Washington State Auditor’s Office Troy Kelley Independence Respect Integrity Debt-Offset Programs: A tool to help Washington collect delinquent debt Joint Legislative Audit and Review Committee December 10, 2014 Chuck Pfeil, CPA, Director of State and Performance Audit Sohara Monaghan, Senior Performance Auditor

Washington State Auditor’s Office 2 Businesses  Owe the state a significant amount of delinquent debt Washington State  Makes payments to businesses that owe delinquent debt to the state  Lacks a systematic method to identify when delinquent businesses receive payments from the state  Lacks single comprehensive authority needed to offset state payments to businesses at a statewide level Background As of June 30, 2014, businesses owed five state agencies about $738 million in delinquent debt that was 90 days or more past due

Washington State Auditor’s Office 3 Other states report offset programs can provide significant benefits:  Fast debt collections  Efficient use of staff resources  Increased voluntary compliance  Improved recovery of difficult debts  Better management of debt data Debt-offset programs: A national best practice Offset programs help states recover debt by intercepting payments the government makes to delinquent businesses and reducing these payments by the amount owed

Washington State Auditor’s Office 4 Can a state debt-offset program help Washington collect delinquent business debt? Can participation in the U.S Treasury’s State Reciprocal Program help Washington collect delinquent business debt? What actions would Washington need to take to develop and implement effective debt-offset programs? Audit Questions

Washington State Auditor’s Office 5 What we did to address Question 1 We compared debt owed by businesses to five agencies with payments made by eight agencies. Delinquent debt businesses incurred and still owed to five state agencies in FY13: Revenue Labor and Industries Employment Security Health Care Authority Social and Health Services COMPARED Payments eight state agencies made to delinquent businesses in June 2013: Revenue Labor and Industries Employment Security Health Care Authority Social and Health Services Transportation Enterprise Services Lottery

Washington State Auditor’s Office 6 A debt-offset program can help collect delinquent business debt faster  State & unemployment tax refunds  Payments for products and services  Unclaimed property  Lottery winnings  State taxes  Unemployment taxes  Worker’s compensation premiums  Medical and social service debt Delinquent debt businesses owed to: DOR, L&I, ESD, HCA, DSHS Payments made to delinquent businesses by: DOR, L&I, ESD, HCA, DSHS, DOT, DES, LOT $4 million Washington’s estimated debt recovery for June 2013 with a state debt-offset program

Washington State Auditor’s Office 7 What we did to address Question 2 Interviewed: U.S. Treasury’s officials Four out of seven states participating in the program (KY, MD, MN, WI) We compared delinquent debt owed by businesses to four agencies with one month of federal vendor payments. Labor and Industries Employment Security Health Care Authority Social and Health Services COMPARED Federal vendor payments for the month of February 2014

Washington State Auditor’s Office 8 The federal State Reciprocal Program can help collect delinquent debt Other states said working with the U.S. Treasury’s State Reciprocal Program helps with recovery of difficult debts:  Helps collect debt owed by out-of-state businesses  Helps recover debt that is up to 10 years old State Reciprocal Program

Washington State Auditor’s Office 9 We could not identify all debt a state debt-offset program might have been able to recover for Washington in June 2013  About 14% of the delinquent debt could not be matched to state payments because it lacked or had inaccurate federal taxpayer identification numbers (TINs)  State agencies said they do not have statutory authority to require federal TINs from businesses To improve debt recoveries:  Other states recommend verifying the accuracy of taxpayer information early on, during business registration or enrollment process Accurate, complete taxpayer data is key to a successful offset program

Washington State Auditor’s Office 10 What we did to address Question 3 To understand what actions Washington would need to take to develop and implement effective debt-offset programs: Interviewed: Nine states WA state agencies U.S. Treasury Researched: Laws and regulations Literature on debt collection Identified: Leading practices Key legislative, system and process changes needed

Washington State Auditor’s Office 11 To develop and implement effective debt-offset programs, Washington would need to:  Pass legislation authorizing the program and defining key components  Develop offset processes that are automated, clear and standardized  Provide initial and ongoing training to staff at participating agencies Three elements are essential to successful offset program design

Washington State Auditor’s Office 12 Leading practices: pass legislation defining key program components  Select a lead agency to implement and administer the programs  Maximize agency participation to increase collections  Develop a sustainable funding model to finance the program administrative costs  Specify types of debts and payments the program can and cannot offset  Establish a priority system to determine which types of debts are recovered first  Provide due process to debtors to ensure they are treated fairly  Authorize agencies to share confidential data needed for debt recovery Other states selected their central payment agency and/or central debt collection agency to lead the program DES processed 87% of payments to delinquent businesses in June 2013 Several states mandate participation in the program to maximize collections (MD, NV, NC, TX, VA, WI) Several states charge fees to debtors to finance program costs, typically a percentage of the amount collected (KY, MD, MN, NV, WI) All states provide due process to debtors which typically include:  Opportunity to pay debt prior to referral to offset program  Written notice  Appeal rights

Washington State Auditor’s Office 13 The lead agency, in collaboration with participating agencies, will need to develop offset processes that are automated, clear and standardized Areas to address include: 1.Processes for transmitting delinquent debt 2.Procedures for identifying debt offsets 3.Protocols for communicating with participating agencies and businesses Leading practices indicate three key areas to address

Washington State Auditor’s Office 14  State and federal debt-offset programs can benefit Washington  Other states find the investment in offset programs is worthwhile because the benefits the programs provide outweigh their costs  Washington’s existing financial system could likely be modified to implement the programs  Leading practices can help guide agencies and policy-makers in the development and implementation of effective offset programs for Washington Conclusion

Washington State Auditor’s Office 15 To implement effective debt-offset programs, we recommend the Legislature: 1.Authorize state agencies to require federal TINs and share payment and debt data 2.Authorize state agencies to participate in the U.S. Treasury’s State Reciprocal Program 3.Establish a workgroup to develop a proposal for the design and implementation of a state and the federal reciprocal debt-offset programs 4.Using the workgroup’s June 2016 report, authorize a single comprehensive statute to offset debts owed by businesses with payments to those businesses Recommendations

Washington State Auditor’s Office 16 Contacts Chuck Pfeil, CPA Director of Performance Audit (360) Website: Troy Kelley State Auditor (360) Sohara Monaghan Senior Performance Auditor (360) Lou Adams, CPA Deputy Director of Performance Audit (360)