk will note that all six witnesses have af-
firmed the oath. .

Please go ahead, Mr. Secretary.

Mr. Hawke. Mr. Chairman, I will summarize my full written
statement, and I appreciate the opportunity to appear. this morning
to discuss our progress in implementing the Debt Collection Im-
provement Act.

The continued interest of you, Mr. Chairman, and this committee
in our efforts to carry out this important rogram have been of
preat value to us, and we really appreciate interaction that we

ve been able to have with you.

Let me start by ies saying a few words about our analysis of the
debt portfolio itself, because during our reassessment of this pro-
gram, it became clear that we needed a much better understanding
of the composition of the $52 billion portfolio of delinquent debts
owed to the Government. We have now established, through inter-
nal and independent external analysis, that only about 60 percent
of that $52 billion is actually referable to the asury for collec-
tion, and that a significantly smaller amount is likely to be collect-
ible by Treasury under the DCIA.

Price Waterhouse has provided us with an analysis—I believe
members have copies of the analysis—of the composition of this
debt and a walkdown from the $52 billion number to the amount
that Treasury could ultimately ex to collect. Price Waterhouse
calculated that, first of all, $47.2 billion of the $52 billion is older
than 180 days and, thus, within the scope of the DCIA. Of that
amount, $18.1 billion is ineligible for referral to Treasury for var-
ious reasons. For example, many of the debts are not legally en-
forceable, because the debtor has filed for bankruptcy protection or
is otherwise legally entitled to temporary relief from collection ac-
tion. Other debts are in dispute and the subject of pending litiga-
tion. In addition, foreign sovereign debt is excluded.

Of the remaining $29.1 billion that is eligible for referral
Treasury for offset, $8.5 billion is also eligible for cross-servicing.
The remaining $20.6 billion is ineligible for cross-servicing due to
a number of DCIA exemptions, such as those for debt that is in liti-
gation and debt that has been referred to a private collection agen-

cy.

Taking into account these limits on cross-servicing and adminis-
trative offset, and after examining private sector experience in col-
lecting debt with comparable age characteristics, Price Waterhouse


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida PAUL E. KANJORSKI, Pennsylvania
JOHN M. McHUGH, New York GARY A. CONDIT, California
STEPHEN HORN, California CAROLYN B. MALONEY, New York
JOHN L. MICA, Florida ‘THOMAS M. BARRETT, Wisconsin
‘THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
DAVID M. McINTOSH, Indiana pc
MARK E. SOUDER, Indiana CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona DENNIS J. KUCINICH, Ohio
STEVEN C. LATOURETTE, Ohio ROD R. BLAGOJEVICH, Illinois
MARSHALL “MARK” SANFORD, South DANNY K. DAVIS, Illinois
Carolina JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire JIM TURNER, Texas
PETE SESSIONS, Texas THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey HAROLD E. FORD, Jr., Tennessee
‘VINCE SNOWBARGER, Kansas
BOB BARR, Georgia BERNARD SANDERS, Vermont
DAN MILLER, Florida (Independent)

Kevin BInaeR, Staff Director
DanteL R. MOLL, Deputy Staff Director
Davip A. Kass, Deputy Counsel and Parliamentarian

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY
STEPHEN HORN, California, Chairman

PETE SESSIONS, Texas DENNIS J. KUCINICH, Ohio
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
JOE SCARBOROUGH, Florida MAJOR R. OWENS, New York
MARSHALL “MARK” SANFORD, South CAROLYN B. MALONEY, New York

Carolina JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire
RON LEWIS, Kentucky

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

ap


ng

There were many difficulties in implementing a broad, multi-faceted, government-wide
debt collection operation as delineated in the DCIA. Any reasonable person would
welcome constructive assistance in how to improve the implementation. There is nothing
constructive the subject report, however. Auditors, they say, are those people who come
in after the battle has been fought, and bayonet the wounded. The blades, here, were
very dull indeed.

Sincerely,

Pamaie Mt bin M. Dillon Qs

Director, Treasury Offset
8/95 to 11/97
Retired

The Honorable Stephen Horn
The Honorable Carolyn Maloney
Office of Inspector General, Treasury


68

government doesn’t have to spend time
and money chasing the resulting debt. My
bill will save the taxpayer money, and I
hope that the Chairman will hold a hearing
on that bill soon.

Thank you.


719

Refund Offset Program, where I think the amount that we have
collected through that program this last year has been $981 million
in child support. So the need is there, and I agree with you, that
number isn’t all that impressive.

think the reason that it is not, is because there aren’t that
many payments that we now have in the offset process to work
against those child support debts. When we bring in later this year
the National Finance Center’s salary offset, and then work next
year with Social Security and some of the other payment streams,
I think that will change.

I think we will work with the States, too, when the time is right,
when we have more of those payments available to encourage them
to use administrative offset in addition to the tax refund offset.

Mr. Horn. Well, I thank you.

I now yield 5 minutes to my colleague from New Hampshire, Mr.
Sununu.

Mr. SUNUNU. Thank you very much, Mr. Chairman.

Mr. Engel, in your summary, in your evaluation of FMS, one of
your main criticisms was that the FMS operation lacked an overall
concept of operations. Could you get into a little bit more detail
there? Describe what you meant by that. Put it in layman’s terms
and give us a couple of specific examples.

Mr. ENGEL. Sure. I will do that, and then I will have Keith
Rhodes give you a specific example in layman’s terms. What we are
saying is that when we are dealing with the development of a sys-
tem, and if you look at that from a building block approach, the
concept of operations is where you pretty much are establishing the
operations that you want that system to handle, how it will be run,
who will do what, and how those operations will be performed. But,
to put this in layman’s terms, Mr. Rhodes can you give them an
example?

Mr. RHODES. Mr. Sununu, prior to coming to the Government, I
worked in aircraft design, so I will give you an example from there
using the C-17. The concept of operations, we make a distinction
in the systems, discussion between concept of operation and func-
tional requirements. The concept of operations regarding aircraft,
for example, you would say, in the C-17, I want a heavy lift air-
craft that can go into a short runway environment where there is
no prepared runway, it has to be able to support brigade level, and
can go in by itself.

You know, it is a single stand-alone unit. The functional require-
ments will get down to actually defining what the runway is, actu-
ally defining how much, how heavy the heavy lift is, trying to get
within four engines or two engines. If I translate into what we are
talking about regarding debt collection, the discussions you have
been having prior to our discussion are actually trying to work out
the concept of operations, how large a problem, I mean, how grand
is grand, in GTOP, how interim is interim in ITOP. Those are the
kind of things you are working out.

How much money are we actually talking about? Is ITOP, GTOP,
whatever the final system looks like, is it a last ditch effort? If, for
example, I want the “something” TOP system to deal at the State
level, I have to understand up front that I want this to be incor-


15

Next, I would like to cover the assessment that we conducted of our two
automated offset systems. As Mr. Hawke has indicated in his testimony, Treasury
has determined that enhancement of the current ITOP system represents the most
effective and least risky approach to implementing the offset provisions of the
DCIA. In contrast, further development of the contractor-developed system,
GTOP, presents significantly greater risks. Although the vendor delivered system
software in November 1997, GTOP has not been placed into operation because a
detailed description of how the system is intended to operate has not been
developed, and until that is done, there is no way to test the system to determine if
it will accurately and consistently meet out debt offset needs. In essence, the

software is untested and its capability is unknown.

Documenting the detailed steps necessary for GTOP to perform the required offset
functions, testing those functions and then modifying the software to correct
deficiencies would take up to 18 additional months. Under this approach, the
current system would be operated “as is" during that period of time, and would not
be modified to offset additional types of payments. As a result, there would be
between $8 and $14 million fewer debts collected and the planned merger of tax

June 3, 1998 3:33) 5 ANTESTIMIAGRG


74

farm program; that there is no uniformity in certain areas of writ-
ing off debt within 1 year, the farm agency service report. So that
is an important area to look at.

Mr. .WKE. Mrs. Maloney, I think that is a very important

int. That is one of the reasons that we wanted to have this Price

aterhouse study done, because a very substantial portion of the
$52 billion in debt is over 4 years old. And when you look at the
Price Waterhouse report and the experience in the private sector
in collecting debt, it is a very low percentage. So, I think the point
you are making is clearly right: The earlier that you can begin the
collection effort, the higher percentage of the debt you are going to
collect.

Unfortunately, under the act, the way it is structured, the debt
does not come to Treasury until it is 180 days delinquent. And dur-
ing that period of time, the agency is presumably working with the
debtors to get the debt in the door or to deal with the due process
issues and the other kinds of concerns that the statute imposes.

Mrs. MALONEY. Do you have uniform procedures for agencies in
those 180 days? Do you have a guideline such as, we would like
three letters, we would like four phone calls before you refer it to
Treasury, or even a Treasury letter going out by tt particular
agency? I am just saying, do you have uniform procedures

Mr. GREGG. We have not developed that. Really, the part that we
have is that once it is over 180 days, it comes to us, and we have
not gone back to the agencies and tried to say, “Well, here is what
you ought to do to collect that.” I do think that the passage of this
act has certainly elevated the interests and the commitment from
the agencies to do that.

Quite frankly, we have our hands full with the debt that comes
to us after 180 days, and we really haven’t focused on the internal
agencies’ collections before they get to us.

Mrs. MALONEY. It could be something as simple as a letter to
them. We suggest you do three dunning letters. We suggest you do
one from Treasury. We suggest you do four phone calls before you
refer it to us. I mean, it wouldn’t have to a lot of work, just
making a suggestion to him that they wouldn’t have to follow, but
just suggesting.

Mr. GrecG. Excuse me, Congresswoman, there are Federal
claims collection standards that are out there that go through those
kinds of steps. I think, by and large, the agencies are doing that.
There is a routine that they are to follow and how often letters,
subsequent letters, go out.

Mrs. MALONEY. Could you get to the committee what the routine
is; that is, the uniform routine for the agencies?

Mr. GREGG. We would be happy to.

(The information referred to follows:]


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103

‘Mr. Chairman and Members of the Subcommittee:

1 am pleased to be here on behalf of the Department of Defense to discuss the Debt
Collection Improvement Act of 1996, and share with you the Department's progress in
implementing the Act.

Historically, the Department has had a strong debt collection program as a result of
aggressively implementing the Debt Collection Act of 1982. As you may recall, the Debt
Collection Act of 1982, provided agencies needed tools for implementing a successful debt
collection program. These tools included referring delinquent debtors to credit bureaus;
offsetting a Federal employee's salary to satisfy general debts owed the Department; accessing
interest and penalties on debts; and the use of private collection agencies. The De
policies, procedures and systems since then have culminated in a successful application of those
tools. Additionally, with the aid of those tools, most of the Department's debt collection efforts
have been incorporated into the Department's entitlement and payroll processes, and collections
now are accomplished largely through a payment offset process.

The Debt Collection Improvement Act of 1996, provided additional tools and imposed
additional requirements. Among those is the requirement that agency debts, that are 180 days or
more in arrears, be transferred to the Department of Treasury for collection or administrative
offset, disbursing officer’s payments be matched to debts certified to the Department of Treasury
for offset, the mandatory use of electronic funds transfer when making payments and the
inclusion of tax identification number on vouchers certified for payment.

Under the Debt Collection Improvement Act, the Department of Treasury is the federal
government's primary debt collection agency. Up to the time that debts are referred to the
Department of Treasury for collection, the Defense Finance and Accounting Service is the
Department of Defense's primary debt collection agency. The Defense Finance and Accounting
Service was created in 1991 as the Department's accounting firm. Since then, the Defense
Finance and Accounting Service has made significant progress in standardizing and
consolidating debt collection systems and operations within the Department. Information
regarding delinquent debts owed to the Department, where no Department of Defense payment is
available for offset, now is maintained in a centralized debt collection system--the Defense Debt
Management System. The Department's consolidation of debt collection operations were
successfully completed in May 1997. This consolidation resulted in a $9.5 million annual
savings to the Department. The Defense Debt Management System is scheduled to be year 2000
compliant by October 31, 1998. In May 1998, this model program was awarded the Vice
President's National Partnership for Reengineering Government prestigious “Hammer” award
for improving collection services and realizing cost savings to the taxpayer.

Most of the debt owed to the Department results from administrative determinations of
amounts owed by the Department's vendors, service members or civilian employees--rather than
from government loans or credit programs. Vendors become indebted to the Department
primarily in one of two ways--by failing to perform contractual obligations or by receiving
payments in excess of amounts eamed. Individuals become indebted to the Department by
receiving pay or benefits that they are not entitled to. Examples would include a military


39

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64

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Congress of the United States
Bouse of Representatives
‘Washington, BE 20515-3214

June 5, 1998

REP. CAROLYN B. MALONEY --
OPENING STATEMENT

HEARING ON THE IMPLEMENTATION OF
THE DEBT COLLECTION IMPROVEMENT ACT OF 1996

Thank you Mr. Chairman.

I am very pleased that you are holding
this semi-annual oversight hearing on our
Debt Collection Improvement Act of 1996
(DCIA). I am hoping our bipartisan
investment in collecting delinquent debt
will soon start to show a profit. So far,


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67

schedule.

If I have learned one lesson from the
briefing material that the Treasury
Department has provided, it is that the
older the debt becomes, the harder it is to
collect. That’s why I believe that we must
move quickly to carry out the DCIA. If
we don’t, we stand to lose that money
forever.

Perhaps even more important is that we
should try to prevent debts from occurring
in the first place. I want to point out that
my bill, the Federal Benefit Verification
and Integrity Act would prevent debts by
improving the accuracy of information
provided by applicants of Federal benefits.
For example, by preventing an
overpayment from occurring, the


104

member who was paid an enlistment or reenlistment bonus but who failed to complete the period
of service for which the bonus was paid or an individual who received emergency medical care
at a government medical facility but was not entitled to receive the care free of charge. Both
vendor and individual debt collection processes have imbedded administrative procedures that
may defer collection actions until the completion of formal agency determination processes. For
example, for contractor debt, such debts may be appealed to the Armed Services Board of
Contract Appeals.

‘The Defense Finance and Accounting Service pays the Department's military members,
retirees, and annuitants, as well as the Department's civilian employees. The Department's
individual debt management operation is an integrated extension of many payroll functions
performed for the Department’s Service members and civilian employees. As a result, the
Defense Finance and Accounting Service has the ability to work with an individual to arrange
for the voluntary repayment of a debt, or to offset pay if voluntary repayments are not agreed to.
It also provides the capability to consider and respond to other actions such as: a claim by the
member/employee, a request for waiver or forgiveness of a debt, and findings from a Board of
Correction of Military Records.

‘Once a debt is delinquent, and there is no Department of Defense payment available to
offset, the debt is transferred to the Department's centralized debt collection office/system
(Defense Debt Management System). The Defense Debt Management System automatically
issues demand letters and monthly billing statements to debtors. Additionally, if debt remains
unpaid, the debt system may report the debtor to a credit bureau and refer the debt to a private
collection agency. These actions normally are completed within 30 to 120 days of debt
establishment. The Defense Debt Management System also performs debt matching to
Department of Defense pay systems for internal offset where feasible. Larger debts are referred
to the Department of Justice for appropriate legal action, Debts also regularly are referred to the
Internal Revenue Service for offset against matching Federal income tax returns.

During FY 1997, the Department collected $10.1 billion in amounts owed to the
Department. At fiscal year end, the Department's “Report of Receivables Due from the Public”
reflected $5.5 billion in accounts receivable due from the public. Of those amounts, $3.1 billion
were for debts that remained unpaid beyond the date of a written demand for payment.

However, as you may be aware, not all debts shown in the “Report of Receivables Due
from the Public” are in a collectable status. That is, although, from the Department's perspective
the amounts included in the “Report of Receivables Due from the Public” are owed to the

the Department may not be in a position to legally enforce collection action on
some amounts. For example, some amounts may be in protest or dispute; may be involved in
further agency determinations (review or judgement); or in deferment, litigation or bankruptcy
proceedings, Such amounts are exempt from collection action until resolved. After taking into
consideration all such debt amounts that were not legally enforceable debts at the end of
FY 1997, of the $3.1 billion Department of Defense debt shown on the “Report of Receivables
‘Due from the Public,” only $267 million was subject to the cross-servicing or administrative
offset provisions of the Debt Collection Improvement Act.


45

the cost more than doubled from $3 million to $6.1 million when additional
requirements were identified and added.

« FMS either did not always provide the contractor with needed requirements
and specifications or provided specifications that were too vague. FMS
relied on the contractor to develop the business requirements for GTOP.
Consequently, the contractor was left to its own resources to develop a
system to process payment and debt data coming from many different
agencies. This increased the risk that GTOP would not operate as intended.

«Lastly, FMS did not adequately ensure that the contractor would develop a
system that would meet customer agency needs. For example, the initial
task order required the contractor to develop a fully tested and operational
interface with approximately four non-Treasury Disbursing Offices.
Instead, the contractor delivered one standard payment interface and a

reversal process to which these agencies must adhere.

All of this points to a systems development effort that was not well planned or
managed. In another review we currently have on-going, we are taking a
broader look at FMS’ overall strategic planning process. What we are finding
is that FMS" difficulties with implementation of DCIA are symptomatic of
fundamental weaknesses in their strategic planning process. These fundamental
weaknesses will need to be corrected if FMS is to be successful as they move

forward to fully implement the DCIA.


87

3 years ago, when it all happened. Have we got ways to keep this
from mounting up?

Mr. Hawke. Well, I think the implication of your point is very
well taken, Mr. Chairman. I think that the Blondie-Dagwood anal-
ogy may be apropos. But I do want to say——

Mr. Horn. It puts us both at the same age.

Mr. Hawke. The decision that was made here was in effect a cut-
your-losses decision. Because it would have taken almost $8 million
more to bring the GTOP system to the point where we could really
determine whether it worked or not. And it would be a contingency
or an uncertainty even then. We know the ITOP system with en-
hancements will work. So that while we, in effect, wrote off a $5
million investment, we saved an investment of an additional $8
million that might or might not have turned out to be a wise in-
vestment.

Mr. Horn. No, I think you made the right decision. I wish more
would manage these programs than what I have witnessed at FAA
in 1993. You could just tell it was unmanaged. That was the prob-
lem. I asked them if they checked with Lufthansa as to what they
were doing: Oh, gee, no, we didn’t. I finally got to the Lufthansa
tower a year and a half ago, went up in it, the president of Luft-
hansa was our host. I said I am curious, has the FAA ever been
in this tower. He checked with his technical people there, and no,
they had never been in the tower.

Of course, the equipment in the tower, I think I have told you
this story, was Raytheon from Massachusetts. It was not German,
it was American. The © People there said all you would have to do
for the whole air traffic system in America, which is obviously
much larger than Europe in interactions every day, is simply add
a series of boxes and you would have it met.

Well, we blew $4 billion because we didn’t go and look at what
other people are doing. I am used to that attitude in California,
since their attitude is: Gee, if we didn’t do it in State government,
why nobody has done it. Well, we have got innovation all over this
country in small States, medium States, large States, and the same
with the Federal Government. We need to learn from each other,
and not repeat the same mistakes. So I am glad you cut your losses
when you did. You made the right decision.

I don’t have any other questions—well, I have one sort of, be-
cause we mentioned IRS, and I have great confidence as, you know,
in Commissioner Rossotti. I think we all do. But before Rossotti,
let me ask this to Commissioner Gregg: Has the FMS experience
in collection of debt based on the offset of the IRS refunds been any
different than the experience of IRS when they managed this pro-
gram? What are the differences that you see—and maybe the In-
spector General and GAO have some thoughts on that subject—has
it changed in any way, moving into FMS and out of IRS in terms
of the collection of debt and the offset refunds?

Mr. GREGG. The experience that we went through during the end
of 1997 and the tax year of 1998 had both FMS and IRS involved
in this transition year, and that was extremely difficult to pull off
keeping two automated systems in sync. I think it also reflects
what you can do if you work together very closely. So the next year,


8

In support of this goal, FMS has shifted from an implementation
app! that attempts to address all requirements at once to a
phased approach that establishes priorities for goals and addresses
them appropriately. This new approach allows key DCIA require-
ments to be pursued aggressively by ensuring that sufficient re-
sources are available to meet commitments and implementation
deadlines. FMS management has also consolidated reporting and
agency liaison activities to ensure consistent and positive external
communications, bel

While se Cl are very recent, we ieve good progress
has been achieved ance the last hearing and we welcome the op-
Portunity to share that progress with you.

First, I would like to review the 1998 tax refund offset transition
progress. As we reported in our November testimony, FMS and IRS
originally planned to merge the tax refund offset and the Treasury
offset programs in January 1998. In light of the magnitude of col-
lections in the Tax Refund Offset Program, and the potential for se-
rious problems and disruptions, the transitions were not completed
smoothly. FMS and IRS jointly agreed to delay the merger of those
two programs until January 1999.

Since that time, FMS and IRS have worked closely together to
implement a transition process in 1998 that allowed FMS to
streamline and improve its operations by providing a single mecha-
nism for agencies to simultaneously refer debts for both the tax re-
fund offset and administrative offset. This action was successful in
ensuring that an estimated $2 billion in delinquent child support
and Federal nontax debt collections was not jeopardized.

The joint 1998 process includes a significant change in workflow
and provides many of the benefits that would have occurred

through the merger of the two offset . By requiring agen-
cies to submit their debt files throu, AMS, we have been able to

significantly increase the Treasury Offset P: debt data base
and to more fully prepare creditor agencies for the full program
merger.

Since the last hearing, Federal nontax debt referrals for adminis-
trative offset have increased from $9.4 billion to $16.7 billion, and
participation has increased from 17 to 36 agencies as a direct re-
sult of the information sharing between FMS and IRS. This year’s
Federal nontax debt collections for tax refund offset transition proc-
ess total over $765 million as of May 15. That is compared to $541
million during that same period in 1997.

In addition, combined administrative offset collections for Fed-
eral nontax debt and child support total over $1 million from last
November through May 15 of this year. This is largely due to the
successful implementation of the 1998 transition process for admin-
istrative and tax refund offset.

Having accomplished the 1998 transition process, we imme-
diately turned our attention to merging the two systems. FMS’ ad-
ministrative offset strategy over the next 8 months will focus pri-
marily on the full merger of the Tax Refund Offset Program with
centralized administrative offset in January 1999. To accomplish
this objective, FMS is working closely with the San Francisco Fed-
eral Reserve Bank to upgrade the current Interim Treasury Offset
Program system to handle larger volumes and more complex proc-


OVERSIGHT OF THE IMPLEMENTATION OF
THE DEBT COLLECTION IMPROVEMENT ACT

FRIDAY, JUNE 5, 1998

House OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room
2247, Rayburn House Office Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.
resent: Representatives Horn, Sununu, Kucinich, Lewis, and

loney.

Staff present: J. Russell George, staff director and chief counsel;
Mark Brasher, senior policy director; Matthew Ebert, clerk; and
Faith Weiss, minority counsel.

Mr. Horn. The Subcommittee on Government Management, In-
formation, and Technology will now come to order.

Over 2 years ago Congress passed, and the President signed into
law, the Debt Collection Improvement Act of 1996. This law
changed the rules of the game for debt collection. Currently, the
total of delinquent nontax debts is $50 billion. By providing new
collection tools to the agencies and incentives to increase collections
and accountability, we would hope to increase the dismal perform-
ance of the Federal Government in collecting delinquent debts.
That has not been how it has worked out. We are here today to
see if we can impart a new sense of urgency and breathe some new
life into this program.

First, let’s review the facts. Let’s look at the program costs. The
Department of the Treasury’s Financial Management Service has
spent $40 million implementing the Debt Collection Improvement
Act, but has collected only $4 million. We have collected peanuts,
in brief, and that needs to change.

Let’s look at the system failures. The Department of the Treas-
ury hired a contractor to build a system that it now says it did not
need. It spent $5 million doing this, but that did not allow us to
intercept money from deadbeats who owe the money to the U.S.
taxpayers, the stated purpose of the system. Now the Department
is returning to its old system to improve that “interim system,” to
allow new payment streams to be included. Treasury estimates
that they will collect almost $100 million per year once their old
system is improved. That means that we have lost $100 million be-
cause of the year-long delay.

q@


42

Mr. Chairman and Distinguished Members of the Subcommittee:

Mr. Chairman, members of the Subcommittee, I am pleased to appear before you today
to discuss the Financial Management Service's (FMS) efforts to implement aspects of

the Debt Collection Improvement Act of 1996 (DCIA).

The overall purpose of the DCIA was to strengthen the Federal government's ability to
collect delinquent debt. Some of the tools provided by the Act to enable the
Government to achieve better debt collection successes include: centralizing certain
Federal non-tax debt operations within the Department of the Treasury (Treasury);
mandating the use of electronic funds transfer; and creating a Treasury offset program.
As you know, Congress intended Treasury to act as the coordinator of Government-
wide debt collection activities. As the coordinator, Treasury would provide a
mechanism for effective administrative offset and act as a clearinghouse to assure that
Federal debts are collected in a timely and efficient manner. Treasury delegated

primary responsibility for implementation of the DCIA provisions to FMS.

We recently issued a draft audit report to FMS which focused on their efforts to
develop a new automated information system, the Grand Treasury Offset Program.
otherwise referred to as GTOP. Our conclusion was that overall this development
effort was not well planned or well managed. While FMS has not had sufficient time
to formally respond to our report, recent events at FMS would appear to support our

report's conclusions.


73

Now, as Mr. Hawke said earlier, we are not where we want to
be here. But in that area, in the cross-servicing, just within the last
few months, I think we have seen some noticeable improvement,
and we certainly look, as more and more debt is provided to us for
cross-servicing, for greater results in that area.

