[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]


 
  THE DEBT COLLECTION IMPROVEMENT ACT OF 1996: HOW WELL IS IT WORKING?
=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 10, 2001

                               __________

                           Serial No. 107-96

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform




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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          ------ ------
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida                  MAJOR R. OWENS, New York
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                 Henry Wray, Professional Staff Member
                          Mark Johnson, Clerk
           David McMillen, Minority Professional Staff Member






                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 10, 2001.................................     1
Statement of:
    Engel, Gary T., Director, Financial Management and Assurance, 
      U.S. General Accounting Office; Richard L. Gregg, 
      Commissioner, Financial Management Service, Department of 
      the Treasury; Claude A. Allen, Deputy Secretary, Department 
      of Health and Human Services; William D. Hansen, Deputy 
      Secretary, Department of Education; and Leo S. MacKay, Jr., 
      Deputy Secretary, Department of Veterans Affairs...........     5
Letters, statements, etc., submitted for the record by:
    Allen, Claude A., Deputy Secretary, Department of Health and 
      Human Services, prepared statement of......................    55
    Engel, Gary T., Director, Financial Management and Assurance, 
      U.S. General Accounting Office, prepared statement of......     7
    Gregg, Richard L., Commissioner, Financial Management 
      Service, Department of the Treasury, prepared statement of.    47
    Hansen, William D., Deputy Secretary, Department of 
      Education, prepared statement of...........................    69
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Mackay, Leo S., Jr., Deputy Secretary, Department of Veterans 
      Affairs:
        Prepared statement of....................................    78
        Reponse of the DVA to the written statement of Vietnam 
          Veterans of America, Inc...............................    92
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............   101


  THE DEBT COLLECTION IMPROVEMENT ACT OF 1996: HOW WELL IS IT WORKING?

