May 31, 2000

The report provided is in response to a special provision within House Bill 168-Section 25 of the 1999 legislative session. The General Government Appropriations Subcommittee presented the special provision, Extend Pilot Program on Reporting on Collection of Bad Debts by State Agencies. The subcommittee requested additional information to determine specific debt collection problem areas and if additional bad debt volume may support the implementation of a Bad Debt Collection Clearinghouse Pilot Program. As a result of the special provision, the Office of the State Controller (OSC) has focused limited resources on reviewing agency accounts receivable activity and creating a limited 90-day Bad Debt Clear inghouse Proof of Concept Prototype that could provide information as to the feasibility of establishing a one-year Bad Debt Collection Clearinghouse Pilot Program. An attached PowerPoint presentation summarizes the prototype findings to date, lessons le arned and recommended next steps.

The State Controller remains committed to the redesign of accounts receivable, debt setoff processes and systems to standardize bad debt collections, as well as maximize automation and minimize manual proces sing. However, in recent years there have been limited financial resources for implementation of an integrated accounts receivable system that utilizes imaging and workflow technologies, modern e-commerce electronic data interface technology and a highly automated data warehouse for centralized accounts receivable information. The above mentioned special provision reflects an effort to continue some level of effort towards updating the State’s accounts receivable and debt collection environment.< /P>

As a result of this mandate, the Office of the State Controller decided to look into the concept of a Bad Debt Collection Prototype project. PriceWaterhouseCoopers (PwC) was contracted from a previou sly established convenience contract to create a prototype system that would allow a feasibility study on centralized outsourcing of debt collection activities. The outsourcing of debt collection activities is necessary because no infrastructure exist wi thin the State to support extensive in-house collection of challenging debt and expansion funding for new systems is extremely limited. Therefore, PwC and OSC developed a strategy to implement a limited 90-day Bad Debt Clearinghouse Proof of Concept Prot otype to provide input into the feasibility of extending this concept to a larger volume one-year pilot program.

Initially, the project team focused on securing agency participation from both state and local governments. Agencies with debt for which common collection processes had been executed were sought. As these debts were officially "uncollectible", state pursuit had already been suspended on these debts. In order to streamline prototype functionality, a standard agreement was created between OSC and the participating agency. This agreement documente d the agency commitment to participation as well as the OSC requirements. Although several agencies were interested in participating, the ability to participate was limited by legislative, security, and/or technological restrictions. For example, ESC ha s severely restrictive data security issues that disallowed participation in this study. DHHS Mental Health was also unable to participate due to patient confidentiality agreements. Some smaller agencies, however, were limited by the inability to collec t or transfer the data to the prototype. These issues should be further investigated during the next phase of the prototype.

In addition to securing participation within the State, a collection agency was required. With the cooperation of the Attorney General’s office, the prototype was able to take advantage of existing contracts wi th two collection agencies. After interviewing both NCO Collections and Windham Collections, it was determined that, under these circumstances, Windham Collections would be the more appropriate agency. Arrangements were established with Windham to initi ate the data transfer, collection management, and revenue distribution with the participating state agencies. A memo of understanding was executed between Windham Collections and each state agency.

An initial database was designed, and all agencies were asked to approve the design. As agencies began to see the actual design, several issues arose. There were questions about security, and special arrangeme nts were made. All agency issues were addressed utilizing solutions such as: a standalone unconnected PC; debt identifiers to reduce debtor confusion; and data transfer by diskette or CD. The prototype was developed and test runs were made with the Stat e and collection agencies.

In tandem to this project described above, the NC Department of Revenue (DOR) was required to conduct a study to identify and evaluate efficient tax collection processes. As this project aligned closely with th e OSC project, the PwC team executed both projects. Preliminary DOR results have shown that the use of a collection agency for out of state and "uncollectible" debt is a common and recommended practice. The results of the DOR study were presen ted to the Revenue Laws Committee on April 27^th. A copy of the DOR report is available through DOR or legislative support staff.