Mrs. MALONEY. I am going to call it cross-servicing centralization
of debt, because that is really what it is. I think cross-servicing is
a misnomer. Centralization of debt in Treasury, whose mission it
is to collect debt. Were you surprised that the centralization of debt
was more successful than the offset program?

Mr. GREGG. We only have the vendor payments and the OPM re-
tirement under offset right now. So, I think we are not where we
want to be in terms of bringing that payment stream in.

On the other hand, if you look at the Price Waterhouse analysis
that was done for us, r you get through the tax refund offset
portion of that, cross-servicing actually is a fairly significant piece
and greater than the offset portion. Was I personally surprised?

'es; I was.

Mrs. MALONEY. I wasn’t. I wasn’t. And what surprises me is the
reluctance that agencies have to cooperate with you.

I mean, they call me up and they tell me they don’t want to refer
their debt to sury, yet they are not bringing it in. I don’t un-
derstand their resistance to referring debt and still, at this point,
they are not really following the law. They are not referring the
debt to you, yet they are not bringing it in either.

So, I am wondering if another approach of just sending them a
Treasury centralization letter, even if it comes into their own de-
partment, might help the process more. I don’t know.

Mr. GREGG. Mrs. Maloney, we have worked in the last few
months very cooperatively with the agencies. And I think to some
extent the progress that had been shown before is as much our re-
sponsibility as the agencies’ responsibility. We are working to-
gether, and I think we are working together very well. We went to
the agencies and went through the process of working together to
evaluate what is in their debt portfolio and figuring out how much
can be referred, and now, actually, the amounts are starting to
come to us.

So, I think, admittedly, it was a slow start, but I think in the
last few months the agencies have, in fact, been working well with
us, and more and more debt is coming over to us for cross-serv-
icing, or for centralization, as you say.

Mrs. MALONEY. You mentioned the Price Waterhouse report. On
page 6, they talk about most of the Government’s debt is too old
and will be hard to collect. I think that point is the point I keep
trying to make. The older the debt gets, the harder it gets. So,
right at the beginning is when you should have most of your focus,
to get letters out from Treasury to citizens about their responsi-
bility, and then it comes in.

Do you have guidelines for writing off debt? Have you developed
centralized guidelines for writing off debt?

Mr. Hawke. The question of writeoff policy is one that is under
active consideration, I think, in the credit policy working group.

Mrs. MALONEY. I think that that is needed. That is pointed out
in this report, the one that I mentioned in the GAO report on the


82

Mr. SUNUNU. I would certainly appreciate you submitting that
list to the committee. Are there any specific examples that you can
call to mind?

Mr. CALAHAN. Let me ask Mr. Savill to respond to that.

Mr. SAVILL. I can’t think of any. There was—Systems 90 was an
tm T systems development within FMS that did have some problems.

Mr. SUNUNU. What was the purpose of that system?

Mr. SAVILL. It was an accounting system internal to FMS.

Mr. SUNUNV. Is it in use today?

Mr. SAVILL. I can’t comment on that, sir.

Mr. Greac. Mr. Sununu, if I might.

Mr. SUNUNU, Please.

Mr. GREGG. I think there are a couple of points. One is that the
evaluation that we did on the ITOP and the GTOP system was to
try to figure out what makes sense for going ahead, and that was
a decision that we recommended to Treasury, to terminate any fur-
ther work on the GTOP system and to proceed with ITOP. I can’t
speak to what FMS has done in the past in developing automated
systems, but I have a fair amount of experience in the kind of
things that work and the kind of things you have to watch out for.
It starts with having the top management of the organization, es-

‘ially for large systems, being involved and taking the responsi-
Patity to make sure that things get done.

Another thing is having a Project manager who is knowledgeable
and a project manager who will raise issues. One of the biggest
things that happens is that problems occur, and people they are
afraid to raise them up in the organization. So you need someone
who has that kind of confidence and knowledge to spot things.

I think one of the biggest dangers is not having the right kind
of interaction between ople knowledgeable in the program
and those developing it. Unless you have that, the risks are very
great that what you are going to get is not what you want. You
need the Program peoples for example, in this case, debt, working
yery closely with the ITOP people and others to make sure this

appens.

Mr. SUNUNU. Do you believe that you have that kind of program
structure and accountability in place now at FMS?

Mr. GREGG. Yes, sir. One final point.

Mr. SUNUNU. Please.

Mr. GREGG. A concern in large automated systems is they keep
growing. You need someone to say this is what we are going to
build and get it built, and do that in a modular fashion. The great-
est danger is for someone to keep getting ideas and to have it get
bigger and bigger and 2 or 3 years go by and you still don’t have
anything. You need the constant reinforcement of what it is you
are going to build and sticking to that, and then enhancing it later
on, rather than trying to do too much at once is important, because
they are tough enough as it is.

Mr. SuNUNU. Thank you. Let me get back briefly, Mr. Gregg, to
some discussion on the collections process and, in particular, collec-
tions of so-called deadbeat corporations. Last night the sub-
committee received a letter from Dun & Bradstreet, and they had
evaluated a series of deadbeat corporations that are delinquent, but


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
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

JUNE 5, 1998

Serial No. 105-181

Printed for the use of the Committee on Government Reform and Oversight

oe

U.S. GOVERNMENT PRINTING OFFICE
52-627 WASHINGTON : 1999

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

3 ISBN 0-16-058356-X
SPO,



108

Mr. Horn. Thank you very much.

Mr. Bitz, do you have anything to add at this point?

Mr. Bitz. No, sir.

Mr. Horn. OK. Mr. Sununu, 5 minutes, a long 5 minutes.

Mr. SUNUNU. No; I have just a couple of questions. First, for Mr.
Catlett, I have a question about third-party payments, third-party
debts. As I understand it, the VA probably is going to be collecting
more and more payments from third parties as a result of recent
legislation. Could you describe the Department of Veterans Affairs’
efforts to improve that third-party collection process, in particular,
medical debts that are owed by insurance companies?

Mr. CATLETT. Mr. Sununu, I will give you a brief overview and
let Mr. Grams answer that. This question is directly germane, I
think, to his attendance today, and he can give you better detail
more quickly than I can. But you are right, clearly collection of
third-party debt has become pivotal for us because we now retain
those collections as of last year rather than returning them to
Treasury.

Mr. SUNUNU. That provides a little bit of positive feedback, a
positive incentive. Go ahead.

Mr. Catvett. If I could, I would ask Mr. Grams to give you a

juick overview, and I will be glad to provide in detail for the record

e Steps we have been taking to improve those collections.

Mr. Grams. I will make this very quick.

Mr. SUNUNU. Take your time, it is important.

Mr. Grams. We have about a dozen initiatives underway which
we think over the next 5 years will help us almost double the
amount of money that we are collecting from veterans’ health in-
surers. They include several major efforts, such as changing what
we bill insurance companies for the care that we provide veterans
that is pursuant to a law that Congress passed last year, which al-
lows us to charge something called “reasonable charges” instead of
“reasonable costs.”

That allows us to determine what the community charges are
within each one of the locations of our 153 medical centers and
charge something that is more comparable to what insurance com-
panies are likely to pay, as opposed to limiting ourselves to our av-
erage costs, which is what we are doing at the present time.

Another major initiative is the referral of debt that is over 90
days old—well, referral is not quite right. It is getting the help of
a private collection agency when a debt is over 90 days old. We ran
a pilot at our Houston Medical Center over the last several months,
and they used a private collection company who was familiar with
the State laws concerning insurance collections in Texas, and they
went after the health insurance companies in that State. For an in-
vestment of $10,000, that facility brought in $322,000. So for eve:
dollar they spent, they brought in $32 in increased insurance col-
lections. We expect later this month to sign a contract to move that
program on a national basis and are hoping that the returns will

somewhat similar to the experience at Houston.

We are working with HCFA to do a data match on the small
number of Medicare eligible veterans who have primary health in-
surance coverage; either the elderly that are still working or some-
one who has retired and has Medicare, but their spouse is still




109

working and they still have primary insurance coverage. HCFA has
been very cooperative with us on that.

That initiative alone can generate around $70 or $80 million a

ear by helping us identify which veterans have insurance much
tter than we can today.

Another way we are trying to improve the identification of insur-
ance that veterans have is called preregistration calls. This is real-
ly simple. Mrs. Maloney mentioned earlier common sense. Well,
one of our staff really came up with a good commonsense idea,
which was to call veterans at their home, remind them they have
an appointment, check all of the information that they have pre-
viou: y given us, including whether or not they have health insur-
ance. it we found is if they are talking to you from the comfort
of their home, they are much more likely to tell you they have
health insurance than if they are sitting in front of an admissions
clerk in one of our facilities and they are anxious to get in and get
on with their actual health care.

One of the other things that is going on is that you passed a law
last year that allows us to keep money we collect. In the past
this was something that may or may not——

Mr. SUNUNU. Not you Personally?

Mr. Gras. No, the Congress. Passed a law last year that allows
VA, not me, to keep the money, although I wish it was the other
way. I think this is going to provide a great incentive to our facili-
ties to collect this money, because what they are about is providing
health care to veterans and when they see that money coming in
and knowing that they can use it to improve health care for vet-
erans, we think that will provide a tremendous incentive to in-
crease their efforts.

Mr. SUNUNU. Is the retention within VA as a whole or is it on
a VISN by VISN basis?

Mr. GRAMS. According to the law, it is a VISN by VISN and facil-
ity-by-facility basis.

Mr. SuNUNU. Is it specific facilities retained or is it retained
within the VISN?

Mr. GRAMS. It is retained within the VISN.

Mr. SuNUNU. In your mind, is there any value to sort of devolv-
ing this to the next level allowing facilities to retain, does that pro-
vide even additional feedback in each facility effectively managing
this information regarding insurance and coverage on a customer-
by-customer basis?

Mr. GRAMS. I think the way they are running it now, that is the
way they are doing. Certainly if you told the facilities they auto-
matically get to keep 100 percent, you might expect they would do
a little bit more than if they are told they are getting 80 or 90 per-
cent of it. On the other hand, what we are doing now in VHA is
making each network office responsible for the health care of all of
the veterans within their part of the country.

And we would like to balance maybe that extra incentive off
against letting the network director and the network office decide
overall where the resources should be, and just because a par-
ticular facility may have collected more than another, there may be
reasons to put some of those resources in the other hospital to help


30

As of the last hearing, cumulative administrative offset collections totaled more
than $936,000. Today, collections are almost $2 million.

Treasury has made significant progress in other areas as well:

In January, FMS and IRS completed processing and loading agency debt files to
the Treasury Offset Program and Tax Refund Offset Program databases for the
1998 transition year process, the precursor to complete merger of the two offset
programs in January 1999. This increased the database of delinquent Federal non-
tax debt available for administrative offset from $9.4 billion to $16.7 billion and
represents an increase from 17 to 36 participating agencies. Tax refund offsets
were higher this year than they were last year, increasing from $1.39 billion in
May 1997 to $1.74 billion in May 1998. Commissioner Gregg will provide more
details in his testimony of our work in this area.

We are working closely with the National Finance Center to incorporate their
Federal salary payments into the administrative offset program, and with the
Social Security Administration to develop a joint implementation plan for
inclusion of SSA benefit payments into the program.

In compliance with the President’s Executive Order mandating that Treasury
support collection of delinquent child support debt through administrative offset,
we are working with the Department of Health and Human Services and the States
to bring more delinquent child support debts into the system for offset. The
number of States and territories participating has increased from 8 to 15, with
referrals totaling over $6.8 billion as of May 15th.

In otder to increase and strengthen agency compliance with DCIA referral
requirements, FMS has implemented an outreach effort that focuses on the
transfer of all eligible delinquent non-tax debt to FMS. Through this effort, we
are working with approximately 50 agencies which carry the majority of
delinquent debt receivables. FMS has worked out the terms for debt referral with
the five major credit agencies (Department of Education, Department of
Agriculture, Department of Veterans Affairs, Small Business Administration, and
Department of Housing and Urban Development), which hold 70 percent of all
delinquent Federal non-tax debt. We have also met with all 24 CFO agencies and
have obtained commitments for debt referral. We plan to complete meetings with
all remaining agencies and expect to have referral schedules in place by July 31,
1998.

In this regard, I would like to thank you, Mr. Chairman, and
Maloney, for your efforts to assure that agencies understand the importance of


89

Mr. ENGEL. The payoff itself I can’t speak to. But, I would say
that one of the benefits that the transition process resulted in this
year was having the amounts that were going to be matched

inst the IRS payments for the tax refund offset go through
FMS. This increased the administrative offset database, so that is
what jumped when we spoke of earlier today about $9.4 billion up
to the $16.7 billion. I think that was a direct result of the inter-
action between IRS and FMS.

Mr. Horn. Good. Any comment, Mr. Calahan?

Mr. CALAHAN. No, Mr. Horn.

Mr. Horn. OK. Well, we thank each of you for coming here and
having this dialog with us. We appreciate it. You are doing a very
important thing as far as we are concerned. You could see from
Mrs. Maloney’s views on this, which have been consistent from the
very beginning, we all feel strongly. I think we speak for our col-
I es in both parties, that this is a useful thing to get into, and
if there are ways we can improve it in any way, in either law or
by administrative regulation, why, I hope we can work together
and get the job done.

ou for coming.

We will now have panel 2 come forward. Our two presenters in
panel 2, Mr. Mark Catlett, the Chief Financial Officer, Department
of Veterans Affairs. He is accompanied by Mr. Todd Grams, who
is the Chief Financial Officer, Veterans Health Administration, De-

ent of Veterans Affairs. Mr. Nelson Toye, the Deputy Comp-
troller, Department of Defense, accompanied by Mr. Greg Bitz, the
Director of Finance, Defense Finance and Accounting Service.

Gentlemen, you know the routine, when we introduce you, your
statements will be automatically put in, we would like you to sum-
marize, and we do ask witnesses to take the oath.

[Witnesses sworn.]

Mr. Horn. Thank you. The clerk will note all four have affirmed.

Let’s just start with Mr. Catlett. Both of you are oldtimers here,
so, even though you look pretty yor to me. What good news do
you have to bring with us, Mr. Catlett?

STATEMENTS OF MARK CATLETT, CHIEF FINANCIAL OFFICER,
DEPARTMENT OF VETERANS AFFAIRS, ACCOMPANIED BY
TODD GRAMS, CHIEF FINANCIAL OFFICER, VETERANS
HEALTH ADMINISTRATION, DEPARTMENT OF VETERANS AF-
FAIRS; AND NELSON TOYE, DEPUTY COMPTROLLER, DE-
PARTMENT OF DEFENSE, ACCOMPANIED BY GREG BITZ, DI-
RECTOR OF FINANCE, DEFENSE FINANCE AND ACCOUNTING

RVI

Mr. CATLETT. Mr. Chairman and members of the subcommittee,
it is my pleasure to testify on behalf of the Department of Veterans
Affairs concerning our implementation of the Debt Collection and
Improvement Act [DCIA]. Accompanying me today is Mr. Todd
Grams, the Chief Financial Officer for the Veterans Health Admin-
istration.

As VA's Chief Financial Officer, I have been working closely with
our Veterans Benefits Administration, Veterans Health Adminis-
tration, and other VA elements to take the steps necessary to en-
sure our compliance with the requirements of the DCIA.


84

[The information referred to follows:]
195gtVRS (Credit Alert Interactive Voice Response System) began in December,

Mr. Hawke. Mr. Sununu, could I add just one point. I think the
point you are focusing on, which is a very important one, reflects
some of the concern that Chairman Horn and Mrs. Maloney were
expressing earlier about the rigor with which program agencies col-
lect debt. It is not at all surprising to find that an agency, for ex-
ample, that is dealing with a contractor that they have to deal with
on a regular basis or to provide some service that they believe is
particularly important for them, may be more permissive in col-
lecting delinquent debt from that contractor than a third party
would be. That is the underlying concept of the Debt Collection Act,
that is to get that debt out of the program agency:

Mr. SUNUNU. Your point is well taken. But this specific concern
isn’t about being rigorous in collecting debt, it is about being rig-
orous in communicating to agencies when there is a delinquency so
we don’t keep lending or providing grants or providing contracts to
these deadbeat corporations. That is—I mean it is complementary,
but it is a separate system that needs to be put into place.

Mr. HAWKE. I agree. You are referring there to interagency rela-
tionships or multiple agency relationships with the same debtor. I
was really going back to the earlier point about the granting of ad-
ditional contracts within a particular agency.

Mr. SUNUNU. You are correct, interagency is important although
some of these examples are also within a single agency, a single
agency that has a delinquency. Again, it is not a question of being
aggressive in collecting the delinquent debt, it is a question of rec-
ognizing a delinquency so you don’t continue to issue contracts and
continue to put additional taxpayer funds at risk.

Mr. Hawke. Exactly. I think that reflects the chairman’s point
that program agencies may tend to be more concerned with car-
rying on their programs than collecting debt, and sometimes things
like that happen.

Mr. Horw. It is a long 5 minutes. Go ahead. Keep going.

Mr. SUNUNU. Let me conclude with a question on a slightly dif-
ferent topic, but one that is near and dear, if you will, to the sub-
committee’s heart. We are talking about GTOP and the cost of poor
implementation of IT systems. I want to just touch briefly on the
year 2000 computer problem, which is one that the chairman of
this subcommittee, I think, began to investigate and evaluate long
before most anyone else in Washington, DC. As we approach the
year 2000, obviously, the importance of this problem is receiving
the exposure it deserves.

Currently, I believe FMS has completed 15 of its 62 mission-crit-
ical components for upgrades necessary to deal with the year 2000
problem. According to the most recent quarterly report, I believe it
has been completing the renovation of five systems per quarter,
and at that rate FMS clearly will not finish on time.

My question, Mr. Gregg, is how is FMS prioritizing the need to
deal with this issue, how are you prioritizing your information
technology staff in order to focus on the highest impact systems?

Mr. GREGG. Let me say that one of the issues—let me just men-
tion specifically Social Security, since it has been identified as a


12

partners to resolve implementation issues. In support of this goal, FMS has
shifted from an implementation approach that attempts to address all requirements
at once to a phased approach that prioritizes goals and addresses them
appropriately. This new approach allows key DCIA requirements to be pursued
aggressively while insuring that sufficient resources are available to meet
commitments and implementation deadlines. FMS management has also
consolidated reporting and agency liaison activities to insure consistent and

positive external communication.

While these changes are very recent, we believe that good progress has been
achieved since the last hearing and we welcome the opportunity to share that
progress with you. In particular, I would like to underscore the importance of Mr.
Hawke's comments regarding our recent portfolio analysis. This analysis has
provided a baseline -- a starting point, if you will — for reviewing Treasury
performance in the collection of delinquent non-tax debt and has assisted us in
focusing our efforts and determining our priorities. We view this analysis as a
crucial new tool to assist us in effectively implementing the debt collection

tune 3, 1998 (3:33pm) 2 AATESTIMIA.GRG


54

future, other agencies may identify payments exempt by statute or request means-tested
or discretionary exemption of payments.

To date, Treasury has primarily relied on the agencies to identify potenually exempt
payments. For example, VA informed Treasury that certain payments were exempted
based on Section 6301(a) of Title 38, and Treasury confirmed the exemption, In addition,
the Social Security Administration (SSA) and USDA requested and received exemptions
for Supplemental Security Income and certain Food and Consumer Services payments,
respectively, based on DCIA's requirement that the Treasury Secretary exempt payments
under means-tested programs. At this stage, Treasury does not now the total effect on
the administrative offset program of payments that will be excluded from the program in
accordance with DCIA, or other statutory provisions, and on the basis of requests for
exclusions by heads of agencies.

To facilitate implementation of payments into the administrative offset program, Treasury
is developing several regulations applicable to payment issues. Some regulations have
been published as Interim Rules (for example, those relating to federal salary offset),
while others are currently being drafted or are with another agency for comment. For
example, the rule for offset of federal benefit payments has been forwarded to SSA for
consultation. Retirement and Survivors Benefits and Disability Insurance Benefits under
the Social Security Program accounted for about 61 percent of the number of payments
made by Treasury Disbursing Offices in fiscal year 1997.’ According to Treasury's most
recent DCIA Implementation Plan, it does not intend to publish a final rule for offsetting
federal benefit payments, including Social Security payments, until October 1998. In
addition, according to Treasury and SSA officials, even if the final rule were published,
SSA will not be ready to make required systems changes until 1999 because of demands
_on its staff related to the Year 2000 computing crisis.”

"DCIA excludes payments certified by the Department of Education under Title IV of the
Higher Education Act of 1965 and payments made under United States tariff laws. In
addition, DCIA requires exemptions for means-tested programs and allows other
discretionary exemptions when the head of the agency makes the request to the Treasury
Secretary, and the Secretary approves the request.

*DCIA provides that, except for $9,000 a debtor may receive within a 12-month period,
all payments due to an individual under the Social Security Act shall be subject to offset.

*For the past several decades, information systems have typically used two digits to
represent the year, such as "98" for 1998, in order to conserve electronic data storage and
reduce operating costs. In this format, however, 2000 is indistinguishable from 1900
because both are represented as "00." As a result, if not modified, computer systems or
applications that use dates or perform date- or time-sensitive calculations may generate
incorrect results beyond 1999.

6 GAO/T-AIMD-93-195


96

through the Treasury cross-servicing center rather than

directly to TOP.

IMPLEMENTATION OF CROSS-SERVICING REQUIREMENT

The DMC continues to work with OMB and Treasury to explore
the possibility of becoming a cross-servicer of government
debt under the DCIA. In regard to this objective, the DMC
submitted a debt collection business plan to OMB and, in
April 1997, submitted a cross-servicing application to
Treasury. We have since been involved in discussions with
OMB and Treasury, and we have been advised that a decision
should be made by Treasury shortly regarding the cross-
servicing application. At the same time, OMB has endorsed
the DMC as a franchise fund activity. This was reflected in

the FY 1999 Congressional budget.

The DMC currently houses almost 88% of VA debt over 180 days
delinquent (excluding third party medical claims, the unique
nature of which are addressed in this testimony, and active
vendee home loans which are managed by a mortgage servicing
contractor). The DMC is a highly efficient and effective
operation that performs all the functions required of a
cross-servicing center. In recent years, the DMC has
generated an average of about $15 in cash collections
(excludes collections from VA benefit offset) for every

dollar of operating cost. Inclusion of administrative


xi)

Question 2: What are the routine procedures agencies use to collect debt within their 180
day threshold. Do they send a dunning letter on Treasury stationery. Could

they?
Be
Answer:

The Federal Claims Collection Standards (FCCS) set forth government-wide standards for debt
collection policies and procedures. Although each agency is subject to unique statutory and
regulatory requirements conceming debt collection, agencies generally use the following
procedures when servicing debt less than 180 days delinquent, pursuant to the FCCS:

(a) first determine that a debt is owed ({.¢, it is legally enforceable);

(b) send one or more demand letters (which become progressively stronger) on
agency letterhead with notification to the debtor of the type and amount of the
debt, the agency's intent to collect the debt by various available means, including
referral to Treasury, the agency's policies with respect to charging interest,
penalties, and costs, and any due process rights available to the debtor;

(©) _ teview debtor's claims disputing the debt, hold heanngs, and comply with any
other applicable due process requirements;

(d) use any combination of the following debt collection practices, as appropriate:
(ji) report the debt to credit bureaus;
(ii) negotiate a repayment or compromise agreement;
ii) use internal offset, if available;
(iv) determine eligibility of debt for asset sale;
(v) refer debt to offset (tax refund and administrative offset);
(vi) refer debt for litigation;
(vii) begin foreclosure proceedings with respect to any collateral securing the
del

(viii) gamiish a debtor's non-Federal wages or other property; and
(ix) refer debt to a private collection agency.

Agencies do not send letters to debtors on Treasury letterhead. There are several reasons that
Treasury does not believe that is in the Government's interest to allow agencies to use Treasury
letterhead. As a practical matter, use of Treasury letterhead may result in debtors contacting
Treasury for information about their debt. Such information will not be available to Treasury if
the debt has not yet been referred. Also, use of Treasury letterhead by other agencies may result
in inappropriate use of that letterhead. Finally, a debtor receiving a letter from a creditor agency
on Treasury letterhead might mistakenly believe that his or her debt is being collected by and/or
is owed to the Department of the Treasury. Although not subject to the Fair Debt Collection
Practices Act (FDCPA), Federal agencies generally comply with FDCPA principles when
collecting debt, Use of another agency's letterhead could be construed as a false or misleading
representation in violation of the FDCPA. See also 31 U.S.C. § 333 (Civil and/or criminal
penalties may be imposed for misuse of Treasury letterhead).

Within 5 days of a debt being referred to Treasury for cross-servicing, Treasury sends a demand
letter to the debtor on Treasury letterhead. As long as an agency has completed all due process
requirements, debts less than 180 days delinquent may be referred to Treasury for ctoss-
servicing.


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48

efficiencies envisioned by such a consolidation have not yet been re-
lized.

Treasury's new management team, responsible for implementi
the act, has begun to address systems development problems an:

ans to comply with ‘Treasury's systems development guidance.
While we are encouraged by the positive steps Treasury is taking
in this direction, we have identified several areas where additional
actions are needed. I would like to highlight three of these for the
subcommittee.

First, Treasury has not yet developed and documented an overall
concept of operations. This is critical because it provides a high-
level description of the information systems, their interrelation-
ships and information flows. It also describes the operations that
must be performed, who must perform them, and how those oper-
ations will be performed. In short, it is the primary building block
on which a major system development effort is based.

Second, overall functional requirements for the system are not
yet available. These are based on the concept of operations and are
essential because they form the foundation that guides the system
development process.

Third, Treasury has not yet completed a risk management plan.
This step is integral because it provides management and others
with the information necessary to focus efforts on the areas that
pose the greatest risks. It also outlines the actions that will be
taken to mitigate the risks identified.

We have discussed these issues with Treasury officials. They
have agreed to take corrective actions and establish timeframes for
completing them. But, it will be important for Treasury’s top man-
agement to ensure that planned corrective actions are effective and
completed on schedule. Otherwise, Treasury runs the risk of costly
modifications and additional delays in developing an administra-
tive offset system.

Mr. Chairman, this concludes my remarks. We would be pleased
to answer any questions that you or other members of the sub-
committee might have.

[The prepared statement of Mr. Engel follows:]


117

developed. Reasonable people may disagree on what should be contracted for
first, but 11 ts not accurate to state that FMS did not recognize the need for the
fequirements.

The report faults DMS on page 7 for not providing all the specifications which
limit or exempt specific payments from offset. This is yet another flagrant lack
of knowledge und understanding of the requirements of the DCIA. The inclusion
of certain payments into the TOP, such as, but not limited to, Social Security,
Railroad Retirement and Black Lung payments, are a matter for published
regulations. These regulations were drafted and sent to Treasury's Office of
General Counsel after consultation with the affected agencies as the DCIA
requires. However, they had not been published for public comment and to
freeze requirements for the contractor, before Treasury final approval, and before
public comment, and before final publication, would be foolish at best and a
violation of the Administrative Procedures Act, at worst. As a matter of fact, i
understand that Treasury's Office of General Counsel has voided the draft
regulations worked out in consultation with the affected agencies and is redrafting
them. So itis unknown and unknowable when the exact specifications may be
given to the contractor on these types of payments.

The report suggests on page 7 that a follow-on contract will be needed at further
cost to the government and implies that there is something wrong with that. Asa
matter of record, Congress is considering amending the law: to add payments (or
child support debt collection and follow-on development will be necessary. The
point is to collect the debt at reasonable cost, not to avoid costs and not collect the
debt.

The report states on page 8 that the expertise from the functional areas of
Information Resources and Regional Operations was not utilized in the
development of GTOP. This is completely false and there is ample
documentation to show the involvement of both areas. DMS was in fact under
the Assistant Commissioner for Regional Operations in its earlier phases and all
activities had to receive the approval of the Assistant Commissioner. The files
reflect continuous briefings, formal approval of GTOP design documents. formal
approval of contract documents, team members from both Regional Operations
and Information Resources on GTOP activities, and so on, throughout the design
and development of GTOP. The GTOP platform was determined by the
contractor and by the Information Resources experts, not DMS, as the record
clearly shows. It is quite odd that the report contains statements completely
refuted by the documented record.

Regarding project management on page 9, the report refers to three different
project managers and that one project manager was reassigned without a
replacement. The project manager was not reassigned but was rather promoted.
based on his expertise and performance and remained an active consultant on the
management of GTOP. DMS actively recruited for his replacement using ment


53

must be further reviewed by the states to determine whether these debts are in
repayment status or whether the debtors have been afforded due process. Also,
according to USDA officials, statutory servicing rights normally require that the farm loan
debtors be offered workout alternatives prior to collection by offset. As such, this debt,
which totaled about $420 million, will not be made available for offset until this statutory
process has been completed.

Finally, according to a DOD official, DOD delinquent debts totaling about $2 billion are
primarily in protest or dispute. Accordingly, these debts have not yet been referred to
‘Treasury for offset.

FEW PAYMENTS BROUGHT INTO
ADMINISTRATIVE OFFSET PROGRAM

While referring all legally enforceable delinquent nontax debts for offset is an essential
element of an effective administrative offset program, the program's objectives cannot be
achieved in the absence of another equally essential element-payments that can be offset.
As discussed later, systems development problems have hampered Treasury's ability to
attempt to bring additional payments into its administrative offset program.

Currently, payments that are available for administrative offset are limited to (1) vendor
payments disbursed by Treasury and (2) retirement payments made by the Office of
Personnel Management (OPM). These types of payments have been in the administrative
offset program since 1996. Further, they comprised about 5 percent of the total number
of disbursements made, and about 21 percent of the total dollars paid, by Treasury
disbursing offices during fiscal year 1997.

In addition, although almost all of the vendor payments disbursed by Treasury are
currently available for administrative offset, many of these payments cannot be matched
against debtor information in Treasury's delinquent debtor database because the vendor
records do not contain Taxpayer Identification Numbers (TIN). According to Treasury,
during March 1998, about one-third of the payment requests submitted by the agencies for
payment by Treasury did not include TINs.

Further, Treasury does not yet know the total number of federal payments that may be
available for administrative offset. In addition to federal payments made by Treasury,
more than 50 Non-Treasury Disbursing Offices (NTDO) make federal payments. However,
Treasury has not yet identified the total volume of NTDO payments, which include those
made by DOD, the U.S. Postal Service (USPS), and numerous other federal agencies.
Moreover, Treasury has not yet fully determined the extent to which payments will be
exempt from administrative offset. Currently, Treasury has a request pending from the
Pension Benefit Guaranty Corporation for discretionary exemption for a number of
payment types, including those related to premium refunds to pension plans. In the

5 GAO/T-AIMD-98-195,


49

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to testify on the Department of the Treasury's
implementation of the administrative offset provision of the Debt Collection Improvement
‘Act of 1996 (DCIA). The act, developed under the leadership of this Subcommittee,
among other things, requires that agencies notify the Treasury of all legally enforceable!
nontax debts over 180 days delinquent for the purpose of offsetting federal payments,
including tax refunds, and provides authority for disbursing officials to conduct payment
offsets.

As you requested, our testimony today describes (1) the status of referrals by agencies of
delinquent nontax debts to Treasury for administrative offset, (2) actions Treasury has
taken and plans to take to include all eligible federal payments in the administrative
offset program, and (3) actions Treasury has taken, or plans to take, to consolidate the
administrative, tax refund, and federal salary offset programs.

SUMMARY

Treasury has recently made progress in getting the 24 agencies covered by the Chief
Financial Officers (CFO) Act of 190° to refer nontax debt over 180 days delinquent for
administrative offset. As of Apni 1998, the CFO Act agencies had referred to Treasury
about $16.7 billion in nontax debt over 180 days delinquent, and Treasury has entered
these delinquencies into its debtor database. This is a substantial increase over the
$9.4 billion that had been referred to Treasury about 7 months earlier, at about the time
the Subcommittee held DCIA oversight hearings in November 1997.

Also, as of April 1998, about $26.4 billion of reported nontax debt over 180 days
delinquent had not been referred to Treasury and is unlikely to be referred in the near
future. These delinquencies involve about (1) $12.3 billion of debts involved in
baniquptcies, foreclosures, and forbearance and formal appeals actions, (2) $3.6 billion of
foreign debt, (8) $3 billion’ of debts referred to the Department of Justice (DOJ) for
litigation, and (4) $525 million of debts owed to the Department of Housing and Urban

“Treasury generally considers a debt legally enforceable when the final agency
determination regarding the debt is made or any legal bar to further collection is
removed,

*The CFO Act, as expanded by the Government Management Reform Act, covers the
federal government's 24 largest departments and agencies, which account for 99 percent
of federal expenditures.

According to Treasury reports, agencies have referred about $3.5 billion of delinquent
debt to DOJ for hugation, and DOJ has referred about $500 million of this debt to
Treasury for administrative offset,

1 GAO/T-AIMD-98-195.


78

person like the small farm and the small business person. Should
we not make some recommendations out of Treasury, obviously co-
ordinated with Justice and everybody else, and see if it is part of
the President's program?

But I would hope that the Treasury leadership, and that is you,
Mr. Secretary, among others, down there, would come up with
some recommendations based on what we see in patterns and prac-
tices of people just getting a loan from this branch of the Govern-
ment, or this agency under the executive branch, and then just de-
faulting on it; not even with a buyer league. It seems to be that
person when that starts up in business again, there should be a
real look at how the Federal Government can collect that debt they
are owed, going way back.

realize that is upsetting a few people in bankruptcy law and
all that, but there has got to be some weeding out of who really
needs help. I can think of farmers that need help, when things go
bad due to rain or crop disasters or whatever, but when you got
a business person, whether it be a restaurateur, which is one of the
highest bankruptcy things in the world in the United States, when
you have got a pattern and practice of constantly going into busi-
ness, accumulating unbelievable debts, some of which are Govern-
ment loans, and then simply saying, “Oh, well, forget it, bankrupt,

start another restaurant somewhere, another little business.”

ile I am sympathetic with a little business, I am not sympa-
thetic with people that constantly go into bankruptcy.

I think the asury should be sending us their insights to Cap-
itol Hill and the Judiciary Committee that has jurisdiction on that.
So I don’t know, Mr. Secretary. Do you think Treasury will have
an interest in bankruptcy recommendations?

Mr. HAWKE. Mr. Chairman, our Office of Economic Policy is very
deeply involved in that subject as part of an administration, the de-
velopment of administration position on the pending bankruptcy
legislation.

ir. HORN. Do they have any tentative recommendations?

Mr. Hawke. That has been worked on in another part of the de-
partment, Mr. Chairman. I can’t say exactly where that is.

Mr. Horn. That comes under which assistant secretaries?

Mr. HAWKE. For economic Policy.

Mr. Horn. For economic policy? Because I would think you would
have some major ideas to contribute to that discussion, just based
on what your portfolio is here of debt. Or do you not agree with

t

Mr. Hawke. We have had some input into that process, my staff
has, but it is being run out of a different section.

Mr. Horn. Now, I am looking at the statement here of Commis-
sioner Gregg, and on page 9, it says, since November, child support
collections have more than doubled to 328,000 in administrative
offsets, and these collections will continue to increase as additional
payment types and additional States and territories are included in
the offset program.

I am not too impressed that it is only 328,000. Now, do you have
a feel, Commissioner, as to what is out there?

Mr. Grecc. I think there is a tremendous amount out there in
child support, and we are seeing a fair amount of that in the Tax


88

the 1999 tax year, will be the first year that we are on our own
with the tax refund offset as opposed to working in sync with IRS.

I don’t know what is behind these numbers, but the dollar
amounts jumped considerably during this last year for tax refund
offset. We went from $540.8 million that was collected in the 1997
year to $765.6 million in 1998. Does that reflect FMS’ involvement?
I don’t think to a very great degree. But at the same time, we
haven't analyzed it enough to figure out why you had that kind of

jump.

From our perspective in the administrative offset, we knew that
there is an advantage because we were getting some debts referred
to us earlier than we otherwise would have, had we not been in the
tax refund offset process. We know that tax receipts goil out or
payments going out were greater, but that really doesn’t reflect the
amount of that jump.

Mr. HAWKE. Mr. Chairman, could I just add one point on that?
We have thought right along it is of primary importance to protect
the success of the Tax Refund Offset Program, and that really
leads me to another point that I may have made before in these
hearings, but I think it is important to continue to emphasize, and
that is there is no constant relationship between the source of pay-
ments that we make or the kind of payments that we make and
the likelihood of getting a connection with respect to an offset of
a delinquent debt.

For example, far and away the largest universe of payments that
we make is Social Security, yet Social Security yields—and the
Price Waterhouse report I think indicates this—Social Security will
yield almost the lowest incidence of offset hits. And that is because,
for example, a great proportion of the delinquent debt is student
loans, and to the extent that you have got debts like student loans
and child support in the universe of debts, you are not likely to find
an awful lot of hits against the population of Social Security annu-

itants.

On the other hand, the universe of tax refund Payments is prob-
ably much more broadly representative of the public at large, and,
therefore, much more likely to yield hits in the debt offset match-

ing.

So we would like to sit down with the committee staff and go
over numbers that we have develo) that show the varying rela-
tionships between the incidents of offsets and the nature of the
payment stream, because there is a tendency to assume that you
are going to get the same incidence of offsets no matter what the
nature of the payment stream is, and those relationships are all
over the place.

Mr. Horn. Well, I am not surprised. I mean it seems to me you
have the upper hand with offsets, as opposed to a lot of other
things you would have to do if they weren't offset.

Mr. HAWKE. For example, the—well, we can sit down and show
you the numbers.

Mr. Horn. I would like to do that. Well, I appreciate it. Does the
inspector general have anything to add, and does the General Ac-
counting Office have anything to add, perhaps, on the offset change
and why we get a much better payofi in 1 year as opposed to an-
other when it moved to FMS?


43

Let me briefly summarize for you the findings from our report. Before I do this, |
want to preface my remarks by pointing out that after we concluded our audit field
work there were significant changes to the executive management at FMS, including
the appointment of a new Commissioner, Richard L. Gregg. As stated previously, we
only issued our formal draft to Mr. Gregg three days ago, so FMS has not had the
opportunity to provide us with their corrective actions. We did however, provide the
results of our audit in February. Since February, we have met with FMS, and they

have indicated concurrence with our recommendations.

We also noted that shortly after the changes in management, we found a number of
Positive steps have been taken to overcome the problems that caused delays in getting
GTOP operational. In our report we expressed concern that despite these positive
steps, FMS° strategy was to split their efforts between the development of GTOP while
enhancing ITOP (Interim Treasury Offset Program) without the benefit of adequate
functional requirements. It is our understanding that after a cost of over $7 million.
FMS has terminated further development of GTOP and plans to focus their efforts on
enhancing the existing system ITOP. With this decision, it would appear that at least
‘one recommendation in our report has been acted on. However, considering the
number of problems we identified in FMS" development of GTOP, it is essential that
they exercise strong management control over the current effort to develop an

automated system and effectively execute sound system life cycle planning


113

Mr. Horn. I am told that the General Accounting Office looked
at the DOD situation and they said you could collect $1 billion a
year. Do you agree with them on that?

Mr. Toye. Mr. Chairman, we think——

Mr. Horn. From insurance companies they are arguing. Does
that make sense to you?

Mr. ToYE. From the-—

Mr. Horn. $1 billion a year from insurance companies?

Mr. Toye. As a result of the military hospital operation, I am not
sure that I would agree with the $1 billion number. And I don’t
know if they are—whether they are saying $1 billion in total or $1
billion in addition to what we are already collecting.

Mr. Horn. Do we have the General Accounting study here? OK.
We will get it and send it to you.

Mr. TOYE. We would be happy to—

Mr. Horn. We will put the summary that the General Account-
ing Office made in the record at this point without objection.

Mr. Bitz. Sir, could I ask for a clarification? Our records show
that our total hospital debt is under $340 million. So I am not
sure—we will be glad to answer the GAO’s numbers, sir.

Mr. Horn. Yes; well, do we even bill in any of these hospitals?

Mr. Brz. Yes.

Mr. Horn [continuing]. How do we know what we are charging,
and that is what is going to become debt, and where is the gap
there? What are we—what do we do in actual services if you put

the monetary value to it versus what you have ing out there
as a possible debt? What is your feeling on that? We have got some
ballpark figures.

Mr. Bitz. No, sir; I don’t know if they are questioning whether
we are billing the right rate to people who come in who aren't enti-
tled to the service or whether they are questioning after we have
determined the customary and usual charge for that service, have
we turned around and billed them and the insurance company.

And I assure you in the latter part we do. Once we get—provide
the service, we provide the individual bill. If that individual then
clearly establishes that we should have billed an insurance com-
pany, then we take action to remove the debt from them, apply it
back to that insurance company. The number $1 billion is quite
large. I will have to do some research.

Mr. Horn. It impressed me that way. It isn’t my figure, it is pre-
sumably their figure. We will get it straightened out if you can give
us a response.

Mr. BiTz. Yes, sir.

Mr. Horn. In the billing, I assume it is done internally in most
hospitals?

. Bitz. Yes, sir.

Mr. Horn. How is the debt collection work in relation to the hos-
pital debt? Is it handled within the Surgeon General’s office or is
it kicked over to your firm?

Mr. Birz. We handle that. In each of the hospitals there is a
small finance and accounting office or unit that prepares
billings and gives us a status on the billings issued. If they do not
receive payment within the 30 days, they will transfer that to our


122

ATTACHMENT
Dun & Bradstreet letter, dated June 3, 1998, to Chairman Steve Horn.

verification matters,

It would probably be best to give you a very brief description of Dun & Bradstreet,
ineluding some specifics on how we collect data and provide services to government.
D&B gathers and maintains information on more than 49 million business locations
around the world. We operate directly in 39 countries and have correspondent
relationships with information gathering entities in more than 150 additional counties.
D&B's database contains up to 1500 unique elements on each business location. The
<data is collected by over 3000 business analysts as well as from electronic feeds from
financial institutions, large vendors, public utilities and government agencies. D&B
spends more than $300 million per year and makes over 900,000 updates to our files
‘each day to ensure the timeliness and accuracy of our databases.

‘Through a Memorandum of Understanding signed after the passage of the Debt
Collection Act of 1982, D&B receives commercial debt information from 22
government agencies in 1 lcabinet-level Departments on either a monthly or quarterly
basis. We take the individual tapes and, using highly evolved (and patented) entity
‘matching software and assign the appropriate DUNS® Number which allows us to
‘merge them with additional data on the entity, euch as debarment information from the
GSA’s Office of Acquisition Policy and grant information from the Federal Assistance
Awards Database System, to create our Government Activity Database. This database
holds more than 546,000 individual cases of debt owed to the Federal Government
‘worth about $50 billion. There are two issues here which we'll come back to. First,
we know that we don’t have ALL of the commercial debtor data. And, second, the
<database is not integrated with the commercial payment information on the entity.

Another data element that D&B collects from governments is the Tax ID Number
(TIN). Of D&B’s standalone database of 6.6 million TIN’s about 1.5 million are
‘obtained from the federal government and another 5.1 million are gathered from the 50
states from business registrations, UCC filings and corporate charter details.
‘Commercial entities and some government agencies use D&B’s files as a source for
‘TINs on vendor and payee databases.

D&B also collects tax lien information electronically through all federal and state
filing locations. This data is stored in our Public Records database and lien
information is incorporated into our credit, supplier evaluation and stress scoring
services.

Government uses D&B information, primarily using our GSA Schedule as the
procurement vehicle, in all phases of supply chain management for controlling risk in
‘contracting, awarding grants and approving loans. D&B services, reports and scoring
‘models allow government to verify the authenticity of a perspective trading partner
‘and validate its ability to repay or perform during the “Pre-Approval” stage. For
‘example, before a Small Business Administration Low Doc or Export Express loan is
disbursed, the decision maker can access the D&B database to obtain an up-to-the-
‘minute score card on how likely the recipient is to repay on time, DoD uses D&B as,


CONTENTS

Hearing held on June 5, 1998 ....
Statement of:

Catlett, Mark, Chief Financial Officer, Department of Veterans Affairs,
accompanied by Todd Grams, Chief Financial Officer, Veterans Health
Administration, Dey ent of Veterans Affairs; and Nelson Toye, Dep-
uty Comptroller, Department of Defense, accompanied by Greg Bitz,
Director of Finance, Defense Finance and Accounting Servi

Gregg, Richard, Commissioner, Financial Management Service; John D.

wke, Jr., Undersecretary, Department of Treasury; Richard Calahan,

‘Acting Inspector General, Department of Treasury, accompanied by

Barry Savill; Gary Engel, Associate Director, Accounting and Informa-

tion Management Division, General Accounting Office, accompanied

by Keith Rhodes, Technical Director, Accounting and Management Di-
vision, General Accounting Office ...

Letters, statements, etc., submitted for the record by:

Bitz, Greg, Director of Finance, Defense Finance and Accounting Service,
information concerning third party collections ...

Calahan, Richard, Acting Inspector General, Department of Treasi

Information concerning systems development problems
Prepared statement of...

Catlett, Mark, Chief Financial Officer, Department of Veterans Affairs,
prepared statement of ....

Engel, Gary, Associate Director, Accounting and information Manage-
ment Division, General Accounting Office, prepared statement of ..........

Gregg, Richard, Commissioner, Financial Management Service:

information concerning CAIVRS ....
Information concerning private debt col
Information. concerning routine procedures
Prepared statement of ...

Hawke, John D., Jr., Undersecretary,
statement of

Kucinich, Hon.
pared statement of

Maloney, Hon. Carolyn B.,
of New York, prepared statement of

Toye, Nelson,’ Deputy Comptroller,
statement of

(iD



106

of electronic funds transfer. In fact, the Department of Defense has been using electronic funds
transfer to pay some of its personnel and vendors for many years.

The Air Force was the first agency to start a Direct Deposit program--over 25 years ago.
‘The Department continued to offer electronic funds transfer to all employees on a voluntary basis
until the early 1990s. At that time, salary payment by electronic funds transfer became a
condition of service for military members and voluntary for civilian employees. Those who had
entered the service/been employed by the Department before that date were grandfathered in
some instances. With the passage of the Debt Collection Improvement Act, electronic funds
transfer became a condition of employment for both military members and civilian employees.
For the quarter ending March 31, 1998, paid approximately 99 percent of its
military members, and 97 percent of its civilian employees, via electronic funds transfer.

‘Similar to salary payments, the Department's use of electronic funds transfer to
reimburse personnel for travel costs also was voluntary initially. In the early 1990s, the
Department began to standardize and consolidate its travel systems to provide for the increased
use of electronic funds transfer throughout the Department. Now, with the implementation of the
Debt Collection Improvement Act, the Department of Defense has mandated the use of
electronic funds for transfer travel reimbursements to all employees/members. While we have
‘not yet fully implemented electronic funds transfer for the reimbursement of travel costs,
currently, approximately 84 percent of such payments were made via electronic funds transfer as
of the quarter ending March 31, 1998.

Until the passage of the Debt Collection Improvement Act, vendor participation in
electronic funds transfer also was voluntary. With the passage of the Debt Collection
Improvement Act, all vendors and contractors must accept electronic funds transfer payments.
Accordingly, since the passage of the Act, the Department has been able to enrol! many large
contractors for electronic funds transfer. However, further conversion efforts were stymied by
the inability of many financial institutions to receive, or pass on to the vender, an electronic
advice of payment. The Department has overcome this difficulty by successfully negotiating
with the Treasury Department and the Federal Reserve System to develop financial electronic
data interchange software. This software enables financial institutions to decode and pass the
electronic advice of payment information to their customers. The Department also worked with
the National Automated Clearing House Association to ensure that Association rules were
changed to mandate the passing of the advice of payment to contractor, effective this September.
These efforts will better ensure that vendors and contractors know what they are being paid for
and will encourage the financial market to charge fairly for passing an advice of payment to the
recipient.

‘The Department also has developed a Central Contractor Registration database.
Registration became mandatory for new contracting efforts on June 1, 1998. Establishment of
the Central Contractor Registration database permitted the Department to establish a centralized
data process for the collection and maintenance of electronic funds transfer and taxpayer
identification number data and to standardize the electronic funds transfer data it collects.
(Registration can be accomplished either by paper or electronic means.) With the full


66

Robert Rubin, and then Office of
Management and Budget Director, Frank
Raines, requesting that Federal agencies
redouble their efforts to collect this debt.

Six months later, the verdict is still
out. Fortunately, the Treasury
Department has made some major
changes. Treasury established a whole
new management team which is now
regularly briefing the Under Secretary for
Domestic Finance and other top Treasury
officials. Treasury has completed an
informative portfolio analysis and has
analyzed the collectibility of some of this
debt. Treasury is also doing a great job
briefing the Congress. I am hoping that
this high-level visibility will help keep
implementation of the DCIA on the new


52

— about $12.3 billion relates to nontax dehnquent debts that are involved with
bankruptcies, foreclosures, statutory forbearance, or formal appeals. An automatic stay
that generally prevents the government from pursuing collection against debtors in
bankruptcy is provided by 11 U.S.C. Section 362. In addition, debts in foreclosure are
governed by state laws that may preclude the government from pursuing foreclosure if
collection is attempted through offset Further, debts subject to forbearance generally
are not legally enforceable, thus precluding collection of the debt until the forbearance
process 1s completed.’ Also, agencies generally cannot certify debts under appeal as
valid and legally enforceable until the appeal process is completed. Consequently,
‘Treasury has agreed with agencies that these types of debts should be excluded from
referral for offset.

— about $3.6 billion involves delinquent foreign debts. Treasury has stated that, for the
most part, collecting these delinquent debts through administrative offsets is infeasible
primarily due to foreign diplomacy considerations and affairs of state.

~ about $3 billion of delinquent nontax debt has been referred by agencies to DOJ for
litigation. (See footnote 3.) These debts are no longer under the control of the
agencies and, therefore, Treasury does not hold the agencies responsible for referring
such debt for administrative offset Rather, DOJ is to determine if, and when, such
debt is referred for offset.

~ about $525 million of delinquent nontax debt owed to HUD, much of which will be
scheduled for sale, is not being required to be referred for administrative offset at this
time.

In addition to these categories of unreferred debt, about $7 billion of outstanding nontax
debt over 180 days delinquent remains. Most of this debt involves circumstances that
may delay or preclude offset.

For example, the vast majority of the Department of Education's approximate $3.1 billion
of unreferred nontax delinquent debt consists primarily of debts related to student loans,
most of which were being serviced by state or private guaranty agencies. According to
Education officials, although delinquent debt serviced by guaranty agencies is subject to
referral for administrative offset, many referrals have not yet been made because the
required due process for the debtors has not been completed.

Another example involves delinquent debts related to the Department of Agriculture's
(USDA) state-administered food stamp program and farm loans. According to USDA
officials, the food stamp program's delinquent debts, which totaled about $775 million,

‘Forbearance action taken by a creditor, generally, extends the time for payment of a debt
or postpones, for a time, the enforcement of legal action on the debt.