The prototype was executed on March 15^th, 2000. There has been a steady stream of daily collections on North Carolina accounts. Although overall collections for the prototype have been somewhat low initially (approximately two and one-half percent of debt submitted), the collections have been deemed successful due to the previously determined "uncollectible" nature of the accounts submitted. We have included a brief synopsis of the in itial 60 days collection activity. It is important to note in reviewing these numbers that the debt submitted by the City of Raleigh was for utilities. These debts are typically smaller and more difficult to collect. These debts may reduce the overall impact of the success rate.

Following is a summary of the participation by agency:

• Sent:

Accounts: 1033

Amount: $927,170.46

• Collected:

Accounts: 71

Amount: $47,119.94

Avg. Debt: $663.66

• Sent:

• Collected:

• Sent:

• Collected:

The existing database has been designed to address collection requirements for the remainder of the 90-day prototype and an additional one-year expanded pilot. It has been created to accept additional debts during this period with the anticipation that additional agencies would be interested in contributing their outstanding debts to this system. As the existing collection agency contract expires on June 30^th, the Attorney General’s office is pu rsuing arrangements with additional agencies. Under this agreement, the agency collection costs will be paid through successful collections in the form of collection agency fees. Additional project costs to maintain the central database in OSC; however, are not addressed within these agreements.

Due to limited in-house resources, the OSC intends to solicit information from collection agencies concerning the possibility of these agencies maintaining a centralized bad debt database for the State. T he OSC will further analyze the issue of state agency restrictive data security and/or confidentiality issues to determine whether non-disclosure and required security contractual terms and conditions could allow these bad debts to be included in a centralized database. Those agencies prohibited from parti cipating in the centralized bad debt database will be accommodated through procedures for direct access to qualified collection agencies when legal and contractual authority permits this action.

In closing, the Bad Debt Collection Prototype project has been moderately successful to date. Continuation for a one-year period on an expanded basis would allow additional feasibility determination. The addit ional year will be used to further clarify participation requirements, refine the standard data formats that must be used to centrally manage these debts, and continue to research the concept of outsourcing the centralized debt collection clearinghouse to the extent possible in order to limit the state resources required to support this program.

Additional legislative special provision language necessary to extend these efforts is suggested below:

Section XX. (a) The General Assembly having been presented additional information related to a limited 90 day Bad Debt Clearinghouse Proof of Concept Prototype for the collection of p reviously determined "uncollectible" accounts now request that additional state agencies with a material amount of accounts receivable bad debts be included in a one year pilot to further determine the feasibility of implementing a centralized B ad Debt Collection Clearinghouse Program.

(b) The Office of State Controller shall establish a procedure by which state agencies/institutions with a material amount of accounts receivable shall report on collection of bad debts. This pilot program is intended to concentrate on agencies that have a large amount of bad debts, in order to determine the extent to which those debts may be better collected both in those agencies and in the whole of state government. The OSC may solici t information from collection agencies concerning the possibility of these agencies maintaining a central debt collection database limited to those state agencies without restrictive data security or confidentiality issues. Procedures for direct access t o qualified collection agencies may be established for agencies with restrictive data security or confidentiality issues when legal and contractual authority permits this action.

(c) The Office of State Controller shall administer a one-year Bad Debt Collection Clearinghouse Pilot. The pilot shall address the use of one or more private collection agencies and may make provision to allow local government units to participate in this pilot program. The pilot shall further address whether the potential Bad Debt Collection Clearinghouse Program should be administered jointly by the Department of Revenue and the Office of the State Controller.

(d) The Office of State Controller shall report the results of the Bad Debt Collection Clearinghouse Pilot to the General Assembly no later than May 15, 2001, along with recommendations on changes in law or procedure to better collect the bad debts including the feasibility of implementing a centralized Bad Debt Collecti on Clearinghouse.

Thank you for your time and consideration in this matter. If you have any further questions or concerns please contact Don Waugh at (919)981-5465.

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