4 GAO/T-AIMD-98-195


101

tors to arrange for the voluntary repayment of debt, or it can offset
payments if a voluntary agreement cannot be reached.
‘ithin the Department, once a debt is delinquent and there is
no Department of Defense payment to offset the debt, the debt is
ferred to the Department’s centralized debt collection office
and is managed through the Defense Debt Management System.
The system automatically issues demand letters and monthly bill-
ing statements to debtors. Additionally, if a debt remains unpaid,
the debt system may report the debtor to a credit bureau or, until
recently, refer the debt to a private collection agency.

These actions normally are completed within 30 to 120 days of
the establishment of a debt. The Defense Debt Management Sys-
tem also performs debt matching to Department of Defense pay
systems for internal offset where feasible. Other debts may be re-
ferred to the Department of Justice for appropriate legal action.
Debts also regularly are referred to the Internal Revenue Service
for offset against matching Federal income tax refunds.

During 1997, fiscal year 1997, the Department collected $10.1
billion in amounts that were owed to the Department. At fiscal
year’s end, the Department’s report of receivables due from the
public reflected $3.1 billion for debts that remained unpaid beyond
the date of a written demand for payment, As you may be aware,
not all debts shown in the report of receivables due from the public
are in a collectable status. From the Department’s spective, the
amounts included in the report may be owed to Department,
but the Department may not be in a position legally to enforce col-
lection on some amounts. .

For example, some amounts may be in protest or dispute, they
may be undergoing further agency review or pending judgment.
They may be in deferment, litigation, or involved in bankruptcy

or

proceedings. Such amounts are exempt from being transferre
referred ed to the Treasury for collection or administrative offset until
resolved.

After taking into consideration all such debts that are not at the

stage where they are legally enforceable debts, as of the end of fis-
cal year 1997, of the reported $3.1 billion that remained unpaid be-
yond the date of a written demand for payment, only $267 million
was subject to the cross disbersing or administrative offset provi-
sions of the Debt Collection Improvement Act. Of the $267 million,
$140 million had been referred to private collection agencies, $117
million had been referred to the Department of Justice, and the re-
maining $6 million was being collected through offsets to payments
otherwise owed to the individual or the contractor by the Depart-
ment.

Notwithstanding that, the collection of amounts owed to the De-
partment are being actively pursued by the De ent. The De-

artment also recognizes the need for and the benefit of referring
its debts to the Treasury for administrative offsets. Furthermore,
the Department strongly supports the use of the Treasury Offset
Program to perform administrative offsets for delinquent debt at
the Federal level.

Previously, the Defense Finance and Accounting Service and
Treasury's Financial Management Service began a joint effort to
develop methodology for referral of Department of Defense debts


26

has estimated that Treasury can collect between $864 million and
$1 billion annually, once all eligible debts are referred and the pro-
gram is fully implemented. An estimated $661 million of this total
will result from the ongoing collection activity of the Tax Refund
Offset Program, while $117 million to $225 million will result from
cross-servicing, and an additional $86 million to $142 million from
administrative offset.

Let me now just turn briefly to the ITOP-GTOP system choice.
Another critical decision we have confronted, relates to the choice
of which automated system to use to accomplish administrative off-
sets. At the time of the last hearing, we discussed two systems, one
which we identified as the Interim Treasury Offset , or
ITOP, was developed for us by the Federal Reserve B: of San
Francisco. This system became operational in the spring of 1996
and remains in use today.

The other, which we have called the Grand Treasury Offset Pro-
gram, or GTOP, was developed by a private sector vendor starting
in December 1996 after F management decided that a new
automated system was needed to meet the anticipated volume of
offsets and to provide more efficient matching of payments and
debt files. It was planned that once GTOP was developed and made
operational it would replace ITOP.

One of the top priorities of the new management at FMS has
been to evaluate these two systems to determine which can best
move the debt collection program forward based on an assessment
of the requirements and circumstances that exist today. After care-
fully assessing the technical data processing issues, as well as the
merits from a business perspective, FMS management has con-
cluded, and the department agrees, that the best approach is to use
the ITOP system for the administrative offset program.

ITOP is a proven system and has been in operation for approxi-
mately 2 years. It has recently been successfully enhanced to ac-
commodate the fiscal year 1998 modified Tax Refund Offset Pro-
gram, and it can be further enhanced to handle greater volumes of
debts and additional payment streams, and to accomplish all the
functions required under DCIA in a manner that is faster, less un-
certain, and at a lower cost than the other system.

FMS management believes that the ITOP system provides us the
best opportunity to maximize the collection of delinquent debts for
the foreseeable future. While our decision not to pursue GTOP
means that approximately $5 million invested in that system will
have been spent without benefit to the Government, that decision
avoids the expenditure of even greater amounts, almost $8 million,
that would be necessary to pursue GTOP further, and even then
the outcome would still not be certain. I believe this was a sensible
and responsible decision.

Commissioner Gregg has gone over various indicators of our
progress in implementing the DCIA since the last hearing, and I
will not repeat that. There is attached to my testimony a series of
graphs that indicate the progress in various categories, and I think
those exhibits speak for themselves, Mr. Chairman, so I will con-
clude my remarks at this point and be happy to answer questions.

[The prepared statement of Mr. Hawke follows:]


22

service to agencies with debts that are not otherwise required to be referred for

cross-servicing.

FMS’ use of private collection agencies has also begun to show positive results.

In accordance with the DCIA, we are maximizing use of private sector expertise in
the collection of delinquent debt. Twelve contracts have been awarded and FMS
is transferring delinquent debt to these private collection agencies for collection.
As of May 15th, 6,822 cases totaling over $255 million had been referred to them.
Private contractor collections to date total over $600,000 with an additional

$543,000 in repayment agreements.

Publication of regulations continues to move forward as well. There are a
substential number of regulations that FMS and the Department are issuing in
order to implement or facilitate implementation of the debt collection provisions
of the DCIA. We have made great strides by streamlining internal and
Departmental processes, prioritizing efforts and closely monitoring the clearance

Jane 3, 1998 (3:33pen) 12 AATESTIMI4.GRG


105

Of the $267 million in legally enforceable debts that had been owed to the Department
for 180 days or more as of September 30, 1997, $144 million had been referred to a private
collection agency, $117 million had been referred to the Department of Justice, and the
remaining $6 million was being collected through offsets to payments otherwise owed by the
Department. Under the provisions of the Debt Collection Improvement Act, these debts were
exempt from being transferred to the Department of Treasury for collection (cross-servicing).

‘Notwithstanding, that the collection of the Department's legally enforceable debts are
being actively pursued by the Department, the Department also recognizes the need for, and
benefit of, referring its debts to the Treasury Department's National Interactive Delinquent
Debtor Database for administrative offset. Furthermore, the Department strongly supports the

use of the Treasury Offset Program to perform administrative offsets for delinquent debt at the
Federal level. Previously, the Defense Finance and Accounting Service and Treasury's Financial
Management Service began a joint effort to develop a methodology for referral of Department of
Defense debts in an automated process to the Treasury Offset Program. In September 1997, the
Defense Finance and Accounting Service referred over 131,000 delinquent debts, totaling in
excess of $245 million, to the Treasury Offset Program.

‘The Department of Defense is one of the few agencies in the federal government other
than the Treasury Department that pays its own bills. Therefore, the relationship between the
Department of Defense and the Department of Treasury is different from that of most other
federal agencies for both payments and collections. As a result, the govemment-wide payment
offset concept for disbursing officials, as contained in the Debt Collection Improvement Act,
presents special technical, procedural and process challenges for the Department.

‘The Department is working with the Department of Treasury to ensure that its payment
information can be matched against debtor files at the Federal level. This is needed in order to
successfully implement those provisions of the Debt Collection Improvement Act that would
require agencies to offset proposed payments by amounts owed to other federal government
agencies. For those agencies for which Treasury disburses funds, matching payments to the
debtor records in the Treasury Offset Program is fairly straightforward. However, since the
Department of Defense makes its own payments, there is a need to design a methodology to
interface the Department of Defense's payment files with the Treasury Offset Program debtor
records.

This matching requires an interface with process and procedural controls between the
Department's payment systems and the Treasury's National Interactive Delinquent Debtor
Database. The Department is working with the Department of Treasury to develop a working
model that can be adapted to a methodology for matching its salary payments. The Department
of Defense will continue to work with the Department of Treasury on process and procedural
solutions to this payment matching issue.

Another major provision of the Act that I would like to address relates to the
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115

Pamela M. Dillon
4601 North Park Ave., Apt. 718
Chevy Chase, Maryland 20815

March 11, 1998

The Honorable Robert E. Rubin
Secretary of the Treasury

U. S. Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220

Dear Secretary Rubin:

The Office of Inspector General Report entitled, "EFFECTIVE PLANNING AND
MANAGEMENT ARE NEEDED OVER THE IMPLEMENTATION OF THE DEBT
COLLECTION IMPROVEMENT ACT OF 1996" (A-WA-97-066) is replete with
factual inaccuracies, unfounded conclusions, questionable objectivity, and lack of
understanding of both the spirt and letter of the Debt Collection Improvement Act of
1996 (DCIA).

For example:

1 The report refers several times to admnistrative offset as authorizing the offset of
Federal debts by withholding Federal payments, See page 2 (at least 6 times).
Debts are not offset. Payments are offset to pay the debts. This is a
fundamental lack of understanding by the authors of the report of the offset
programs. If all the debis of the Federal government were referred to FMS, and
‘no payments were matched against those debts, there would be no offsets,
because debts are not offset.

p

The report states (p.2) that FMS and IRS offset debt authorized by the Debt
Collection Act of 1982 and that IRS created the tax refund offset program. Both
statements are false, The iax refund offset program was created by law, not IRS,
and the law was not the Debt Collection Act of 1982. Again, these are
fundamental errors of fact. i

3. The report states thiat one of the objectives of the audit was to evaluate FMS'
planning and development processes for implementing the DCIA. (p.3). The
audit results, however, only refer to one part of the DCIA, that of administrative
offset. Neither cross-servicing provisions, nor asset sales provisions, nor wage
gamiishment provisions, nor regulation issuance provisions, nor gainsharing
provisions, nor taxpayer identification number provisions, nor mandatory
electronic payments, etc., are included in the audit but are all part of the


58

operations that must be performed, who must perform them, and where and how the
operations will be carried out.

According to Treasury officials, they understand the importance of such a document, but
until recently, have not placed a high priority of completing it because they believe the
individuals involved with the project have an overall view of how the offset processes
should work. After we discussed this issue with Treasury officials, they have agreed to
increase the priority associated with this effort and have projected completion of an
overall concept of operations in July 1998.

It is important for Treasury to place a high priority on ensuring that this effort is
completed on schedule because it is the primary building block on which the entire
systems development effort is based. Moreover, if personnel changes occur prior to
completion of the project, it would be difficult to effectively complete the project
promptly without such documentation.

Second, overall functional requirements for the administrative offset system are not yet
available. Functional requirements, which describe a system's functional inputs,
processes, and outputs, are derived from the concept of operations and serve as the
rationale for a system's detailed requirements, They are generally expressed in user
terminology and are the foundation that guides the development process.

Although Treasury has begun to develop and document functional requirements for
several key processes, such as federal salary and tax refund offsets, it has not developed
overall functional requirements for the administrative offset system. While the
development of functional requirements for each key process is a necessary step in the
incremental systems development approach being used, it does not replace the need for
overall functional requirements Until the functional requirements for the overall system
are defined, the requirements for a given process may not be adequate. We discussed this
issue with Treasury officials, and they have agreed to increase the priority associated with
this effort and have projected completion of overall functional requirements by the end of
August 1998.

Treasury is in the process of preparing functional requirements for certain key processes.
‘Treasury personnel stated that for each key process, the functional requirements would
be clearly defined and that a requirements traceability matrix would be developed so that
a test plan could be prepared.

‘Treasury must place a high priority on (1) completing the overall functional requirements,
(2) clearly defining the specific functional requirements as they are prepared for each key
process, and (3) ensuring that the key process functional requirements are consistent with
the applicable overall functional requirements. ‘This is important because many system
developers and program managers have identified ill-defined or incomplete requirements

10 GAO/T-AIMD-98-195,


112

We have already a consolidated debt ement program. So I
think in some respects VA is moving in the direction that DOD al-
ready has moved; although we only recently completed that, as I
indicated, in May 1997, and that was a significant benefit to the
Department, benefit in the sense that we reduced our costs of col-
lecting debt and we believe we increased our success rate in col-
lecting debt.

Mr. Horn. You mentioned that the hospital debt was your larg-
est category of debt in the Department?

Mr. Toye. Yes.

Mr. Horn. What's 2 and 3?

Mr. Brrz. No. 2, sir, is routine overpayments of salaries and ben-
efits caused by delays in getting input that would show that service
member’s status had changed before they left service. No. 3 is
recoupment of bonuses where we now Pa the maximum amount
of bonus up front as a recruiting tool. e military members, for
some reason, must shorten their term, their 6-year term, we then
need to recoup that, and that tends to be No. 3 right now, sir.

Mr. Horn. Remind me what the total debt collection now is with-
in the Department of Defense, all services? What are we talking
about in money?

Mr. Toye. As of the end of 1997, the total value of the debts that
remained uncollected as of the first demand letter was $3.1 billion.
But as I indicated earlier, that includes a number of instances
where the debt is still under review or bankruptcy may be in-
volved, litigation, or other issues.

Mr. Horn. So it is a total of $1 billion?

Mr. TOoYE. $3.1 billion.

Mr. Horn. $3.1 billion. And you collect how much of that $3.1
billion of debt?

Mr. Bitz. In 1997, we only collected about $126 million against
that. But it is a definitional problem, Mr. Chairman, in that one
of the debts is $1.3 billion. It is one company and it is in court. But
we have to it for accounting reasons; it is an accounts receiv-
able. But it is also in our debt portfolio as something that looks like
it is churning there awaiting for us to collect but we can’t touch

it.

In fact, if you take all of the amounts in that $3.1 billion total
that are either in court or under some form of negotiation, it totals
well over $2 billion.

Mr. Horn. Tell me a little bit about it. Was that a class action
suit of sorts?

Mr. Bitz. No, sir, it is one contract on the A-12.

Mr, Horn. I see. OK. How long has that been kicking around in
court?

Mr. Bitz. 1991, sir.

Mr. Horn. 1991. And has the case been decided?

Mr. Bitz. The Government lost the original case and it is now
under appeal.

Mr. Horn. And what was the original case for, how much money
wi

as—
Mr. Bitz. For the $1.3 billion. But the contractor has countered
and Tequested $2.6 billion from the government, so we are appeal-
ing that.


76

Mrs. MALONEY. Once it gets to Treasury, to you, Mr. Gregg, what
is the procedure? Now, you have gotten it, it is 180 days, but from
what I read, even after 180 days they are not referring it to you,
but anyway, if you do get it, what do you do with it?

Mr. GREGG. The first thing we do if it is coming to us for cen-
tralization or cross-service, is send it to our Birmingham office
within FMS. They go through a period of approximately 30 days,
and go out and on sury letterhead try to contact the debtor.

Mrs. MALONEY. How many letters do they send out, one, two?
How many letters do they send out before they refer it to a private
collector?

Mr. GREGG. We send out one letter and give them a 30-day pe-
riod after that time. If we are unsuccessful, we then turn it over
to the private collection agency for continued efforts.

Mrs. MALONEY. So Birmingham is sending out one letter. Do
they do a phone call or just one letter?

ir. GREGG. They also try phone calls to establish contact with
the debtor.

Mrs. MALONEY. How much has been brought in since you have
been on board, Mr. Gregg?

Mr. GREGG. Under cross-servicing, we have had an additional
$3.8 million directly within the FMS. An additional $600,000 from
the private collection agencies is entirely new, since they just got
established. So the total in the cross-servicing area is $4.4 million;
however, the repayment agreements amount to another $31 mil-

jion.

Mrs. MALONEY. But that is a definite improvement, I applaud
you.

Mr. GREGG. Yes.

Mr. Horn. We are going to have to recess now. We have two
votes on the floor, ‘and we will come back to this and carry it on.

Mrs. MALONEY. One last question.

Mr. Horn. We are in recess for about 15, 20 minutes.

[Recess.]

Mr. Horn. The subcommittee will reconvene.

Mr. Sununu is not here. OK. Let me continue some of the ques-
tions that both Mrs. Maloney and I have asked this morning. What
we want to clarify in the record, and I think perhaps we have al-
ready done it, is for you to give us the policy as to selection of pri-
vate debt collectors. Also, the policy for the agencies that are grant-
ing loans, accumulating debt in terms of the degree to which their
personnel send perhaps the first dunning letter, Commissioner, or
do we just know that private collectors are involved. We say, “Well,
that isn’t our job, we will just dump it on them.”

Let’s face it, the psychol ogy of an agency in the executive branch
is to help their clients. If they are agriculture, they are farmers;
if they are over in HUD, they are an urban constituency, and no-
body likes to tell them the bad news; that wasn’t a grant, it was
a loan. And the only way you get the message over, as to whether
it is a grant or a loan, is you really need to contact them in the
first 30 days once they’ve defaulted on the loan.

It just seems to me that we need that spelled out, and if we are
going to really be serious—and I am pleased, Mr. Secretary, that
things seem to be moving better in that direction. If they are really


28

Our approach in this endeavor was twofold. First, we met with the five major Federal
agencies as well as all other Chief Financial Officer agencies to assist them in analyzing the
composition and referability of their non-tax debt. These 24 agencies hold 92 percent of all
delinquent Federal non-tax debt. We then contracted with Price Waterhouse to provide an
analysis of the composition of this debt and a “walkdown” from the $52 billion to the amount
that Treasury could ultimately expect to collect through its own efforts under the DCLA.

Price Waterhouse calculated that $47.2 billion of the $52 billion is older than 180 days,
and thus within the scope of the DCIA. Of that amount, $18.1 billion is ineligible for referral to
Treasury for various reasons. For example, many of the debts are not legally enforceable because
the debtor has filed for bankruptcy protection or is otherwise legally entitled to temporary relief
from collection action; other debts are in dispute and the subject of pending litigation. In
addition, foreign sovereign debt is excluded. Of the remaining $29.1 billion that is eligible for
referral to Treasury for offset, $8.5 billion is eligible for cross-servicing. The remaining $20.6
billion is ineligible for cross-servicing due to a number of DCIA exemptions, such as those for
debt in litigation and debt that has been referred to a private collection agency.

Taking into account these limitations on cross-servicing and administrative offset, and
after examining private sector experience in collecting debt with comparable age characteristics,
Price Waterhouse has estimated that Treasury can collect between $864 million and $1 billion
annually once all eligible debts are referred and the program is fully implemented. An estimated
$661 million of this total will result from the ongoing collection activity of the tax refund offset
program, while $117 million to $225 million will result from cross-servicing, and an additional
$86 million to $142 million from administrative offset

The Price Waterhouse analysis not only provides Treasury with a better understanding of
the composition and age of the body of debt owed the Federal government, but also provides a
quantitative basis upon which to establish realistic program goals, including both agency referral
and collection targets. ‘The information allows us to verify which of the collection tools will be
the most effective and to set our priorities accordingly.
‘The ILOP/GTOP System Choice

Another critical decision we have confronted relates to the choice of which automated
system to use to accomplish administrative offsets. At the time of the last hearing we discussed
two systems: One, which we identified as the Interim Treasury Offset Program (ITOP), was
developed for us by the Federal Reserve Bank of San Francisco. This system became operational
in the spring of 1996 and remains in use today. The other, which we have called the Grand
Treasury Offset Program (GTOP), was developed by a private sector vendor starting in
September 1996, after FMS management decided that a new automated system was needed to
meet the anticipated volume of offsets and to provide more efficient matching of payment and

debt files. It was planned that once GTOP was developed and made operational, it would replace
TTOP.


94

VA's first step in the referral implementation process was
to identify those debts that are eligible for TOP and those
that are eligible for referral to Treasury's cross-servicing
center. As we previously informed this committee, of the
$1.33 billion of VA debt more than 180 days delinquent as of
the end of fiscal year 1997, we identified $333.6 million
eligible for the administrative offset program, and $698.9
million eligible for cross-servicing. The categories, of
course, are not mutually exclusive and many debts are

eligible for both administrative offset and cross-servicing.

Debts that are not eligible for referral for TOP and/or
cross-servicing may be exempt for a variety of reasons,
including: debt is in bankruptcy or foreclosure
proceedings, debt is in VA's mandatory waiver/appellate
process, debt is statutorily barred from referral. Further,
among the amount that VA reports as over 180 days delinquent
is approximately $155 million of third party medical care
reimbursement billing (i.e., medical insurance claims) that
is not referable to Treasury for TOP or cross-servicing
because such "claims" do not represent sum-certain amounts
owed. Rather, they are undergoing an administrative process
whereby VA and the insurance company mutually determine the
existence and amount of the third party liability, if any,
under the applicable health care contract. Generally, upon
completion of that process, either the third party pays the

adjudicated debt amount (usually a portion of the original


9

essing. FMS and the Federal Reserve Bank staff are meeting con-
tinuously to identify additional requirements and to make en-
hancements necessary to support inclusion of tax refund offset into
the administrative offset program.

Implementation of salary offset is also a high priority for Treas-
ury. FMS has been working closely with the U.S. Department of

iculture’s National Finance Center to implement offset of the
ry payments, which they issue. Inclusion of EFT salary pay-
ments issued by the National Finance Center represents approxi-
mately 35 percent of the total Treasury dispersed civilian payroll.
These salary offsets are scheduled to begin in the summer of 1998.

Similarly, with benefit offsets, our approach is to use the phased
approach. FMS currently is working with the affected agencies to
develop a strategy for implementation, finalize requirements, and
complete joint implementation plans. Our hope is to target cal-
endar year 1999 for commencement.

Mr. Chairman, it is important to note that in scheduling addi-
tional payments to be used in the offset program, we in FMS are
very mindful of the work going on throughout government to pre-
pare automated systems for the new century; that is, the Y2K prob-
lem. For the balance of this year and all of 1999, we will have to
carefully plan and schedule our debt collection work to minimize
the impact on agency preparations for the century date change.

We are also working to collect child support. Voluntary State and
territory participation in the administrative offset program to col-
lect delinguent child support has increased from 8 to 15 entities
since the last hearing. Most recently, in March, the State of Okla-
homa submitted $141.7 million in child support debt, and the coun-
ty of Los Angeles forwarded debts with a value of $1.45 billion. In
April, Illinois followed with $957 million in delinquent child sup-
port debts. This brings the total debt load for child support in 1998
to 760,000 debts to’ ing over $6.8 billion.

Since November, child support collections through administrative
offsets have more than doubled, to $328,000. These collections will
continue to increase as additional payment types and additional
States and territories are included in the offset program.

The progress in cross-servicing has been very encouraging over
the last several months. Since the last hearing, referrals have in-
creased from $460 million to almost $1.8 billion. In addition, cross-
servicing collections have increased from $1.1 million as of the last
hearing, to $5.5 million as of May 15. The most dramatic change
is that repayment agreements have increased from $2 million to
over $31 million during that same period.

Once debts are referred to Treasury for cross servicing, and prior
to referral to a private collection agency, FMS’ Birmingham debt
collection center works all the debts for a period of 30 days, send-
ing demand letters and attempting to locate and contact by phone
delinquent debtors. If FMS succeeds in establishing a repayment
agreement with the debtor, the account is managed in Birmingham
until the debt is fully satisfied. Although we are not yet able to dis-
tinguish between collections as a direct result of demand letters
and those due to other cross-servicing activities, creditor agencies
have indicated a marked increase in collections from debtors who
have received demand letters on Treasury letterhead.


77

serious here, we need all those agencies to be marching to the same
tune down this parade and I think the taxpayers would appreciate
it.

In terms of IRS what is our situation there, in terms of private
debt collectors doing what had technically—I don’t know if le-
Bally,_been sort of written off by the previous Commissioner. We

two pots, as I remember, which is what got me started in this
law, over $100 billion since 1990, and then yet a $60 billion pot
that they thought they could collect off the others. The others, they
had just sort of written off themselves.

I thought there was national scandal for one that month. And
where are we? Anything happening in IRS on debt collection?

Mr. GREGG. If you are referring, Mr. Chairman, to tax levy, that
is something that we have ist started talking to IRS about. We
are working with them to figure out how to include the tax levy
portion of what they've been responsible for, but we also have
shared responsibility now, and my recollection is that is about $42

ion.

We have had some discussions with them on how to bring those
over into the offset program. I don’t think it is going to get done
this year, but we do hope to move that along as quickly as we can
to bring that into the offset program.

Mr. Horn. Is your thinking to have any different rules with IRS
than you already have with other agencies? Are they unique in any
way that you have to relate to them?

Mr. GREGG. There are some unique characteristics of tax le
debt that is different from what we have on the other debt that will
be in the offset program. We have to make sure that we under-
stand that, and we also have to be careful to make sure that that
kind of debt is not sent out for cross-servicing, for example. There
are certain rules that apply for tax debt that don’t apply for other
types of debt. We are in process of trying to work out the re-
quirements for that.

Mr. Horn. Do we know the degree to which the holders of this
debt that they haven’t paid off, are taking bankruptcy of one sort
of another?

Mr. GREGG. I don’t know that information, Mr. Chairman.

Mr. Horn. Has anybody ever thought about getting it, because
that is part of the problem. Now we hear and read in the friendly
papers around here that at last someone on the Hill is thinking
about revising the Bankruptcy Act. Does the Treasury have a posi-
tion here of how they would like it revised? The headline I saw was
that he would like to help people that have less maybe than $60
or $70 thousand in income. But they weren’t too keen on others.

I guess what bothers me on the use of personal bankruptcy and
what they do certainly in California, I am sure they do it else-
where, on housing, they just decide to declare bankruptcy. They sit
in the house for 6 months. The poor soul happens to be one of my
student assistants—her father left her a four-apartment building,
and here you have a person declaring bankruptcy, and everything
else. You can’t get them out, and you can’t get them to pay the
mol a
‘And it is just harming the people who have small investments;
the big guys and gals can take care of themselves. I think of the


83

have continued to receive Federal grants and contracts. In that let-
ter they gave three illustrative cases.

In the first case they had a company, company A. It had de-
faulted on a Federal loan and then that default was quickly fol-
lowed by the filing of a tax lien. The agency still awarded a $71,000
contract to the company. At that time, they weren’t satisfied with
the company’s performance, and it was finally debarred from doing
business with the Federal Government until the year 2000.

A second case, company B, received a loan and filed for bank-
ruptey, yet even after that fact, they still received contracts with
six different agencies for a total of $5 million. And in the third
case, company C, they stopped paying on a Federal loan to an
agent , and then that same agency made another loan. Addition-

, the agency was named in Federal tax liens, a different Federal
agency also awarded contracts worth approximately $200,000 to
this so-called deadbeat corporation.

This letter notes also over 1,200 companies are Federal vendors
eligible to receive Federal purchases through the Visa impact credit
card, and these vendors have received $106 million in Federal busi-
ness,

The basic question is, if a private company like Dun & Brad-
street can identify these kinds of problems, why can’t the Federal
Government be more effective in identifying these kinds of dead-
beat corporations and stopping this kind of fundamentally unneces-
sary subsidy?

Mr. GreGG. There is a regulation that we have published in the
last few months that provides some overall guidance on barring de-
linquent debtors from obtaining Federal loans or loan guarantees.
Proposed regulation is out for comment now, and we plan to get it
published in final form as quickly as we can. I think that there are
some tools now available, and I think the DCIA will help with that
problem. Whether or not it solves it, I am not sure, but agencies
that are granting loans or guarantees, first of all, should have in-
formation on the claim form regarding whether or not an indi-
vidual is delinquent in any debts. Second, I think they have re-
sponsibility to check with credit bureaus on whether or not the:
are on the list, because that is one of the things, I don’t think 1
mentioned before that, in fact, we do. We report this information
on delinquent debt to credit bureaus. So if they reference that, then
I think there is at least some opportunity to i entity some of these.

Mr. SUNUNU. Is there any interagency system of communicati:
this kind of delinquency electronically, a red flag system where
agencies are informed simultaneously when this kind of a delin-
quency occurs?

Mr. GREGG. There is a system that—I see. There is a system, I
forget which agency has it which is called CAVIRS, C-A-V-I-R-S,
and I don’t know whether that is HUD.

Mr. SUNUNU. I think that is a HUD system.

Mr. GrecG. A HUD system. And I think one of the purposes of
that is to help agencies identify individuals or companies that are
delinquent.

Mr. SUNUNU. How new is that system?

Mr. GrecG. I don’t know. I will have to answer that for the
record.


is charged with implementing the DCIA. After our Subcommittee hearing
last November, it was revealed that the FMS had serious troubles with the
system it was designing for the administrative offset program. FMS also
was making insufficient progress developing regulations required by the
DCIA.

Under new management, the FMS can demonstrate substantial
progress in both of these areas over the last six months. Currently, FMS is
using a proven system for administrative offsets and plans to modify the
system by adding on new capacity instead of developing an entirely new
system. The agency has demonstrated a commitment to engaging other
Federal agencies on debt collection. FMS has made good progress on its
regulations in the last six months. While these are positive developments,
there is a long road ahead before this law is implemented successfully.

Federal agencies are learning more about their debts, and through
this process are determining which are collectible. Price Waterhouse
recently estimated that Treasury could collect between $864 million and $1
billion each year in referable delinquent debt once all the payment streams
are loaded into its system.
Pereontege-and sauce.ct-eolectibie debttrattourd De referred to FMS.
The suitrareas indicate debtthat is currently being-cotlested-through
ofeets. It is significant to note that almost 60% of the projected collectible
debt is recouped through tax refund offsets.

bt



111

Department of Defense, and we refer that to the consolidation proc-
ess, the Defense Debt Management System, and we immediately
start communication with the debtor, and we try to collect that.

Quite frankly, we don’t always wait to 180 days. If we have sent
a letter to an individual, and we get a response and that response
makes it clear that we are not likely to reach a negotiated settle-
ment, we will move right away. Even though that may be only 30
or 60 days after establishment of the debt, we will move right
away.

Previously, we perhaps would have referred the debt to a debt
collection agency. Today, we will work to get it into the Treasury
offset program.

Mr. Horn. Could you look into how the debts are collected in
your major medical centers such as Walter Reed, and are they tak-
ing advantage of that close relationship you are talking about, Mr.
Catlett, with HCFA? I am glad——

Mr. Bitz. Mr. Chairman, if I could add a little clarification on the
hospitals, on our medical facilities. That is our largest single cat-
egory of debt we are dealing with right now. Our first action is
against the individual to whom we gave the service. If they bring
proof of an insurance that would actually have been required to re-
imburse us, then we reverse the effort against them and turn it
into a third-party debt, similar to the VA, and then we go against
that insurance company. But we can get you the specific steps of
how we do that, sir.

Mr. Horn. Yes, I would appreciate that. And without objection,
it will be put at this point into the record.

[The information referred to follows:]

Currently the Defense Finance and Accounting Service does not have specific
steps in place to improve third collections for medical facilities because th
are service specific and decent : ad. However, the Department of Defense, Healt
Affairs ice, is in the of condus a jiness process
to improve the Third Party Collection Program. Process reengineering study

Mr. Horn. It seems to be that there is a lot of opportunity to
have both Medicare reimburse and move that money from the
Medicare accounts over to the Surgeon General’s account or wher-
ever you put the hospital system in the Department of Defense,
and it also seems to me that some of them probably have additional
health plans. Perhaps they are still working for State government
or they are working for city government or they are working for a
corporation.

And given the needs of the military hospitals, because they had
been squeezed a little bit in recent years and some just canceled,
the service obviously can’t then be as supportive as a one-time in-
convenience to where the patient clientele is versus where the hos-
pital is. But if you can give us a feel for how that is coming, and
are we collecting that type of money, I would appreciate it.

Mr. Brrz. Yes, sir.

Mr. Horn. What else could we learn from the Veterans Adminis-
tration as you listen to the testimony? Are there some things they
are doing that the Department of Defense should do, because in a
way your clientele is somewhat similar. Let’s face it.

Mr. Toye. In some ways, we may be a little bit ahead of VA, at
least with regard to the consolidation of debt management services.


81

INFORMATION FOR THE RECORD
PROVIDED BY RICHARD B. CALAHAN
DEPUTY INSPECTOR GENERAL
U.S. DEPARTMENT OF THE TREASURY

Lot me first say that the Office of Inspector General does not have a series of reports that
would support a conclusion that the Financial Management Service has a history of investing
in systoms that fail to meet their original goals. However, over the past five years, cither our
office or contracted reviewers have identified a number of problems in existing systems that
need attention. Some of these deficiencies have existed for quite some time. For example:

© In our audit report entitled Fit 's
Se eee Sees Acide To Proce ad
at three Regionel Finance Centers. Certain access controls and disaster recovery plan
testing were inadequate because computer security officers had not conducted required
tests on computer security and disaster recovery plans, The Regional Finance Centers
also hed not always updated status reports to help senior officials monitor actions to
correct the deficiencies (O1G-94-097, May 26, 1994).

* Ina follow-up review to this earlier audit, we found that Financial Management Service
officials still had not fully corrected the conditions we reported. Although management
had made progress on some of the corrective actions we recommended, none had become
fully implemented (O1G-97-121, August 18, 1997).

* In our audit report entitled is ice’
Processing Refuunds, we identified programming errors in the Treasury Receivable,
Accounting and Collection System (TRACS). ‘The TRACS was designed to provide
accounting, billing, collection and reporting requirements for the check claims process.
‘We found that the programming errors caused inaccurate check claim case histories as
well as insccurate general ledger account postings and balances
(O1G-97-025, January 7, 1997).

. Mae ane ee ea Audi Survey of Accounts Administered by

the Eianeial Managers ‘public accounting firm identified similar: problemas ‘vith
TTRACS. One of the more significant issues wes that unreconciled differences existed
between TRACS and the central accounting system and that the TRACS trial balance did
not agree with supporting detail records, The firm slso reported that the Credit
‘Accounting Branch did not have formal back-up procedures ensuring financial data will
be recoverable in the event of system failures (OTG-97-076, April 10, 1997).

* In our audit report entitled Treasury's R
Benefits Teannfer Program. we evalusied the Financial Management Service's actions to
resolve 18 vulnerabilities identified for the conceptual mode] of the nationwide
Electronic Benefits Transfer system configuration. These vulnerabilities had been
previously identified in a December 1996 contractor report that provided an assessment
of risks and operating effectiveness of the system’s internal control structure. Our
review found that the issues had not been formally addressed and remained unresolved
(OIG-98-081, April 27, 1998).



107

implementation of Central Contractor Registration, electronic funds transfer participation is
‘expected to continue to increase as new contracts are signed and grandfathered contracts lapse.

For child support payments, the Department of Defense has obtained Treasury's
concurrence to continue payment by check until the various states can accept electronic funds
transfer. This will ensure that child support payments will continue without interruption.

‘The Department of Defense will continue to improve it performance under the Debt
Collection Improvement Act. The Department also will continue to work with the Treasury
Department on the interagency aspects of the Act, to include active membership on various
Treasury sponsored Debt Collection Improvement Act working groups and ad hoc committees.

Enhancing the Department's processes and systems to enable the Department to produce
and report more reliable debtor information is a continuing challenge. The Department continues
to modify and upgrade accounting, and other financial and nonfinancial systems to construct an
improved financial infrastructure within the Department. The results of this effort will provide
better information to manage the Department and safeguard the resources entrusted to the
Department by the Congress and the American people. The Department is proud of its progress
to date in the area of debt collection and expects to improve upon its previous performance.


92

STATEMENT BY
THE HONORABLE D. MARK CATLETT
ACTING ASSISTANT SECRETARY FOR MANAGEMENT AND
CHIEF FINANCIAL OFFICER
DEPARTMENT OF VETERANS AFFAIRS

BEFORE THE
SUBCOMMITTEE ON GOVERNMENT
MANAGEMENT, INFORMATION AND TECHNOLOGY
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
U.S HOUSE OF REPRESENTATIVES

JUNE 5, 1998

INTRODUCTION

Mr. Chairman, and members of the Subcommittee, it is my
pleasure to testify on behalf of the Department of Veterans
Affairs (VA) concerning our implementation of the Debt

Collection Improvement Act (DCIA) of 1996.

As VA's Chief Financial Officer (CFO), I have been working
closely with our Veterans Benefits Administration (VBA),
Veterans Health Administration (VHA), and other VA elements
to take the steps necessary to ensure our compliance with

the requirements of the DCIA.

In turn, VA personnel have worked closely with Treasury's
Financial Manageinent Service (FMS) to help in implementing
the provisions of the DCIA. VA staffs have reviewed and
provided comments on numerous draft, proposed, and interim
regulations published by Treasury to implement the DCIA.

Staff from our Office of Financial Policy participate in all


60

Finally, Treasury has not yet evaluated the adequacy of the hardware and software
platforms. ‘Treasury has decided to use the hardware and software platforms" that were
selected for GTOP until it can conduct tests to determine if these platforms are adequate.
Treasury officials acknowledge that this decision increased project risk because
development efforts were being based on these platforms prior to knowing whether they
were adequate for the requirements of the enhanced ITOP system. However, they believe
the risk is justified because (1) the hardware has already been acquired and an evaluation
of the adequacy of the platforms should be completed by June 30, 1998, and (2) some
work had been performed to evaluate the adequacy of the platforms before they were
selected for GTOP. Management must ensure that the evaluation of the hardware and
software platforms is completed by the estimated completion date of June 30, 1998.
Otherwise, Treasury runs a risk that the system it is developing cannot become
operational without costly modification.

Treasury's commitment to address the systems development issues we have raised is
encouraging. But it will be important for Treasury's top management to ensure that the
planned corrective actions are effectively and expeditiously completed prior to making
any significant investment in the development of an administrative offset system.
Otherwise, Treasury is significantly exposed to the risk of costly systems modifications
and additional delay in developing a system to implement the administrative offset
provision of DCIA.

Mr. Chairman, this concludes my statement. I would be happy to respond to any
questions that you or other members of the Subcommittee may have at this time.

(901774)

"The hardware platform is the physical computer, which consists of components such as
the central processor, memory, and disk storage. The software platform refers to the
operating system software and other system support software. Application software that
performs a specific task is designed to run on a specific combination of hardware and

software platforms. Consequently, applications for one platform generally cannot run on
others.

2 GAO/T-AIMD-98-195


56

Prior to the passage of DCIA in April 1996, Treasury in conjunction with the Federal
Reserve Bank of San Francisco (FRBSF), developed a pilot system to demonstrate the
feasibility of conducting administrative offsets on a routine basis. The system, referred to
as the Interim Treasury Offset Program (ITOP), is currently operational and is used to
offset vendor payments disbursed by Treasury Disbursing Offices and OPM retirement
payments. However, Treasury never intended the system, as it was originally developed,
to perform all of the administrative offset functions envisioned as a result of DCIA.

In September 1996, Treasury awarded a contract for the development and implementation
of a new and expanded administrative offset system, known as the Grand Treasury Offset
Program (GTOP). This system was to be used to consolidate the administrative, tax
refund, and federal salary offset programs, and was to include all eligible delinquent
federal nontax debt and federal payments. In additon, Treasury intended the system to
be capable of incorporating state child support debts and other state debts, which DCIA
authorizes to be recovered through federal payment offsets.

GTOP was scheduled to be implemented in January 1998. However, because of systems
development problems, it has not been placed into operation. Currently, Treasury is
focusing its efforts on enhancing ITOP to handle all eligible debts and payments for the
administrative offset program, as well as the consolidation of the administrative, tax
refund, and federal salary offset programs.

GTOP's Development

Treasury has concluded that it currently cannot use GTOP for the administrative offset
program primarily because Treasury did not apply a disciplined system development
process for that system. Treasury's policies, including its systems life cycle methodology,
and our guidance’ call for the completion of a concept of operations and functional
requirements in the development of a major system.

‘The GTOP development effort was undertaken without (1) completing an overall concept
of operations, which includes the high-level information flows for the system and (2)
documenting the functional requirements that the system must meet. Treasury's policies
call for such generally accepted steps to be completed before a system is developed.

We are unsure why the previous management team responsible for GTOP's oversight
allowed GTOP to be developed before these critical steps were completed. However,
according to Treasury, the effect was that the completeness and usefulness of the
software delivered by the GTOP contractor in October 1997 cannot be reasonably

Fr
Architectures (GAO/IMTEC-92-51, June 1992).
8 GAO/T-AIMD-98-195


18

EFT salary payments issued for the National Finance Center represents

approximately 35% of the total Treasury-disbursed civilian payroll. These salary

offsets are scheduled to begin in Summer 1998.

Similarly, with benefit offsets our approach is to use a phased approach. FMS
currently is working with the affected agencies to develop a strategy for
implementation, finalize requirements and to complete joint implementation plans.

Our hope is to target calendar year 1999 for commencement.

Mr. Chairman, it is important to note that in scheduling additional payments to be
used in the offset program, we in FMS are very mindful of the work going on
throughout govérnment to prepare automated systems for the new century. For the
balance of this year and all of 1999, we will have to carefully plan and schedule
our debt collection work to minimize the impact on agency preparations for the

century date change.

We are also working to collect child support. Voluntary state and territory
participation in the administrative offset program to collect delinquent child

June 3, 1998 (3:33pm) 8 AATESTIMIAGRG


47

Mr. Horn. Thank you very much. We will get back and explore
some of the things you have raised there.

Mr. Gary Engel is the Associate Director for the Accounting and
Information Management Division of the General Accounting Of-
fice, and he is accompanied by Mr. Keith Rhodes, the Technical Di-
rector, Accounting Information and Management Division, General
Accounting Office. Welcome.

Mr. ENGEL. Thank you. Mr. Chairman, members of the sub-
committee, thank you for the opportunity to be here today to report
to the subcommittee on our review of Treasury’s efforts to collect
delinquent nontax debts through its administrative offset program.
This program is intended to carry out provisions of the Debt Collec-
tion Improvement Act of 1996, which was developed under this
subcommittee’s leadership.

With me today is Keith Rhodes, Technical Director, as you stat-
ed, with our office of the Chief Economist. I would like to summa-
rize my statement that I have submitted formally.

Last November, the subcommittee held an oversight hearing on
the act’s implementation. At that time, Treasury reported that
agencies had referred $9.4 billion of delinquent debt for offset.
Since then, these referrals have increased to $16.7 billion. This
progress is attributable to Treasury working more closely with the

4 CFO act agencies in recent months to: No. 1, identify the debts
that can be referred and, No. 2, bring the debt that agencies sub-
mitted for the IRS Tax Refund Offset Program into Treasury’s ad-
ministrative offset data base.

However, as Mr. Hawke has stated previously, there remains a
significant amount of nontax debt over 180 days delinquent that
has not yet been referred, for the various reasons he identified.
Also, billions of dollars of delinquent nontax debt have not been re-
ferred, primarily because agencies have not yet completed certain
actions. These actions include: No. 1, ensuring due process, a nec-
essary step before debts can be referred for offset; and, No. 2, de-
termining whether loan workout procedures have been established
with debtors, which precludes referral for offset.

As the Treasury Acting IG has just highlighted, Treasury has ex-
perienced significant problems developing an administrative offset
program system. These problems have seriously affected Treasury’s
implementation of two important aspects of the administrative off-
set program. First, systems development problems have hampered
Treasury's ability to attempt to bring additional payments into the
program. Currently, payments that are available for administrative
offset are limited. They include only vendor payments disbursed by
Treasury and retirement payments made by the Office of Personnel
Management. These payments comprised about 5 percent of the
total number of disbursements made, and 21 percent of the total
dollars paid, by the Department of Treasury’s disbursing offices
during fiscal year 1997. Further, Treasury does not yet know the
total number of Federal payments that may be available for admin-
istrative offset. Nor has it fully determined the extent to which
payments will be exempt from administrative offset.

nd, ’s consolidation of the administrative tax refund
and Federal salary offset programs, as envisioned by the act, is
also impeded by these systems problems. Thus, any debt collection


51

RECENT PROGRESS TO IDENTIFY AND REFER
DELJNQUENT NONTAX DEBT FOR OFFSET

‘The Subcommittee's November 1997 oversight hearing on DCIA‘s implementation
underscored the need for progress in referring delinquent nontax debts to Treasury for
offset At about the time of the hearing, agencies had referred $9.4 billion of nontax debt
over 180 days delinquent to Treasury for administrative offset.

Initially, agencies had been slow to refer delinquent nontax debt for administrative offset
under DCIA largely because of uncertainty as to the delinquent nontax debt that should
be referred. Also, Treasury had not made a concerted effort to identify delinquent nontax
debt that could be offset or to develop time frames for agencies to refer the debt for
offset.

In January 1998, Treasury began actively working with agencies to reach agreement on
the outstanding nontax debts over 180 days delinquent that can be referred for
administrative offset and to obtain commitments from the agencies on referral of those
debts. Treasury initially met with the five major credit agencies-the Departments of
Agriculture, Education, Housing and Urban Development, and Veterans Affairs (VA) and
the Small Business Administration. Later, Treasury expanded its work to include the
other CFO Act agencies.

‘As of April 1998, the CFO Act agencies had referred about $16.7 billion of delinquent
nontax debt to Treasury for administrative offset-a 78 percent increase over about 7
months. Most of this increase resulted from Treasury's work with the agencies to bring
the nontax delinquent debts they submitted for the Internal Revenue Service's (IRS) tax
refund offset program into Treasury's administrative offset, database. Debts that agencies
normally would have referred to IRS for tax refund offsets in calendar year 1998 were,
instead, referred to Treasury's Financial Management Service. These debts were
incorporated into the database Treasury uses for matching debts for administrative offset
and then referred to IRS, which maintains a separate database.

In addition to the delinquent nontax debt that has been referred for offset, the CFO Act
agencies also hold considerable delinquent nontax debt that has not been referred to
Treasury. According to Treasury reports, in April 1998, these agencies held $43.1 billion‘
of nontax debt over 180 days delinquent, including the $16.7 billion of referred debt.
Treasury and the CFO Act agencies have determined that $19.4 billion, or almost 75
percent, of the $26.4 billion in unreferred nontax delinquent debt would not be referred
for administrative offset, at least not in the near term, for the following reasons:

“These delinquencies comprise over 90 percent of the debt over 180 days delinquent
reported for the entire federal government.

3 GAO/T-AIMD-98-195.


80

porated into State functionality, because each of the States is going
to handle the rules regarding debt differently.

Some are going to employ the Government regulation regarding
25 percent of disposal income is the max that anyone can recoup.
Maryland and Virginia implement that rule differently. Maryland
has wiry cpecifie rules about the maximum value that money can
be coll whereas Virginia employs the straight Federal guide-
line on 25 percent of disposal income.

Those are the concepts that you are looking for. The specific—
how do you know—how big a problem are we trying to solve? That
is really what you are getting to in the concept of operations, and
then it is who is going to do it. As they are talking about in cross-
servicing, who actually is going to be providing the information and
executing the collection.

Mr. SUNUNU. Ultimately who is really—who has got to be respon-
sible for defining and driving those concepts of operations?

Mr. RHODES. It would be Treasury. Treasury in consultancy with
the other agencies that has to figure out what the monetary flow
is and who is ultimately going to be in charge of collections.

Mr. SUNUNU. You mentioned GTOP, so let me ask a little bit
about that. I think everyone in the room is disappointed to hear a
story of $5 million that has been invested for a system that will
really never achieve any of its original goals. That is a significant
problem, but the fact is, no sys stem is perfect.

The shortcomings at GTOP—in your assessment, is that an iso-
lated incident, is it an aberration, or has FMS had a history of ad-
ministrative and implementation problems of this sort?

Mr. ENGEL. We are not familiar with the history of FMS’ systems
development problems, but I would say as it relates to the GTOP
situation that, as Keith pointed out, one of the key problems, and
the reason it could not be used, is they could not test to see wheth-
er it would do the functionality that it was intended to do, because
it did not have the concept of operations, and it did not have the
functional requirements.

I don’t know whether other Treasury systems, such as at IRS or
places like that, whether they incurred those same types of prob-
lems. But, I do know that systems failures quite often are because
of those building blocks not being in place. So, I would assume
things that have gone wrong over at IRS, in some cases, have been
because the proper upfront work in designing what the concept of
operations and what they want the system to do and what is the
functions they want it to perform was not done.

Mr. SUNUNU. Would any of the other panelists like to comment,
particularly those from Treasury? Is this an isolated incident? $5
million—in taxpayers’ money—and the project has not been
brought to fruition. Are there systematic problems that are going
to cause this sort of waste to occur again?

Mr. CALAHAN. Well, the IG’s Office could comment briefly on that
point. I think we view the problem with GTOP as a problem that
is linked to process as opposed to episode. And we could provide for
the record for you a list of problems in the past with systems devel-
opment.

PiThe information referred to follows:]}


13

provisions of the DCIA. I would now like to take a few minutes to provide a
status update on the major debt collection programs and initiatives that support
DCIA implementation:

First, I would like to review the 1998 Tax Refund Offset Transition Process. As
we reported in our November testimony, FMS and IRS originally planned to
merge the tax refund offset and the Treasury offset programs in January 1998. In
light of the magnitude of collections in the tax refund offset program and the
potential for serious problems and disruptions if the transition were not completed
smoothly, FMS and IRS jointly agreed to delay the merger of these two programs

until January 1999.

Since that time, FMS and IRS have worked closely together to implement a
transition process in 1998 that allowed FMS to streamline and improve its
operations by providing a single mechanism for agencies to simultaneously refer
debts for both tax refund offset and administrative offset. This action was
successful in ensuring that an estimated $2 billion in delinquent child support and
Federal non-tax debt collections was not jeopardized. The joint 1998 process

‘hae 3, 1958 339m) 3 AATESTIN4.GRO


55

OFFSET PROGRAMS NOT YET CONSOLIDATED

One of the DCIA's goals is to minimize debt collection costs by consolidating related
functions and activities. To date, however, Treasury has not yet consolidated the
administrative, tax refund, and federal salary offset programs.

‘The Federal Tax Refund Offset Program (TROP) has been a cooperative effort of IRS and
the federal program agencies. Legislation, beginning with the Deficit Reduction Act of
1984 (Public Law 98-369), authorized the use of tax refund offsets to recover delinquent
federal nontax debts. The Emergency Unemployment Compensation Act of 1991 (Public
Law 102-164) provided permanent authority to use tax refund offsets. Since TROP's
inception in 1986, approximately $8.5 billion of delinquent debt has been recovered
through the program.

The Debt Collection Act of 1982 authorized, but did not require, federal salary offsets and
administrative offsets to liquidate delinquent nontax debt owed to federal agencies. The
DCIA requires agencies to participate in an annual matching of records to identify federal
employees delinquent on federal debts.

Since 1987, the federal employee salary offset program has been a cooperative effort
between the federal agencies and DOD's Defense Manpower Data Center (DMDC). Under
the program, DMDC performs the computer matching necessary to identify federal
employees who are delinquent on their debts using delinquent nontax debtor files
provided by the various creditor agencies. DMDC matches these files against active and
retired civilian employment files provided by OPM, as well as against DOD's active,
retired, and reserve military personnel files. Under a similar program, creditor agencies
submit delinquent nontax debtor files to USPS for matching against USPS personnel files.
According to Treasury data, during fiscal year 1997, agencies collected over $42 million
through these programs.

Treasury's lack of progress in consolidating the offset programs is primarily the result of
its problems with the development of a new administrative offset system. I would now
like to highlight these problems.

SYSTEMS DEVELOPMENT PROBLEMS
MUST BE EFFECTIVELY ADDRESSED

Treasury does not have a system that can perform all the administrative offset functions
envisioned as a result of DCIA. This can be directly attributed to problems Treasury has
experienced in managing the development of such a system. Although Treasury has
recently taken several actions to address systems development issues, it will be some
time before enough information is available to accurately assess the effectiveness of those
actions. In addition, we have identified several areas where additional actions must be
taken immediately to reduce the risk of further system development problems.

7 GAO/T-AIMD-98-195


2

Let’s look at the status of regulations. Even after Congress en-
acts a law, the executive branch must provide the guidance and
regulations needed to fill out the details prescribed by the law. Sev-
eral key authorities from the Debt Collection Improvement Act will
continue to be unavailable to agencies until those regulations are
finalized. This is the one ray of hope right now in the debt collec-
tion program. We are finally making progress on regulations that
have been on the drawing board far too long.

Compare this to the Medicare Program, which I worked on as a
member of the Senate staff 30 years ago. Civil servants worked to
publish the Medicare regulations, the very day the law was signed
by President Johnson. en I was assistant to the Secretary of
Labor under President Eisenhower, we monitored every day the
hearings on a new agency to look at the filings of labor unions. We
had those regulations ready to go when the bill passed the Con-
gress and even before the President signed it. Here we have waited
2 years after enactment, and some regulations are not yet effective.

Well, let’s talk about leadership. This law was a National Per-
formance Review priority. This effort accounts for two of the Presi-
dent’s priority management objectives. After our last hearing, Rep-
resentative Maloney, then the ranking Democrat, and I sent to
President Clinton a letter emphasizing our concerns. The President
raised the issue with the Treasury retary and we have since
seen the departure of several levels of civil servants from the De-
partment of the Treasury and the replacement by a new team
which appears to be capable. We wish them luck and extend our
hand in whatever capacity we can offer. However, we have had 2
years of shilly-shallying on this issue and the taxpayers deserve a
little more rapid action than that.

It has been said that success has many fathers, while failure is
an unclaimed orphan. The original Debt Collection Improvement
Act had the input of the Congress, the input of the Chief Financial
Officers Council, the President’s Council on Integrity and Effi-
ciency, the Federal Credit Policy Working Group, the Office of
Management and Budget, and every credit agency. I still believe
that working together we can accomplish our purpose to collect de-
linquent debts owed to the United States and its taxpayers. But
every new problem should disappoint everyone involved in the en-
actment of the Debt Collection Improvement Act. Ultimately, suc-
cess will be measured by dollars collected and accounts resolved.

With that said, we welcome the witnesses from several Federal
agencies to discuss the implementation of the Debt Collection Im-
provement Act. Although agencies are at varying stages in imple-
mentation, it is fair to say that everyone in this room, and a few
that are not, can certainly do a lot better, and we certainly ex-
pected that, and I think they did so when that became law 2 years

Does the gentleman from New Hampshire have a statement?

Mr. SUNUNU. No; I do not.

Mr. Horn. My colleague from Ohio, the ranking Democrat, Mr.
Kucinich, would you like to have an opening statement?

Mr. Kucinicu. Sure. Thank you, Mr. Chairman. I want to thank
you for holding this hearing on debt collection and the status of the


72

Mr. Horn. Yes; but is 23 percent standard?

Mr. GREGG. I don’t know if it is standard. I do know, based on
previous experience, that that is certainly in the realm of what
they are used to and, in fact, quite often it is higher than that.

Mr. Horn. What are the current criteria to select them? If it is
competitive, it sounds to me like if one said, “Gee, I will do it for
21 percent,” that might give the Treasury more. But apparently it
is not financially competitive, so what is the criteria?

Mr. GREGG. We wanted to have a group of private collection
agencies that would come in. So, basically, once they met that
threshold, we allowed them all in.

. The thing that I think is important to keep in mind is that these
are contracts that come up periodically, and we will assess the per-
formance of each of the contractors and make a judgment of wheth-
er or not to continue. We have the right to extend for 1-year peri-
ods individual contracts, and we will judge whether or not they are
performing and whether or not to keep them as one of the collec-
tion agencies.

Mr. Horn. OK. My time is up. Mr. Lewis.

Mr. LEwiIs. I would like to yield my time to Mrs. Maloney.

Mr. Horn. OK, fine.

Mrs. MALONEY. Thank you. I thank the gentleman for yielding.

I would like to follow up on the chairman’s question, where you
said you are now sending out a dunning letter from Treasury, then
you send it over to a private collector. When did you start doing

sf

Mr. HAWKE. The private collection agency sends out the letter
when the debt is referred to them for collection.

Mrs. MALONEY. When did you start this program?

Mr. Hawke. Commissioner Gregg can correct me on that; I’m

sorry.
Mr. GREGG. Actually, the process is kind of linked together. The
private collection agencies we got up and running in March, actu-

ally.

Mrs, MALONEY. In March?

Mr. GREGG. Before they were actually operational. There was
quite a bit to do.

The process for cross-servicing, now this is only the cross-serv-
icing part, works this way: After we get debts referred to us for
cross-servicing from the agencies, we turn them over to our Bir-
mingham collection center within FMS, and they go through the
process of sending out, on Treasury letterhead, a notice to the debt-
or. We work that debt for a period of 30 days. If we are unsuccess-
ful at that point, we turn it over to the private collection agencies,
which then send out letters and continue the collection process.

The Birmingham operation really got up and running just within
the last 4 or 5 months as a full-fledged operation. The success we
have had with those letters goes back to the point I know you made
in the last hearing, which was on the letters going out under
Treasury letterhead Birmingham has sent those out. Really, in the
last 4 or 5 months, we have repayment agreements of $31 million
as a direct result of those letters going out. And the money is com-
ing in, $200,000 or $300,000 each month, as a result of those re-
payment agreements. So, that effort, I think, has been successful.


EMBARGOED UNTIL 9:30 A.M. EDT
Text as Prepared for Delivery
June 5, 1998

TREASURY UNDER SECRETARY FOR DOMESTIC FINANCE
JOHN D. HAWKE, JR.
HOUSE GOVERNMENT REFORM AND OVERSIGHT SUBCOMMITTEE
ON GOVERNMENT MANAGEMENT, INFORMATION AND TECHNOLOGY

Mr. Chairman and Members of the Subcommittee, thank you for this opportunity to
discuss the Department of the Treasury’s progress in implementing the Debt Collection
Improvement Act of 1996 (DCIA). Your continued interest in our efforts to carry out this
important program has been of great value to us, and I am pleased to report that we have made
significant progress since the last of these oversight hearings. I want to assure you again that the
Department places a high priority on the successful implementation of the DCIA.

‘There have been major changes in both our strategy and in the management team
assigned to the debt collection program. During the past several months our approach has been
to make the decisions that will best move the program forward — even if that means reassessing
our approach, refocusing priorities and acknowledging past mistakes.

is ofthe D foi

During our reassessment of the program, it became clear that we needed a much better
understanding of the composition of the $52 billion portfolio of delinquent debts owed to the
government. In order to avoid a possible perception that the entire $52 billion would actually be
collectable, we determined that an analysis of the debt portfolios of the Federal agencies was
necessary. We have now established through intemal and independent external analysis that only
about 60% of the $52 billion is referable to Treasury for collection and that a significantly
smaller amount is likely to be collectable by Treasury under the DCIA.

RR-2491


70
ready collected $600,000 in these first few months of the referral

P .

Mr Horn. Is this on a competitive bidding basis, or how did you
select them?

Mr. HAWKE. They were selected on a competitive bidding basis.

Mr. Horn. What is the nature of the competitive bids?

Mr. GREGG. Let me interject. After they were selected, the pri-
vate collection agencies are reimbursed a percentage of what they
collect. So they lon’t get any direct money from us, but they get
23 percent of the amount that they collect, plus there is a 2-percent
bonus, depending on how well they do, that may also be available
to them.

Mr. Horn. What is the criterion on how well they do, just to get
more debt in?

Mr. GREGG. Yes; we have to judge them and whether or not they
were entitled to the bonus. We went through a competitive process
in selecting the 12 contractors to begin with. Once they are in
there, then they are evaluated continuously on how well each of
them are doing and whether or not they are entitled to the 2-per-
cent bonus.

Mr. Horn. Is that a decision made by you and the Financial
Management Service or is that made by a higher level in the
Treasury?

Mr. GREGG. The decision on the bonus?

Mr. Horn. The decision as to the policy; the decision as to who
gets what and the decision as to who gets the bonus.

Mr. GREGG. I think the structure was set up certainly under
FMS, but with the knowledge of the Department. We really are re-
sponsible for operating it now that it is up and running, and we
decide on the quarterly bonuses and who is entitled to them.

Mr. Horn. Are there regulations that have the criteria by which
these judgments are made?

Mr. GREGG. I don’t think they are in the regulations, but we do
have information that we can share with you on that.

Mr. Horn. At this point in the record, without objection, I would
like to know what are the criteria that are used in selecting debt
collectors; and what are the criteria that lead to the bonus, et
cetera; how did you happen to pick 23 percent or is that standard
in the private collecting world or what?

Mr. GREGG. We will be happy to provide that for the record.

[The information referred to follows:]


63

capable of paying it, pay your bill. We pay our bills, why can’t peo-
ple who are given government money pay their bills?

I am saying I applaud the Education Department that worked
out help to people, who need more help getting started. I don’t
think you should slap people who are getting started, but I think
if you are affluent, then you should pay your daggone bills. And I
really feel that maybe during this period while we are setting up
the systems, maybe we should take a chunk of it and just contract
it out to accredited private vendors to bring it in.

I have a report here, I’m looking at the GAO report, and I will
be writing the chairman to have a hearing on this.

Mr. Horn. Don’t forget the 5-minute rule, but go ahead.

Mrs. MALONEY. I didn’t even get one question in, Mr. Chairman.
But I tell you, all I have heard is it is not working. I don’t under-
stand why it is not working.

If I owe a doctor’s bill, within 60 days I have a note telling me
that I have to pay it. Yet at one point it was revealed all these af-
fluent doctors hadn’t even paid back their student loans. It is out-
rageous. They should pay their student loans back.

jut, anyway, this was done on the Farm Service Agency, and it
was a 5-year period, and I am going to ask the chairman to have
a hearing on this. But this report showed briefly that in a 5-year
period, billions were written off without any effort to collect it. Yet,
in two States they used private collectors that cost them $58,000
and they brought in $2.2 billion. So, I think this is a very telling
report on a 5-year period.

I think we have a wonderful opportunity to bring this money in
and not raise taxes, yet have money for more IGs, for more people
at Treasury that are overworked with the many problems they are
confronting, for more teachers and police officers, and people that
we need in our communities. I think it is a very exciting thing.

Can I just ask one question?

(The prepared statement of Hon. Carolyn B. Maloney follows:]


20

The progress in cross-servicing has been very encouraging over the past several
months. Agencies are required by the DCIA, with certain exceptions, to refer all
delinquent debt over 180 days old to FMS for cross-servicing. FMS is working
closely with agencies to obtain referral commitments and address any agency
concerns regarding debt referral. Once debts are referred, they are analyzed and
the appropriate collection tools are applied. This could include Treasury offset,
referral to private collection agencies, demand letters and phone calls, or referral
to a debt collection center. Since the last hearing, debt referrals have increased
from $460 million to almost $1.8 billion. In addition, cross-servicing collections
have increased from $1.1 million as of last November to $ 5.5 million as of May
15th, The most dramatic change is that repayment agreements have increased

from $2 million to over $31 million during this same time period.

FMS is working closely on cross-servicing with the five largest creditor agencies
(Housing and Urban Development (HUD), Education (Ed), Veteran’s Affairs
(VA), Small Business Administration (SBA) and Agriculture (USDA)) that hold
70% of all delinquent Federal non-tax debt over 180 days old. Of the
approximately $33 billion held by these agencies, we have determined that $4.8

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57

measured and the system cannot be tested to determine if it would meet Treasury's
needs. Thus, Treasury has not placed the system into operation.

Current Treasury Efforts

In December 1997, Treasury established a new management team for DCIA
implementation, which includes managing a new systems development effort for the
administrative offset program. The new management team has decided to halt all work
on GTOP and enhance ITOP. Treasury recognizes that one of the disadvantages of this
approach is that it may result in little or no return on the approximately $5 million it has
paid to the contractor for development of the system software that has been delivered.
However, it also believes that modifying ITOP is the most practical way to consolidate the
administrative and tax refund offset programs for the 1998 tax year and to begin adding
federal salary and benefit payment streams in the administrative offset program during
calendar year 1998 or early 1999.

According to Treasury officials, the enhancement of ITOP will comply with Treasury
guidance for systems development efforts. Based on our review of documentation
recently provided to us, there are indications that some of the critical system
development requirements are being addressed. For example, Treasury has identified the
information flows associated with several payment types and has begun to develop the
corresponding functional requirements for those payment types. It has also developed a
DCIA Implementation Plan that includes many of the steps necessary to enhance ITOP
and projected completion dates for each step. This plan should enable Treasury
management and others to promptly and objectively measure whether the ITOP
enhancement is on schedule.

In addition, Treasury's Financial Management Service's Debt Management Services is now
routinely briefing the Under Secretary for Domestic Finance and other top Treasury
officials on progress relating to the administrative offset program with the intention that
such high-level oversight will facilitate keeping the implementation of DCIA on schedule
and help to identify any significant problems early so that corrective actions can be taken
promptly. While these efforts are positive steps, we have identified several areas where
additional actions are needed.

Actions Needed to Reduce

‘Sigmficant Risks Further

In reviewing Treasury's plans and actions to date, we have identified several areas where
additional actions must be taken immediately to adequately reduce the risk of costly
modifications and further delays in the effective implementation of the administrative
offset provisions of DCIA. First, a documented overall concept of operations has not yet
been developed. A concept of operations includes high-level descriptions of

information systems, their interrelationships, and information flows. It also describes the

9 GAO/T-AIMD-98-195,


23

process. Also, FMS is chairing an inter-agency committee established to facilitate
information exchange and the expeditious coordination and approval of pending

regulations,

Since the last hearing, we have published both the proposed and final regulations
for Administrative Wage Garnishment, proposed revisions to the Federal Claims
Collection standards (jointly with the Department of Justice), the Interim Rules
for Transfer of Debt to Treasury for Collection and Salary Offset, and proposed
regulations for Barring Delinquent Debtors. A Federal Register policy statement
requiring agencies to develop plans for including Taxpayer Identification
Numbers on payment vouchers will be published shortly. In addition, proposed
regulations for Offset of Tax Refund Payments to Collect Federal Debt, Offset of
Tax Refund Payments to Collect Child Support, and Benefits Offset are currently in
formal clearance. Once these are published as final rules, Treasury will have
issued all regulations required for implementation of the mandatory provisions of
the DCIA. FMS has also begun work on a supplemental regulation to provide
agencies with comprehensive guidance on the administrative offset program. This
General Offset Rule is targeted for publication in September 1998.

June 3, 1998 (3:33pm) 13 ANTESTIMI4.GRG


90

VA personnel have worked closely with Treasury’s Financial
Management Service [FMS] to help in implementing the provisions
of the DCIA. VA staffs have reviewed and provided comments on
numerous draft, proposed and interim regulations published by
Treasury to implement the law. Staff from our Office of Financial
Policy participate in all three interagency working Froups of the
DCIA issues resolution groups. The Department has also formed an
internal VA DCIA work group to monitor VA’s implementation
progress. This internal group continues to meet periodically with
FMS staff to resolve any issues and impediments to implementa-
tion as they arise.

VA's Office of Financial Policy has also worked with FMS to re-
vise the Report on Receivables Due from the Public so that it will
provide better information on the implementation and effectiveness
of the DCIA requirements.

Last April, I testified about VA’s preparations for referring debts
delinquent for more than 180 days to the Treasury. Since then,
working together with Treasury’s Financial Management Service,
VA has made significant progress. The Veterans Benefits Adminis-
tration’s Debt Management Center has completed the amendment
of its Privacy Act system of records to accommodate the referral re-
quirements of the DCIA. Because VA has been a long-time partici:

tt in all available administrative offset programs and ef-
fected many interagency matching programs, the Department had
already published regulations needed to participate in the Treasury
Offset Program [TOP].

VA's first step in the referral implementation process was to
identify those debts that are eligible for TOP and those that are eli-
gible for referral to Treasury’s cross-servicing center. As we pre-
viously informed this committee, of the $1.33 billion of VA debt
more than 180 days delinquent as of the end of fiscal year 1997,
we identified $334 million eligible for the administrative offset pro-
gram and $699 million eligible for cross-servicing. The categories,
of course, are not mutually exclusive and many debts are eligible
for both of these Programs.

Of the $334 million identified as eligible for TOP, VA has already
referred $262 million to Treasury. The amount referred includes all
$218 million of eligible debt managed by our Debt Management
Center in Saint Paul, MN; another $1¥ million of VBA debt not
managed by the debt center; and almost $42 million worth of our
first-party medical care debt, the debt owed to us by the veterans
themselves.

Excluding third-party medical claims, the unique nature of which
are addressed in my written testimony, and the active vendee home
loans which are managed by our mortgaging service contractor, the
Debt Management Center currently houses almost 88 percent of
VA debt over 180 days delinquent.

The Debt Management Center is a highly efficient and effective
operation that performs all the functions required of a cross-serv-
icing center. In recent years, even excluding benefits from VA ben-
efit offsets, the Debt Management Center has generated an average
of about $15 in cash collections for every dollar of operating costs.
Inclusion of collections offset collections in this calculation brings


44

requirements as outlined in the Clinger-Cohen Act and OMB guidance. Among the
more significant weaknesses we found in our audit were:

© FMS did not adequately define its business requirements for
implementation of the DCIA provisions and had not developed a sound
business case for the development of GTOP. Without this, FMS did not
have the analysis needed to assure that GTOP would provide the added
benefit to justify the cost, and would address all the requirements for
successfully carrying out the DCIA provisions, especially as it related to
offset of federal payments.

© FMS had not developed an adequate project management plan to effectively
monitor the development of GTOP. Project management also suffered from
a lack of continuity. Since development of GTOP began, FMS assigned
three project managers. Key issues were not addressed, such as who would
maintain the system, what contingency plans would be implemented in the
event of delays, and how would agency participation be phased in. Also,
FMS did not timely develop an acceptance testing plan. When the
contractor delivered the GTOP application software in October 1997, FMS.
‘was not prepared to perform acceptance testing.

¢ FMS did not determine the overall costs to acquire, develop, and maintain
GTOP or establish a process to capture actual cost, such as in-house labor.

For one key component, the development of the GTOP software application.


85

concern. We have made year 2000 our priority. We have given,
since I first came to FMS on December 15, it has been the top pri-
ority within FMS, period.

‘ith payment systems, and specifically Social Security, we knew
the importance of moving on that, and, in fact, we started testing
with Social Security in March of this year, and we will have the
Social Security payments prepared for the year 2000 by this Au-
gust. So it reflects the kind of priority that we have.

Generally, within FMS, we have a lot to do. But I think in the
payments area, our plan is to have all of our payments year 2000
compliant by the end of this year. We are starting with Social Se-
curity. We are also nearly complete with IRS, and we will have
those all done by the end of this year.

Mr. SUNUNU. Does that encompass all of the 62 mission-critical
systems?

Mr. GREGG. No; it does not. Our plan is to have most all of those
62 systems done by the end of this year. There are some that are
going to drag into early 1999, the March, April time period. And
those are in the area of some of our accounting, Government ac-
counting processes and internal accounting processes. Even within
that, we have a system we call goals that 18 subparts, and the

riority that we gave for those 18 parts of which ones we can do
st, were the ones that were most important. The ones that are
toward the tail end, the March and April timeframe of 1999, are
ones that are not nearly as important to our operation and cer-
tainly don’t have an impact on individuals.

So what we have done is prioritize those. When I came to FMS,
there was a bit of a spreading around of who was responsible for
Y2K. I made it very clear from the start that our CIO, who reports
directly to me, is responsible. She has full authority. In fact, she
met with the subcommittee some time ago to make some decisions.
She also knows that she has my support to see that it gets done.
We are going to get it done.

Mr. SUNUNU, Well, I appreciate your optimism. But I do want to
try and quantify this a little bit more. If we are at 15 systems now,
5 per quarter, I mean that would put us at about 30 of the 62 b:
the end of the year. You have said most all of them, however, will
be completed at the end of this year. There seems to be a little dis-
connect between 30 and 62.

Mr. GREGG. I wouldn’t go on a quarterly basis. For example, we
are working on the payment systems together. And I think the—
you know, there is going to be a considerable number that are com-
pleted by the end of this year. I don’t have a percentage by quarter
of how many of the 62 we will have done, but we do have a very
detailed plan on all of those mission-critical systems, and we mon-
itor that very closely.

The only thing I would point out is that the progress that we
have had in the last quarter is going to accelerate in future quar-
ters. I know what is involved to make sure that we get there. We
have also prioritized those very clearly, and many of those are
going to be completed by the end of this year. I don’t have a per-
centage of the 62 right off the top of my head.

Mr. SUNUNU. Mr. Rhodes, would you care to comment on the
progress at Treasury, in particular, and across agencies in general?


62

ury and OMB and the President, the results are just not coming
in. I feel we have to put a little more enthusiasm behind it.

My next bill is going to be that instead of the money going to re-
duce the deficit, that which we collect will go to the child care pro-
grams that the Republicans and Democrats are putting forward,
and I hope Mr. Horn will help me with this. The Republican wel-
fare bill required women to go back to work, and there is a
need for child care across this Nation to really live up to this Re-
publican program and also to live up to the many women that are
working. So, I am going to put it in that the money that comes in
will go to the child care program that the President has put for-
ward, that the Republicans have put forward, and I hope that there
can be more enthusiasm for it.

I have a series of questions here that are technical on the sys-
tems that are being implemented, and I am going to submit them
to be answered in writing. I have a meeting at 11 o’clock with Mr.
Gephardt, and I might not be here for everything, but I would like
to just focus on the commonsense asg| of all the reports showing
that the older the debt gets, the harder it is to bring it in. So, while
you are developing all these systems, I would like to see more effort
out of Treasury to bring that in.

It doesn’t have to be a computer, it can be a call to an agency
that says, “Look, in 180 days you are going to have to send us your
debt. We are going to give you a Treasury letter right now that
says pay your bills, and let’s see if we cannot get that debt in.” I
want to just see some commonsense approaches.

I recall talking to a member of your staff, who is no longer work-
ing there. I believe this person was fired. But this person used a
commonsense approach. All she did was take Treasury letterhead
and send out a dunning letter to a group of debtors and she im-
proved the debt collection dramatically, over 50 percent. So, I
would just like to see that step taken on this new debt that be-
comes old debt, while you are fiddling with systems and not mak-
ing them work, or they have not gotten up to the standard to work.

I am not being critical. I think that new computer systems are
complex and we need new technology. But while we are waiting for
that system to be put in effect, I would like to just recommend that
you start sending a dunning letter from Treasury just 60 days out.
Have the agencies do it, if you don’t want to do it yourself.

I can’t believe that I am saying this, because I am a true believer
in government. I support government. I think most government
workers are very dedicated. I think government service, if it is
done well and honestly, is one of the most really esteemed profes-
sions that one can have, and I] respect government workers tremen-
dously. I know that government workers can get the job done. But
during this time, while we are working to set up systems that will
bring this money in, I may explore with the chairman seeing if we
could have a pilot project where we just contract all of this out to
the credible private sector persons to see if they can bring it in, be-
cause it is not working.

What is so frustrating, and so exciting to me about this program,
is that this is something Republicans and Democrats agree on. And
I think most Americans agree that if you owe a bill and you are


86

Mr. RHODES. Well, as this committee is probably painfully aware,
GAO has testified numerous times on government readiness. The
problem has gotten to a point at which everyone should be in a con-
tingency planning mode. There is not enough time for everyone to
get everything done. Therefore, you are not looking at it in terms
of systems now, you are looking at it in terms of business con-
tinuity and keeping the continuity of government going,

The problem as it relates to the current subject on GTOP, ITOP,
or whatever the final system is, is now you are trying to solve for
several variables. We just issued a statement on Wall Street. For
example, there was some movement to try and send Wall Street to
operate in decimals as opposed to 1/8’s and 1/16’s, move them off
of that so they can do international trading better. Our position
was that you don’t want to break open the code and try and move
to deci lization at the same time that you are trying to solve for

Over the next 6 months our estimation is there are a great many
modernization efforts that will come to a screeching halt, because
they will just have to solve for Y2K, and that is it. It will be all
hands on deck, damage control, trying to keep the operation alive.
Treasury is no different than the Department of Defense is no dif-
ferent than anyone else.

Your grades came out this week, you gave Treasury a “C.” There
is argument about whether the le is correct or not, but let’s as-
sume that the grade is correct. it means you have a lot of work
to do, and a lot of work to stay in business to keep continuous the
operation of the office, not bring in something else. So these are the
decisions. That is one of the reasons we place so much emphasis
on the risk management plan.

The risk management plan is in light of GTOP, ITOP or what-
ever the final system will be called. The risk management plan,
however, is something that takes the continuity of iS as it re-
lates to Treasury, as it relates to Government, and figures out
whether you have the resources to bring to bear in light of Y2K,
in light of all the other things that are going to have to be done.

Mr. SUNUNU. Thank you.

Thank you, Mr. Chairman.

Mr. Horn. I thank you. That is the most succinct series of ques-
tions I have heard in a long time and easily was cramped in 5 min-
utes. We have a witty staff.

Mr. SUNUNU. They were very good answers. I think that was the

key.

Nir. Horn. That is right. We have witty staff members on this
majority staff and the suggestion has been made that I should sug.
gest to you that instead of GTOP, since it is a failed system, call
it GFLOP, and we al] will understand it.

I feel like Blondie, when she would come home and tell Dagwood,
“I have been in the store, Dagwood. This sale was on and it was
$500 marked down to $100 and, you know, I got a new hat today.”
Because what you have expended on GTOP is probably the de
minimis case in the Federal Government, since I am used to $4 bil-
lion going down the rat hole with the FAA and $4 billion going
down the rat hole with the IRS. So while IRS is in your bailiwick,
neither of those agencies really knew what they were doing 2 or


121

First, your efforts to improve the repayment of debt owed to the federal
government should be commended and supported. According to a survey
conducted by Representative Carolyn Maloney in March, 1997, the amount of
unpaid commercial non-tax debt is very large ~- approximately $51.9 billion
with the vast majority of that debt being more than 180 days old.

Second, verifying the qualifications and eligibility of commercial
entities for federal benefits before those benefits are provided is far more cost-
effective than is seeking to recover from those entities to whom benefits should
not have been provided.

Third, although improvements are being made, the federal goverament
can do a much better job of verifying the eligibility and qualifications of
commercial applicants before federal benefits are provided.

Fourth, systems and techniques currently used by the private sector can
be successfully used by the federal government to improve verification efforts.

‘And fifth, the key elements of a successfull verification program (and
therefore the improved repayment of federal benefits) are (1) improved financial
information concerning the commercial applicant; and (2) the application of
private sector techniques to better evaluate the qualifications and eligibility of
the commercial applicant.

‘With regard to the attachment, the “cases” described in the attachment
are actual reported cases; they are not fictitious. We have not included the real
names of the companies involved because it is not our intent to highlight from
the many cases that exist, the three that are discussed in the attachment. Further,
the information used in the case studies was information reported by various
government agencies and may be, by this point in time, out of date and not
reflective of the current status of the businesses reviewed. Our purpose in
providing these case studies is merzly illustrative to demonstrate that problems
exist and how they may be addressed.

Again, thank you for the opportunity to participate in your important

Sincerely,

Veen Cute

cc: Honorable Carolyn Maloney


31

referring debt. Your recommendation last November for a White House directive
on this matter resulted in a communication from OMB Director Raines to all
Departments and Credit Agencies to accelerate their compliance in referring
delinquent debt.

+ Since our last hearing, we have published six regulations to implement the
provisions of the DCIA. Commissioner Gregg will provide details on our
progress in this area, but I want to point out that the critical regulations are in
place.

I would like to conclude by emphasizing that Treasury recognizes, despite recent
progress, that there is still much work to be done. The Price Waterhouse analysis has provided
us with a realistic target, and we are working diligently to achieve the projected potential
collections.

Mr. Chairman, that concludes my testimony. 1 would now like to ask Commissioner
Gregg to discuss FMS’s implementation of the DCIA in greater detail.

-30-


7
ig Mm Hons Without objection, it will be placed in the record as

read.

We now will have the first panel of witnesses. If the following
will come forward, Under Secretary Hawke; Commissioner of Fi-
nancial Management Service Gregg; Acting Inspector General of
the Treasury, Mr. Calahan; Associate Director, Accounting Infor-
mation Management Division of GAO, Mr. Engel, and he will be ac-
companied by Keith Rhodes, the Technical Director in that division
of .

Please come forward. I think all you gentlemen know the routine
here. After we introduce each of you, the statement you have
brought will be automatically put in the record. We would like you
to summarize it so we can have more time for questioning.

You also know we raise our right hands to accept the oath.

[Witnesses sworn.]

Mr. Horn. Mr. Calahan, who do you have with you?

Mr. CALAHAN. Today I have brought with me Barry Savill, who
is the Director of one of our audit groups and was the supervisor
on this assignment.

Mr. Horn. OK. Mr. Hawke, I believe, is not here yet; so, Mr.
Gregg, would you like to begin?

. GREGG. Yes, thank you, Mr. Chairman. Mr. Hawke will be
with us presently.

I will submit my full statement for the record, and I have an ab-
breviated statement that I would like to make.

Mr. Horn. Sure.

STATEMENTS OF RICHARD GREGG, COMMISSIONER, FINAN-
CIAL MANAGEMENT SERVICE; JOHN D. HAWKE, JR., UNDER
SECRETARY FOR DOMESTIC FINANCE, DEPARTMENT OF
THE TREASURY; RICHARD CALAHAN, ACTING INSPECTOR
GENERAL, DEPARTMENT OF THE TREASURY, ACCOMPANIED
BY BARRY SAVILL; GARY ENGEL, ASSOCIATE DIRECTOR, AC-
COUNTING AND INFORMATION MANAGEMENT DIVISION,
GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY KEITH
RHODES, TECHNICAL DIRECTOR, ACCOUNTING AND MAN-
AGEMENT DIVISION, GENERAL ACCOUNTING OFFICE

Mr. GrecG. Mr. Chairman and distinguished members of the
subcommittee, good morning. I am pleased to be here to report the
progress the Financial Management Service has made in imple-
menting the debt collection provisions of the Debt Collection Im-
provement Act of 1996.

First, I would like to thank the chairman, the ranking minority
member, and other members of the subcommittee for your contin-
ued support and encouragement. I welcome this opportunity to pro-
vide an update on our progress in implementing the DCIA.

In order to strengthen the debt management program and pro-
vide renewed focus toward achieving program success in 1998, we
have established a new management team responsible for imple-
menting the DCIA. This team places strong emphasis on strength-
ening positive agency relationships in order to obtain compliance
with provisions of the act, while working cooperatively with service
partners to resolve implementation issues.


46

In conclusion, the DCIA is an important legislative tool to help the Government
improve its track record on the management and collection of delinquent debt.
At the same time, implementation is a very complex and difficult task requiring
close coordination, both within and outside Treasury. There are numerous
issues to be addressed and obstacles to overcome. FMS has recently taken a
number of steps to get the implementation effort back on track. We intend to
conduct additional audits over the next several years on various aspects of the

DCIA that will assess the effectiveness of FMS’ implementation efforts.


Agencies are required by law to provide due process to persons that
the agency believes owe money. Due process procedures cause delays in
referring debt to FMS. | am encouraged, however, that agencies are taking
due process concerns so seriously. Reasonable delays attributed to due
process are a necessary cost of a democracy, and | for one will defend
them.


40

Mr. Horn. Thank you. We are going to have everybody get their
statement in and then we will question the whole panel.

Our next presenter is Mr. Richard Calahan, the Acting Inspector
General of the Department of the Treasury. Mr. Calahan.

Mr. CALAHAN. Phank you. Mr. Chairman, members of the com-
mittee, we appreciate the opportunity to be here to discuss the Fi-
nancial Management Service's efforts to implement aspects of the
Debt Collection Improvement Act of 1996.

We recently issued a draft audit report to FMS, which focused
on their efforts to develop a new automated information system,
the Grand Treasury iset Program, otherwise referred to as
GTOP. Our conclusion was that, overall, this development effort
was not well planned or well managed.

I would like to briefly summarize for you the findings of our re-
port. Before I do this, I want to preface my remarks by pointing
out that about the time we concluded our audit field work, there
were significant changes in the executive management at FMS, in-
cluding the appointment of a new commissioner. So much of the
work that we performed and we are reporting on today applies to
former management.

We provided the results of our work to FMS in February, and
since February we have met with FMS several times and they have
indicated concurrence with the recommendations in our report.

In our report we express concern that despite recent steps, FMS’
strategy was to split their efforts between the development of
GTOP, while enhancing ITOP without the benefit of adequate func-
tional requirements. It is our understanding that FMS has termi-
nated further development of GTOP and plans to focus their efforts
on enhancing the existing system, ITOP. However, considering the
number of problems we identified in FMS’ development of GTOP,
it is essential that they exercise strong management control over
the current effort to develop an automated system and effectively
execute sound system life cycle planning requirements, as outlined
in the Clinger-Cohen Act and OMB guidance.

Among the more significant weaknesses that we found were:

FMS did not adequately define its business requirements for im-
plementation of the Debt Collection Act provisions and had not de-
veloped a sound business case for the development of GTOP. With-
out this, FMS did not have the analysis needed to assure that
GTOP would provide the added benefit to justify the development
cost for the system.

FMS also had not developed an adequate project management
plan to effectively monitor the development of GTOP. Key issues
were not addressed, such as who would maintain the system once
completed, and what contingency plans would be implemented in
the event of delays. Also, FMS did not timely develop an accept-
ance testing plan. When the contractor developed the GTOP appli-
cation software in October 1997, FMS was not prepared to perform
acceptance testing.

Three, FMS did not determine the overall cost to acquire, de-
velop, and maintain GTOP, or establish a process to capture actual
costs. For one key component, the development of the GTOP soft-
ware application, the cost more than doubled from $3 million to


120

The Dun & Bradstreet Corporation

Jean Cantrelt 1200 New Hampshire Avenue, NW
Dwrector, Government Atairs Suite 440
Government Affairs Washington, DC 20036

Tel 202.463.2154

Fax: 202.463.2163
E-mail: cantrely@maildnb.com

June 3, 1998

Honorable Steve Hom

Chairman, Government Management,
Information and Technology

Government Reform and Oversight
Committee

United States House of Representatives

B-373 Raybum House Office Building

Washington, DC 20515

Dear Mr. Chairman:

‘On behalf of the Dun & Bradstreet Corporation, thank you for the
‘opportunity to provide comments conceming your legislative efforts that would
amend Title 31 of the United States Code to reduce waste, fraud, and error in
goverment programs, to improve federal debt collection practices and to
promote electronic payments. We appreciate the consideration that you and
Mark Brasher of your staff, and Representative Maloney and Mark Guiton of
her staff, have given to these important matters.

This letter encloses the talking points that we have used in presenting
information to those in the federal govemment with responsibility for these
matters. We had hoped to modify this material to a style and form more
suitable for inclusion in your proceedings and to add our suggestions with
regard to the importance of the verification activities and techniques concerning
commercial entities (not consumers) for federal benefit programs. We have not
been able to complete this request but when we do we will submit it for
inclusion in the record of your proceedings, if you conclude that it is appropriate
to do so.

In addition to the attached material, we have the following general
observations.


19

support has increased from 8 to 15 entities since the last hearing. Most recently,
in March, the State of Oklahoma submitted $141.7 million in child support debt,
and the County of Los Angeles forwarded debts with a value of $1.45 billion. In
April, Illinois followed with $957 million in delinquent child support debts. This
brings the total debt load for Child Support in 1998 to 760,000 debts totaling over
$6.8 billion.

Since November, child support collections have more than doubled to $328,000 in.
administrative offsets and these collections will continue to increase as additional
payment types and additional states and territories are included in the offset
program. FMS is working closely with the states, Health and Human Services
(HHS) and the Federal Reserve Bank to address any technical, programmatic or
systems issues in order to insure increased state and territory participation. To
further encourage participation, Don Hammond, the Acting Fiscal Assistant
Secretary, chairs a joint working committee between Treasury and Health &
Human Services. This committee meets monthly to address any barriers to state

participation.

Jane 3.1998 0:33pm) 9 ANTESTIMIGGRO


4

includes a significant change in work flow and provides many of the benefits that
would have occurred through the merger of the two offset programs. By requiring
agencies to submit their debt files through FMS, we have been able to
significantly increase the Treasury Offset Program debt database and to more fully
prepare creditor agencies for the full program merger. Since the last hearing,
Federal non-tax debt referrals for administrative offset have increased from $9.4
billion to $16.7 billion (this represents 58% of all debt identified by Price
Waterhouse as eligible for offset) and participation has increased from 17 to 36
agencies as a direct result of the information sharing between FMS and IRS. This
year’s Federal non-tax debt collections for the Tax Refund Offset transition
process total over $765 million as of May 15th, compared to $541 million during
the same period in 1997. In addition, combined administrative offset collections
for Federal non-tax debt and child support total over $1 million from last
November through May 15th of this year. This is largely due to the successful
implementation of the 1998 transition process for administrative and tax refund
offset.

dene 3, 1998 6:33pm) 4 [AATESTIMI4GRG


3

Trea sury Department’s efforts to consolidate governmentwide debt
collection.

In the interest of time, what I will do is submit the rest of my
statement for the record.

[The prepared statement of Hon. Dennis J. Kucinich follows:]


110

the veterans in that area. So I think we have a good balance right
now.

Mr. SUNUNU. You mentioned the work of staff and helping to
find commonsense initiatives. To what extent are the ideas, I think
you mentioned 12 initiatives, but the ideas that you described, are
they homegrown? Are they coming from staff? Are you looking out
to the Etivate sector for best practices, or other agencies as well?

Mr. Grams. I would say up until several months ago they were
all homegrown, and that was fine. I think with what we are facing
over the next 5 years, we realized we had to go out and look at the
private sector, so we contracted with Coopers & Lybrand. They did
a 5-month study where they went and looked at 25 of our facilities
and 26 private sector health care entities to determine how well we
are pe jorming in terms of the processes and the administration of
billing and collecting versus how it is done in the private sector.
That proven very helpful to us.

Mr. SuNuNU. Are you sharing this information with any other
agencies that are doing third- debt collection?

Mr. Grams. No, we haven't. We have shared it with our com-
mittee staff and all the facilities, but we haven’t gone that extra

step.

Mr. SUNUNU. I will certainly encourage you to do that, given the
level of the success you have had in a very short amount of time.

Thank you. Thank you, Mr. Chairman.

Mr. CaTLEetT. Mr. Sununu, if I could, just to comment on your
question of the distribution of those resources, I can’t help myself
here, one thing we have been talking about and I believe certainly,
and I know Todd does and we are moving in that direction, is I
don’t think collection should be done at all of those sites. We need
to consolidate and centralize that collection. So the issue of where
the money goes, I believe, getting it back to the network or the
VISN is appropriate for health care, as Todd said, across that sys-
tem.

Because, to me, we need to improve our collection efficiency and
one way to do that is to centralize our billing and collection proc-
ess, and those things are underway.

Mr. SUNUNU. you.

Mr. Horn. Thank you.

Let me ask one that affects both of you. I listened to what
the Veterans Kaministration is doing with its hospitals. What is
the defense policy on collection from other health plans for military

ospii

ir. Toye. I can’t answer that specifically. But I will say, as Tin-
dicated earlier, we are very ssively pursuing the collection of
debts. Many of the debts in D are associated with DOD per-
sonnel. If we are talking military hospitals, we are probably talking
about either retirees or military members,. c:ilian employees or
their dependents, so there is a very good chance that we are either
paying the person who received the care or paying somebody in
their family.

If, we have a pretty good track record in terms of being able to
collect money from those folks that are associated with the Depart-
ment of Defense. If we do not have a payment that we can offset
for a debt, then we do have.a consolidated debt process within the


69

Mr. Horn. We are going to have another round. Can you stay
with us?

Mrs. MALONEY. Yes. I have to leave at 11.

Mr. Horn. You have touched on the question that I am going to
touch on, and we might as well elaborate on it, and that is the use
of private debt collectors and what system you have under way.

have talked to you before privately, as well as in hearings,
about what I regard as the idiotic way that the IRS had put up col-
lection of debts due, some of which had been aged to 5 years. That
was the kind of laboratory experiment they wanted to give to the
private collectors.

Now, Mrs. Maloney is absolutely right. We have mentioned ex-
actly that in any number of hearings. The question is what are the
practice and Pe icies now that the asury is implementing itself
and getting rest of the Government to implement, in terms of:
Do you send the first dunning letter at the 30-day mark, or do you
wait until the 60 days? What is our policy on all this?

Mr. Hawke. Mr. Chairman, I think there is it force to the
point that you and Mrs. Maloney are making, and I think the early
experience that we have had with referrals to private debt collec-
tion agencies bears out the force of that point.

If you look at the color charts that were attached to my testi-
mony, for example, there is one that is headed “Debt Collection
Performance Summary,” and the blue areas on those bar graphs
show the tremendous increase in repayment agreements between
the last hearing and the present time.

Mr. Horn. Now, the heading on that is Private Collection Agen-
cies Performance Summary; which one are you on?

Mr. HAWKE. That is another one I want to refer to. This is called
Debt Collection Performance Summary.

Oh, I’m sorry, Mr. Chairman, maybe you don’t have this one. We
will make this available for the record.

Mr. Horn. You are keeping two sets of books down there?
na HAWKE. We didn’t want to burden you with all the paper we

ve.

Mr. Horn. That’s all right. Confession is good for the soul.

Mr. HAWKE. Let me give you the numbers. Since the November
hearing, we have increased from $2 million to close to $40 million,
the amount of repayment agreements. Now, these are agreements
that are entered into through the private debt collection agencies
after a dunning letter is sent out.

I think this bears out the force of the point that Mrs. Maloney
was making. One of the first things the private debt collection
agencies does when debt is referred to them is to send out a dun-
ning letter in the name of the Treasury Department, and the tre-
mendous increase in the number of repayment agreements is di-
rectly attributable to those letters. There is a very positive re-
sponse when people get a letter from the Treasury Department
asking for the repayment of their debt, and they very quickly move
to enter into an agreement with the collection agency.

Now, since the last hearing, we have selected 12 private debt col-
lection agencies. We started with a small Pilot Program of referring
debts to them to see how that worked. We now have referred to
them, something like $255 million worth of debt. They have al-


24

Mr. Chairman, this concludes my remarks this morning. I appreciate the
Committee’s continued interest in the success of the program and I would be
pleased to address any questions that you or other Members of the Subcommittee
may have regarding the implementation of this legislation or our debt collection

efforts to date.

Jone 3, 1998 3.33pm) 14 ANTESTIMI4GRG-


10

FMS’ use of private collection agencies has also begun to show
positive results. In accordance with the DCIA, we are maximizing
the use of private sector expertise in the collection of delinquent
debts. Twelve contracts have been awarded and FMS is transfer-
ring delinquent debts to these private collection agencies. As of
May 15, 6,822 cases, totaling over $255 million, have been referred
to them. Private contractor collections to date total over $600,000,
with an additional $543,000 in repayment agreements.

Publication of regulations continues to move forward as well.
There are a substantial number of regulations that FMS and the
department are issuing in order to implement or facilitate imple-
mentation of the debt collection provisions of the DCIA. We have
made great strides by streamlining internal and departmental
processes, establishing priorities, and closely monitoring the clear-
ance process. Also, FMS is chairing an interagency committee es-
tablished to facilitate information exchange and the expeditious co-
ordination and approval of pending regulations.

Mr. Chairman, this concludes my remarks this morning. I appre-
ciate the committee’s continued interest in the success of this pro-
gram. I am pleased to answer any questions that you or other
Members of the subcommittee may have.

(The prepared statement of Mr. Gregg follows:]


29

‘One of the top priorities of the new management at FMS has been to evaluate these two
systems to determine which can best move the debt collection program forward, based on an
assessment of the requirements and circumstances that exist today. After carefully assessing the
technical data processing issues, as well as the merits from a business perspective, FMS
management has concluded, and the Department agrees, that the best approach is to use the ITOP
system for the administrative offset program. ITOP is a proven system; it has been in operation
for approximately two years; it has recently been successfully enhanced to accommodate the FY
1998 modified tax refund offset program; and it can be further enhanced to handle greater
volumes of debts and additional payment streams, and to accomplish all the functions required
under DCIA in a manner that is faster, less uncertain, and at a lower cost than the other system.

FMS management believes that the ITOP system provides us the best opportunity to
maximize the collection of delinquent debts for the foreseeable future. While our decision not to
pursue GTOP means that approximately $5 million invested in that system will have been spent
without benefit to the Government, that decision avoids the expenditure of even greater amounts
that would be necessary to pursue GTOP further - and even then the outcome would still not be
certain. I believe this was a sensible and responsible decision.

‘DCIA Progress
I would like to tum now to Treasury’s progress in implementing the DCIA.

. In the November hearing, we testified that more than 29,000 debts, having a dollar value
in excess of $460 million, had been referred to FMS for cross-servicing. Over the last six
months, total referrals have more than tripled, to over 97,000 debts, totaling $1.8 billion.

* We also testified that cumulative cross-servicing collections totaled $1.1 million,
excluding private collection agencies, which were not active in November of
1997. This total has increased to almost $5.5 million, which includes collections
by PCAs. In addition, repayment agreements, which are voluntary agreements by
debtors to make scheduled installment payments, have increased from $2.7
million to $31.1 million. Much of this progress is attributable to our increased use
of demand letters, on Treasury letterhead, to delinquent debtors. In addition, the
successful implementation of the government-wide private collection agency
(PCA) contract in January of this year is beginning to yield results. We have
begun assigning a large percentage of cross-servicing referrals to 12 PCAs, and
they have collected over $600,000 as of May 15%.

+ In November we testified that the Treasury Offset Program database contained
2.4 million referred debts totaling almost $16.7 billion in delinquent receivables.
To date, the database has almost 4.5 million debts totaling approximately $23.5
billion. This represents an increase since our last hearing of 2.1 million referrals
and an additional $6.8 billion in receivables.


- 98

VA is currently working with Treasury FMS to determine how
we can best achieve referral of the remainder of VA's
eligible debt, and to determine if VA should request that
the Secretary of the Treasury exercise his authority to
exempt some of this debt from the referral requirement since
it may not be cost effective to refer certain VA debt types

yst

for cross-servicing (e.g., Party medical debt).

DEBT SALES

VA looks forward to working with OMB and Treasury to ensure
implementation of that portion of the DCIA authorizing the

sale of delinquent debt.

Unrelated to the sale of delinquent debt under provisions of
the DCIA, VA currently has a highly efficient process for
selling non-delinquent active vendee home loans. In 1992,
legislation was enacted (Public Law 102-291) which
authorized VA to directly guarantee securities issued in
connection with vendee loan sales. Previously, VA could
guarantee payment on the loans but not the securities which
were issued and sold to investors. A new issuing vehicle
named "Vendee Mortgage Trust" was created and features which
have become standard for Agency mortgage securities were

introduced.


91

the historic collection rate to over $40 collected for every dollar
spent.

The Debt Management Center’s recent collection rates for over-
payment debts is almost 70 percent for compensation and pension
debt, and over 85 percent for our readjustment benefit debt, which
is our education debt. These collection rates represent the ratio of
collections to establishments. To achieve these results, the Debt
Management Center employs every collection tool available to Fed-
eral agencies.

‘A recently completed the Department’s first referral of debt to
Treasury for cross-servicing by referring $1.7 million worth of debt
from the Nurse Scholarship Program. VA has been working closely
with Treasury's Financial Management Service to accomplish refer-
ral of the remaining $698 million of eligible debt that I have al-
ready mentioned. ~

The Debt Management Center sent a test referral file to Treas-
ury in April 1998, but because of the volume of debt involved, an
estimat 66,000 cases for the first referral, VA cannot refer this
debt for cross-servicing until automated processes are developed for
Treasury and VA to update each other’s databases. Both VA and
Treasury expect that systems modifications and new processes
needed to accommodate the cross-servicing operation will be put in
place during the summer of 1998. We expect that the Debt Man-
agement Center will refer approximately $525 million for cross-
servicing soon thereafter.

VA is currently working with Treasury-FMS to determine how
we can best achieve referral of the remainder of VA’s eligible debt,
and to determine if VA should request that the Secretary of Treas-
ury exercise his authority to exempt some of this debt from the re-
ferral requirements since it may not be cost effective to refer cer-
tain VA debt types for cross-servicing, in particular, first-party
medical debt which on average is a very low amount of debt owed
by the veteran.

Mr. Chairman, over the past year, the cooperation and teamwork
between VA and FMS in imp lementing the Debt Collection Im-

ovement Act, I believe has been excellent. With this type of ef-

fort, we think our good record on debt collection will be enhanced
by our participation in Treasury’s DCIA programs.

This concludes my statement, Mr. Chairman. Mr. Grams and I
are ready to answer your and the committee’s questions.

(The prepared statement of Mr. Catlett follows:]


11

Mr. Chairman and Distinguished Members of the Subcommittee:
Good morning. I am pleased to be here to report the progress the Financial
Management Service has made in implementing the debt collection provisions of

the Debt Collection Improvement Act of 1996 (DCIA).

First, I would like to thank the Chairman, the Ranking Minority Member and the
other members of this Subcommittee for your continued support and
encouragement. I welcome this opportunity to provide an update on our progress
in implementing the DCIA. As Under Secretary Hawke has indicated in his
testimony, Treasury and the Financial Management Service have made major
changes to our implementation strategy and the management team assigned to
implement the DCIA.

In order to strengthen the debt management program and provide renewed focus
toward achieving program success in 1998, we have established a new
management team responsible for implementing the DCIA. This team places
strong emphasis on strengthening positive agency relationships in order to obtain
compliance with provisions of the Act while working cooperatively with service

‘ne 3, 1998 0:32pm) 1 ASTESTIMI4.ORG


7

offset collections in this calculation brings the historic
collection ratio to over $40 for every dollar of operating
cost. The DMC's recent collection rates for overpayment
debts is almost 70% for compensation and pension debt and
over 85% for readjustment benefit (education) debt. These
collection rates represent the ratio of collections to
establishments. To achieve these results, the DMC employs

every collection tool available to federal agencies.

VA recently completed the Department's first referral of
debt for cross-servicing by referring $1.7 million worth of
debt from the Nurse Scholarship Program. VA has been
working closely with Treasury's Financial Management Service
to accomplish referral of the remaining $697.2 million of
eligible debt. The DMC sent a test referral file to
Treasury in April 1998, but because of the volume of debt
involved (an estimated 66,000 cases for the first referral),
VA cannot refer this debt for cross-servicing until
automated processes are developed for Treasury to send
collection and other account information back to VA, and for
VA to send account updates to Treasury. Both VA and
Treasury expect that all system modifications and new
processes needed to accommodate the cross-servicing
operation will be put in place during the summer of 1998.

We expect that the DMC will refer approximately $525 million

for cross-servicing soon thereafter.


102

and automated process with the Treasury offset program. In Sep-
tember 1997, the Department referred over 131,000 delinquent
debts totaling in excess $245 million to the Treasury Offset Pro-

gram.

The Department also is working with the Department of the
Treasury to ensure that the Department of Defense’s payment in-
formation can be matched against debtor files at the Federal level.
This is needed in order successfully to implement those provisions
of the Debt Collection Improvement Act that require agencies to
offset their proposed payments by amounts that may be owed to
other Federal agencies.

The Department of Defense will continue to improve its perform-
ance under the Debt Collection Improvement Act. The Department
also will continue to work with the Treasury Department on the
interagency aspects to include active participation on various
Treasury sponsored working groups and ad hoc committees. En-
hancing the Department’s processes and systems to enable the De-
partment to produce and report more reliable debtor information
and to collect such debts is a continuing priority for the Depart-
ment.

The Department continues to modify and upgrade its accounting
and other financial and nonfinancial systems to construct_an im-
proved financial infrastructure within the Department of Defense.
The results of this effort will provide better information to
the Department and to safeguard the resources entrusted by the
Congress and the American people to the Department. The Depart-
ment is proud of its progress to date in the area of debt collection.

Mr. Chairman , this concludes my opening statement. And I, as
well as Mr. Bitz, would be happy to attempt to answer questions
that you or other members of subcommittee may have regard-
ing the Department’s implementation of the act.

e prepared statement of Mr. Toye follows:]


118

principles which the record elearly shows. In addition, the TOP Program
Manager remained in the position throughout the process.

12. Although GTOP was developed. Uclivercd to FMS, and demonstrated by the
contractor. it has not been operauonaily tested. Yet the report faults DMS for not
providing the format for submitting data to GTOP to Federal agencies (Page 11).
It would be quite foolish to provide untested formats and requirements to
agencies and cause them to expend resources before FMS is certain the system
works as intended.

13. The report concludes, without merit, that the task order for the development of
GTOP was issued against an unrelated contract, that DMS selected the contractor
because they were pleased with their work, and that the failure to compete the
contract was a contract violation (p. 12).

a. The report shows a woeful lack of knowledge about contracting. DMS
has no authonty to contract for services. DMS prepares a statement of
work seeking contract services; approvals had to be obtained from the
Acquisition Management Division and a warranted contract officer, from
the FMS Chief Counsel staff, from the Chief Information Officer
(Assistant Commissioner for Information Resources), and from the
Small Business Administration. All of these approvals must
precede the award of the contract and were so obtained as the
documentation clearly reflects.

b. The existing contract, against which a task order was written, included
expertise and services to Federal agencies on participation in the tax
refund offset program. This program was a major piece of the GTOP
concept, as described in the law and Congressional record. The
contractor was therefore knowledgeable of a major piece of the
requirements and was experienced in dealing with Federal agencies on
delinquent debt referral. It was the contractor's expertise with delinquent
debt referral, system guidance to Federal agencies and past performance
that led DMS to seek their expertise in developing GTOP.

c DMS relied for legal guidance on contracting from the Chief Counsel staff
and from warranted contract officers. What the report relied on for its
contract knowledge is not clear.

These comments are mine alone. and do not reflect those of anyone else in or out of
FMS. While {am no longer working on the Treasury Offset Program, the report covers
the ume when 1 was the Director of the Treasury Offset Program and, therefore, | believe
my comments should be considered by those who are interested in an objective audit.


65

the implementation of our Debt Collection
Improvement Act (DCIA), which became
law in April 1996, has only collected $5
million out of the $ 50 billion dollars in
delinquent debt. Although I recognize the
fact that we cannot realistically collect all
$ 50 billion dollars, it still means that in
two years we have collected only $ 1
dollar for every $10,000 dollars that are
owed. As I said before, that’s
embarrassing.

Soon after our last hearing in
November, I have talked with the
President about the government’s
performance, and he shared my concerns
regarding the slow pace of implementing
the DCIA. After our meeting, he
contacted the Secretary of the Treasury,


a

Question 1: What are the criteria used in selecting private debt collection contracts?

‘What criteria determine their quarterly bonus? How was the 23% number
picked?

Answer:

1

Criteria used for selecting the private collection agencies

Under FMS’ solicitation, offerors were required to certify, at the time of award, that they
had the capability to collect nationwide and territorial debt in order to be eligil
award. In addition, offerors were evaluated according to the following criteria, listed in
descending order of importance: collections approach, past performance, system
capabilities, subcontracting, training, security, personnel and facilities. Offerors were
required under the solicitation to submit their price in the form of a percentage fee and
were provided a “target rate” in the solicitation of 23%. According to the solicitation,
offerors were required to provide a justification if their price deviated from the target rate.

Performance Bonuses for the private collection agencies

There are two performance bonuses built into Treasury’s debt collection contract. One
bonus is a monetary bonus and the other is an additional account referral bonus. Private
collection agencies that collect more money for the government may be rewarded
monetarily and/or may receive more accounts for possible collection. The criteria for
determining bonuses are based on such factors as the amount collected and administrative
points awarded for actions in which the collection agencies bear some administrative
costs but do not recover dollars. This could happen if the debt has been resolved or
excused by the creditor agency. The performance period lasts four months, with the first
performance period ending on June 30, 1998. The private collection agencies are
evaluated based upon collections and account resolutions made during that period.

Award of the 23% target fee

The 23% “target rate” contingency fee was established in the solicitation based on
current standards for the private collection industry and historical knowledge of
the previous General Services Administration (GSA) debt collection contracts.
‘Typically consumer debt is much easier to collect than commercial - the
contingency fee for consumer accounts is in the range of 18% while the
contingency fee for commercial accounts is in the range of 32%. Since the
contractors on Treasury's debt collection contract are tasked with collecting both
consumer and commercial debts, a “target rate” of 23% was determined to be fair.
After negotiations were completed, all debt collection contracts were awarded
with a contingency fee of 23%,



16

refund offset and TOP would likely be further delayed. Also, in fiscal year 1998
and 1999, a decision to proceed with the development of GTOP would have cost
$6 million more than operating and enhancing the existing administrative offset

system. We have decided, therefore, to use the automated system - referred to as

ITOP - that was developed for us by the San Francisco Federal Reserve Bank.

In enhancing ITOP, FMS has learned from the GTOP failure by: developing a
detailed project plan; ensuring that the system developers and users work closely
together in determining the user and system requirements; involving our
operations personnel and information resources staff, including the Chief
Information Officer, in the design of the system; and developing the new system
enhancements in an incremental, modular approach. As a result, we are confident
that ITOP can be successfully modified in the next year to handle an increased
volume of debt referrals and the addition of new payment types. However, we
also recognize that the GAO, in its recent review of the offset program, has raised

some legitimate issues regarding the timing of when certain overarching or high-

Jone 3.1998 3:33pm) 6 ASTESTIMI4GRG


99

VA executes three loan sales each year. In three FY 1997
sales, VA sold 13,997 loans with an aggregate balance of
$981.23 million and netted $1.022 billion or $104.17% of
par. In the first FY 1998 sale, VA sold 5,951 loans with an
aggregate balance of $426.16 million and netted $449.6
million or 105.5% of par. Issuance costs for the sales have
now been lowered to less than 0.19% (19 basis points) of the

aggregate balance of loans sold.

This concludes my statement. I will be happy to answer any

question the Subcommittee may have.


21

billion is eligible for cross-servicing. The remaining debt is subject to a DCLA
exemption, legally unenforceable, or is being collected by a third party such as
Education’s guarantee agencies. Since we began meeting with agencies in
January of this year, we have received $1.3 billion in additional referrals,
primarily from SBA, HUD, and Education, bringing total cross-servicing referrals
to approximately $1.8 billion, or 21% of debt identified by Price Waterhouse as
referable to Treasury for cross-servicing.

Once debts are referred to Treasury for cross-servicing and prior to referral to a
private collection agency, FMS’ Birmingham Debt Collection Center works all
debts for a 30 day period, sending demand letters and attempting to locate and
contact delinquent debtors by phone. If FMS succeeds in establishing a
repayment agreement with the debtor, the account is managed in Birmingham
until the debt is fully satisfied. Although we are not yet able to distinguish
between collections as a direct result of demand letters and those due to other
cross-servicing activities, creditor agencies have indicated a marked increase in
collections from debtors who have received demand letters on Treasury letterhead.
In fact, there has been some expressed interest in having Treasury provide this

Jane 3, 1998 (3:33pm), W AATESTIM14.GRG_


50

Development (HUD), much of which will be scheduled for sale. Approximately $7 billion
of nontax debt over 180 days delinquent has not been referred primarily because agencies
have not yet completed actions such as (1) ensuring due process, which is necessary
before debts can be referred for offset, and (2) determining whether loan workout
procedures have been established with debtors, which precludes referral for offset.

On the payment side, because of systems development problems, Treasury does not yet
have a system capable of matching all federal payments against the delinquent debtor
database. As of April 1998, 2 years after DCIA's enactment, Treasury had collected about
$1.2 million of delinquent nontax federal debt through its administrative offset program.
Currently, payments subject to offset through the administrative offset program are
limited to those made by Treasury to vendors and to federal retirees, representing about 5
percent of the total number of payments made, and about 21 percent of the total dollars
paid, by Treasury disbursing offices in fiscal year 1997. Also, Treasury has made little
progress in fully determining the extent to which federal payments, such as those made
by the Department of Defense (DOD), can be made available for offset.

Further, Treasury has not yet consolidated the administrative, tax refund, and federal
salary offset programs. Treasury's systems development problems have also caused delay
in consolidating these programs and thus, any debt collection efficiencies envisioned by
such a consolidation have not yet been realized.

In developing an administrative offset system, Treasury did not apply a disciplined _
systems development process, including the development of an overall concept of
operations and functional requirements. The resulting system, which was planned for
implementation in January 1998, was not placed into operation, and a subsequent systems
development effort is underway.

In current efforts to develop an administrative offset system, Treasury has recently taken
several actions to address systems development issues. We identified and discussed with
‘Treasury several areas where additional actions are needed, including giving a higher
priority to developing a concept of operations, the functional requirements, and a risk
Management plan for the entire system. We are encouraged by Treasury's commitment to
address these issues. But it will be important for Treasury's top management to ensure
that the planned corrective actions are effectively and expeditiously completed prior to
making any significant investment in the development of an administrative offset system.
Otherwise, Treasury is significantly exposed to risks that it may experience costly
modifications and additional delays in developing a system for implementing the
administrative offset provision of DCIA.

2 GAO/T-AIMD-98-195


95

billed amount) or VA determines that no liability exists.
In the unusual case that VA determines a liability exists
but the third party refuses to make full payment, the claim

is referred for enforced collection.

TION OF ADMINISTRAT: Wu:

Of the $333.6 million identified as eligible for TOP, VA has
already referred $261.5 million to Treasury. The amount
referred includes all $218 million of eligible debt managed
by our VBA Debt Management Center (DMC) in St. Paul, MN,
another $1.5 million of VBA debt not managed by the DMC, and
almost $42 million worth of 1°* party medical care debt. Of
the remaining $72 million not referred, over $50 million is
comprised of other debts resulting from the operation of our
medical centers (e.g., vendor overpayments, ex-employee
debt). This debt was not referred under the existing
Interim TOP process because, unlike the DMC debt and first
party medical debt, we had never referred this debt under
the Tax Refund Offset program. Referral of this debt to the
Treasury Offset Program will begin in April 1999 when
necessary system changes are in place. The remaining VA
debt (approximately $20 million) is comprised of debts from
many smaller programs. Given the relatively small amounts
in each program and the costs of effecting referral for each

type of debt, VA plans to refer most of these debts to TOP


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17

level documentation and analysis should be completed. FMS agrees with the
GAO and will take the necessary steps to complete these systems documents and

analysis in a more expedited time frame than originally planned.

Having accomplished the 1998 transition process, we immediately turned our
attention to merging the two systems. FMS’ administrative offset strategy over
the next 8 months will focus primarily on the full merger of the Tax Refund Offset
Program with centralized administrative offset in January 1999. To accomplish
this objective, FMS is working closely with the San Francisco Federal Reserve
Bank to upgrade the current ITOP system to handle larger volumes and more
complex processing. FMS and the Federal Reserve Bank staff are meeting
continuously to identify additional requirements and make the enhancements
necessary to support inclusion of tax refund offset into the administrative offset

Program,

Implementation of salary offset is also a very high priority for Treasury. FMS has
been working closely with the U.S. Department of Agriculture's National Finance
Center to implement offset of the salary payments which they issue. Inclusion of

June 3, 1998 3:33pm) 7 ANTESTIMH4.GRG-


61

Mr. Horn. Well, thank you very much for that most helpful pres-
entation. We are going to start the questioning with a new member
we have on this subcommittee, Ron Lewis, Member from Kentucky.

We are delighted to have Ron. He has a background as a book
dealer and a small businessman. He also is very active in his com-
munity, and we are glad to have him here. So, Ron, we are going
to start with you for 5 minutes, then we will go to Mrs. Maloney
for 5 minutes.

Mr. Lewis. Thank you, Mr. Chairman, it is a pleasure to be on
this committee.

Mr. Hawke, you chair a biweekly debt collection steering com-
mittee. It has meetings with Treasury and FMS staff; is that cor-
rect?

Mr. HAWKE. Yes, sir.

Mr. LEwis. Was it your idea to begin holding these steering com-
mittee meetings?

Mr. Hawke. I believe it was.

Mr. Lewis. When did you first begin these meetings?

Mr. Hawke. I can’t recall the exact date. I think it was probably
in December or January.

Mr. LEwis. So you waited approximately 18 months after enact-
ment of the DCIA to begin managing this program on a regular

asis?

Mr. HAWKE. Well, we began a much closer oversight by main
Treasury at that point. The program management responsibility
was with the Financial Management Service.

Mr. Lewis. How many steering committee meetings were held
before you removed Mr. Murphy, Mr. Morris, and Mr. Smokovich?

Mr. HAWKE. We were not having regular biweekly meetings be-
fore that time, but we had had a number of meetings with FMS
management about the program. It was not on a regular basis.

Mr. Lewis. So there was not a meeting, per se, before that?

Mr. HAWKE. Not in the same format that we started subse-
quently.

Mr. Lewis. Thank you.

Mr. Horn. I thank the gentleman. I now yield 5 minutes to the
ranking member for many years, who was very helpful when we
passed the Debt Collection Act. She had great experience on this
with the New York City Council, and if you can deal with the New
York City Council, you can deal with anything. Five minutes.

Mrs. MALONEY. you, Mr. Chairman.

Mr. Horn. Mr. Brasher is keeping time here.

Mrs. MALONEY. Thank you for allowing us to have this hearing.

You know, I tell you, and I applaud Treasury for putting in a
new team that is working on this, but the bottom line is no matter
how much effort, no matter how many meetings, no matter what
is happening, we are not getting a result.

Usually in this Congress, when we go to the floor, it is a big par-
tisan fight. Last night we had the budget resolution and it was
very partisan, very divided. But what has been somewhat unique
in this. subcommittee, there has been a true bipartisan effort to
work together to make Government work better. And in the bipar-
tisan bill that Professor Horn and I passed, with the help of Treas-


114

debt management system, and we will begin the process of con-
ing the individual who received the service.

Mr. Horn. That is very helpful. Let’s see, how large are the con-
tract audit disallowances? What are we talking about there?

Mr. Bitz. I think the current number, sir, is under half a billion.
I will have to look that up.

Mr. Horn. Where are some of the other problems? You said the
health is the No. 1, you ticked off 2 and 3. there certain things
out there that we should be recovering that we aren’t recovering
for one reason or another, either personnel or computing or what-
ever it is? .

Mr. Birz. All the other reasons vary by type of condition that
caused them, whether it be a government property, lost or dam-
aged, right before they left the service or a civilian employee was
paid excess leave. They vary by that. There are none that are cat-
egorically removed from collection effort. Every debt is moved into
the collection portfolio and, in fact, that is one of the difficulties we
are having with reconciling the numbers with the Treasury; and,
they are looking at a new schedule.

p in mind, our portfolio is—we even include bankruptcies. If
someone goes bankrupt, we do not remove them from the portfolio,
because we are allowed to continue to try and collect each year
against the IRS offset. That is why our numbers tend to be a little
bit higher than what is on those schedules, but there is no debt
that we categorically set aside not to collect.

Mr. Horn. Very good.

Mr. Sununu, do you have any other questions?

Mr. SuNuUNU. No; thank you very much, Mr. Chairman. Thank
you, panel members.

Mr. Horn. Yes; we appreciate your testimony. We have a vote on
the floor, and it is all coinciding at the right time. So thank you
very much for coming and have a day, as the saying goes.
With that, at 12:30, this hearing is adjourned.

I would like to thank the following people: J. Russell George,
staff director and chief counsel; Mark Brasher, senior policy direc-
tor; Matthew Ebert, clerk; Mason Alinger, staff assistant; Bets:
Damus, intern; Mark Urciuolo, intern; David Graff, intern; Fai
Weiss, counsel for the minority; Jean Gosa, clerk for the minority;
Pam Garland, Cindy Sebo, court reporters.

(Whereupon, at 12:30 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]


116

implementation requirements of the DCIA. The objectives of the audit are either
erroncously stated or completely unfulfilled.

The report concludes on page 3 that FMS collected only $717,000 of the
esumated $51 billion in delinquent debts at a cost of over $7 million to FMS and.
attributed this lack of success to its ineffective strategy to implement the DCIA
provisions. The Congressional record of two hearings already conducted clearly
indicate that Federal agencies have been slow to refer delinquent debts to FMS
and that no where near $51 billion has been sent to FMS for collection. An
objective report would indicate how much has been referred, when it was
referred, how old the debt was, etc. An objective report would indicate that
collections were increasing every month and as more payments would be added,
the collections would continue to increase. In addition, an objective report would
acknowledge that investment costs are not recovered at the beginning of any
program, but over time. Finally, an objective report would indicate what the
auditors conclude are the standards for the appropriate return on investment in
‘one year's time for a government-wide computer system and how they arrived at
those standards.

The report refers to the Clinger-Cohen Act on page 4, but fails to include the fact
that an independent contractor completed a Clinger-Cohen Act assessment and

the development of the Grand Treasury Offset Program (GTOP). The
failure to include this assessment by Andersen Consulting in the report would
lead a reasonable person to believe it had been excluded because it did not
comport with the pre-determined conclusions of the audit.

The report's statements on page 5 concerning the merger of the tax refund offset
program with the Treausry Offset Program (TOP) are completely false. The
Congressional record contains unequivocal direction to transfer the tax refund
offset program to FMS for merger into the TOP. [t did not come, as indicated, by
statements from the Fiscal Assistant Secretary and the FMS Deputy
Commissioner. A Memorandum of Understanding between IRS and FMS
concurred in the merger and was supported by the Treasury Chief Financial
Officer and the OMB. Failure to review the Congressional record on the DCIA,
internal Treasury documents on the merger, and budget submissions to OMB
showing the cost benefits is another fundamental error of the audit and report.

The report states on page 7 that DMS only recognized the need for documented
business requirements subsequent to the design of GTOP. This is not true. The
original statement of work for the contract contained a provision for system
requirements. It is not clear from the report whether the audit is using business
and system requirements synonymously. However, FMS (not DMS) did not have
sufficient appropriated funds for all the GTOP needs at one time, and a decision
was made to get a system designed and developed in the first year of the contract
and to obtain the documented system requirements in the second year.

Otherwise, all the money would be spent on requirements, with no system


Opening Statement of The Honorable Dennis J. Kucinich
GMIT Subcommittee: Implementation of the Debt Collection
Improvement Act of 1996
June 5, 1998

Chairman Hom, | would like to thank you for holding this hearing on
debt collection and the status of the Treasury Department's efforts to
consolidate government-wide debt collection. This area is one in which
both you and Representative Maloney have shown great initiative. | would
also like to thank the witnesses here today from the Departments of the
Treasury, Veterans’ Affairs, and Defense, and from the General Accounting
Office for their hard work.

The goal of the Debt Collection Improvement Act of 1996 is a good
one. We should make every reasonable effort to collect debt that is owed
to American taxpayers. Centralizing administrative offset and debt
collection activities should cut costs and increase the efficiency and efficacy
of collections.

-It appears that debt consolidation represents a substantial challenge.
Given the variety of debt and the different statutory requirements imposed
‘on agencies, debt referral and collection is more complex than it seems.
We will hear about some of these complications today.

The Treasury Department's Financial Management Services ("FMS")


93

three interagency working groups (and every subgroup) of the
DCIA Issues Resolution Group. The Department has also
formed an internal VA DCIA Workgroup to monitor VA's
implementation progress. This internal group continues to
meet periodically with FMS staff to resolve any issues and
impediments to implementation as they arise. VA's Office of
Financial Policy has also worked with FMS to revise the
Report on Receivables Due From the Public so that it will
provide better information on the implementation and

effectiveness of the DCIA requirements.

vi "ATI

Last April, I testified about VA's preparations for
referring debts delinquent for more than 180 days to the
Treasury Department. Since then, working together with
Treasury's Financial Management Service (FMS), VA has made
significant progress. The Veterans Benefits
Administration's Debt Management Center (DMC) has completed
the amendment of its Privacy Act system of records to
accommodate the referral requirements of the DCIA. Because
VA has been a long-time participant in all available
administrative offset programs (IRS, Federal Salary Offset,
benefit offset) and has effected many inter-agency matching
programs, the Department had already published regulations

needed to participate in the Treasury Offset Program (TOP).


38

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100

Mr. Horn. Well, we appreciate that, and thank Pla for the state-
ment. We are going to ask Mr. Toye to proceed from Defense. We
have sort of common questions for both of you.

So, Mr. Toye, I take it that this is a promotion since the last time
you appeared or are you still runni: store anyhow?

Mr. Toye. Sir, I think the promotion happened before I came up
here, and I am not sure that I am running the store, but I am cer-
tainly trying, sir.

Mr. Horn. Good. Proceed.

Mr. Toye. Mr. Chairman, members of the subcommittee, I, too,
am pleased to be here again on behalf of the Department of De-
fense, this time to discuss the Department’s progress in imple-
menting the Debt Collection Improvement Act of 1996.

With me at the table this morning is Mr. Greg Bitz. Mr. Bitz is
the Director for Finance at the Defense Finance and Accounting

rvice.

The Department has a strong debt collection program as a result
of aggressively implementing the Debt Collection Act of 1982. That
act provided agencies needed tools for implementing a more suc-
ces: debt collection program.

The Debt Collection Improvement Act of 1996 provided addi-
tional tools. Up to the time that debts are referred to the Depart-
ment of Treasury for collection, the Defense Finance and Account-
ing Service serves as the primary debt collection agency of the De-
partment of Defense. Since its creation in 1991, the Defense Fi-
nance and Accounting Service has worked to standardize and con-
solidate debt collection systems and operations within the depart-
ment.

In May 1997, the Defense Finance and Accounting Service suc-
cessfully completed the consolidation of the Department’s debt col-
lection operations. As a result, information regarding delinquent
debts owed to the Department, where no Department of Defense
payment is available to offset that debt, now is maintained in a
centralized debt collection system, the Defense Debt Management

system.

Much of the debt owed to the Federal Government results from
loans in credit programs. However, the Department of Defense has
few such programs. Much of the amounts owed to the Department
of Defense are owed by the Department’s vendors, military mem-
bers and civilian employees. Vendors may become indebted to the
Department by failing to perform contractual obligations or by re-
ceiving payments in excess of amounts that they have earned.

Individuals may become indebted to the Department by receiving
pay or benefits to which they are not entitled. For example, a mili-
tary member may be paid an enlistment bonus or a reenlistment
bonus, but subsequently fail to complete the period of service for
which the bonus was paid or a civilian employee may receive emer-
gency medical care at a military medical facility, but may not be
entitled to receive the care without charge.

The Defense Finance and Accounting Service pays the Depart-
ment’s military members, its retirees, annuitants, civilian employ-
ees, as well as the Department’s vendors and contractors. As a re-
sult, the Defense Finance and Accounting Service has the ability to
work with individuals and does work with individuals and contrac-


41

$6.1 Grillion when additional requirements were identified and
added.

Four, FMS either did not always provide the contractor with
needed requirements and specifications or provided specifications
that were too vague. FMS relied on the contractor to develop the
business requirements for GTOP. Consequently, the contractor was
left to its own resources to develop a system to process payment
and debt data coming from many different agencies. This increased
the risk that GTOP would not operate as intended.

And five, last, FMS did not adequately ensure that the contractor
would develop a system that would meet customer agency needs.

All this points to a systems development effort that was not well
planned or managed. In another review we currently have ongoing,
we are taking a look at broader FMS’ overall strategic process.
What we are finding is that difficulties in the implementation of
the Debt Collection Improvement Act are symptomatic of funda-
mental weaknesses in the overall strategic planning process. These
fundamental weaknesses will need to be corrected if FMS is to be
successful as they move forward to fully implement the act.

We intend to conduct additional audit work over the next several
years on various aspects of the Debt Collection Improvement Act
that will assess the effectiveness of FMS’ continuing implementa-
tion efforts.

This concludes my prepared statement.

[The prepared statement of Mr. Calahan follows:]