                              ----------                              


                      WEDNESDAY, OCTOBER 10, 2001

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Maloney, and Ose.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, deputy staff director and director of 
communications; Henry Wray, professional staff member; Mark 
Johnson, clerk; Jim Holmes, intern; David McMillen, minority 
professional staff member; and Jean Gosa, minority clerk.
    Mr. Horn. The Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations will come 
to order.
    Today we will examine the Federal Government's progress in 
implementing the Debt Collection Improvement Act of 1996. The 
act greatly enhanced the Government's ability to collect its 
non-tax-related delinquent debt. When these debts become more 
than 180 days delinquent, the law requires that they be 
referred to the Treasury Department for collection. Under the 
Debt Collection Improvement Act, the Treasury is empowered to 
offset other Federal payments to the debtor, such as tax 
refunds. The Treasury may also take other collection actions, 
including the use of private collection agencies. This is known 
as cross-servicing.
    The subcommittee has had a longstanding interest in 
insuring that the government fairly and effectively collects 
debts that are legitimately owed to it. This summer the 
subcommittee surveyed 27 of the government's major departments 
and agencies to determine how well they were implementing the 
Debt Collection Improvement Act. Clearly, there has been 
progress in some areas. The Treasury Department's Financial 
Management Service is working hard to carry out its 
responsibilities under the act and has achieved some positive 
results through its offset program. During fiscal year 2001 the 
Treasury Department collected $3.1 billion in delinquent debt, 
compared to $2.6 billion in the preceding year, fiscal year 
2000.
    The subcommittee's survey also found that most Federal 
agencies are making progress in referring most of their 
delinquent debt to the Treasury Department; however, major 
challenges remain.
    Five years after enactment of the Debt Collection 
Improvement Act, not 1 of the 27 agencies complies with the 
law's basic requirement, that all eligible debts be referred to 
the Treasury Department's Financial Management Service as soon 
as they become more than 180 days delinquent.
    Agencies are referring less than 10 percent of their debts 
within the 180-day timeline. Most of the debts have been 
delinquent for years by the time agencies refer them to the 
Treasury. Equally troubling, several agencies, including the 
Departments of Agriculture and Health and Human Services, have 
yet to refer large amounts of their delinquent debt for 
collection.
    Another problem is that agencies may be misapplying 
provisions of the law that exclude certain debts from referral, 
such as debts involved in bankruptcy or other legal 
proceedings. The General Accounting Office found that some 
agencies made errors affecting hundreds of millions of dollars 
in exclusions. This problem should have long ago had far-
reaching consequences since that one-half of all Federal non-
tax delinquent debt has not been referred to the Treasury for 
collection. In fiscal year 2000, that amounted to more than $30 
billion.
    In addition, many agencies are taking much too long to 
implement procedures to garnish the wages of delinquent debtors 
and to report the delinquencies to credit bureaus. Without 
these reports, Federal agencies have difficulty complying with 
the law's requirements that bars delinquent debtors from 
receiving Federal assistance, including certain loan programs.
    There are at least two underlying reasons for the slow 
progress in implementing the act. Many agency management 
systems are beset by basic weakness that severely limits their 
ability to conduct day-to-day operations, including keeping 
track of their debt. According to the General Accounting 
Office, some agencies simply have not made debt collection a 
high priority.
    Today we want to discuss ways to improve this situation. I 
am encouraged that our witnesses include three Deputy 
Secretaries of Cabinet-level departments. President Bush has 
given each of these Deputy Secretaries responsibility for 
overall department management. That is a good step toward 
giving debt collection and other chronic management challenges 
the high level of the attention that is needed.
    Unfortunately, we were expecting four Deputy Secretaries 
today, but late last evening the Deputy Secretary of the 
Department of Agriculture, James Moseley, informed us that he 
would be unable to testify. Given the Department's abysmal 
record in collecting its delinquent debts, we will hold a 
separate hearing on a later date that will focus exclusively on 
the Department of Agriculture.
    [The prepared statement of Hon. Stephen Horn follows:]
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    Mr. Horn. I welcome all of our witnesses today and look 
forward to their testimony. As I think many of you know how 
this works, but for the newcomers this is an investigating 
subcommittee of Government Reform, and if you will stand and 
raise your right hands.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that both the presenters and 
the staff have taken the oath.
    We thank you very much for coming, and we noted some of the 
progress that is occurring, and we will start with Gary Engel, 
the Director, Financial Management and Assurance, U.S. General 
Accounting Office, part of the legislative branch headed by the 
Comptroller General of the United States.
    We are delighted to have you here, Mr. Engel.

STATEMENTS OF GARY T. ENGEL, DIRECTOR, FINANCIAL MANAGEMENT AND 
 ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; RICHARD L. GREGG, 
 COMMISSIONER, FINANCIAL MANAGEMENT SERVICE, DEPARTMENT OF THE 
  TREASURY; CLAUDE A. ALLEN, DEPUTY SECRETARY, DEPARTMENT OF 
HEALTH AND HUMAN SERVICES; WILLIAM D. HANSEN, DEPUTY SECRETARY, 
    DEPARTMENT OF EDUCATION; AND LEO S. MACKAY, JR., DEPUTY 
           SECRETARY, DEPARTMENT OF VETERANS AFFAIRS

    Mr. Engel. Mr. Chairman and members of the subcommittee, 
good morning. I am pleased to be here today to discuss our work 
on selected agencies' implementation of key aspects of the Debt 
Collection Improvement Act of 1996, which was developed under 
the leadership of this subcommittee. It is essential that 
agencies be accountable for putting effective practices in 
place to maximize the collections of billions of dollars of 
non-tax delinquent debt owed to the Government.
    The DCIA provides agencies with important tools to achieve 
this objective. Since its passage 5 years ago, our message has 
been clear and consistent. If DCIA's benefits are to be more 
fully realized, improvements are necessary in agencies' 
implementation efforts.
    We are encouraged by the significant progress that 
Treasury's Financial Management Service is making in 
implementing its offset program, especially in the tax refund 
area. During each of the last 3 years, FMS reports having 
collected over $1 billion of non-tax debts through tax refund 
offsets. While there has been important progress such as this, 
unfortunately our work over the past several months at selected 
agencies has not allayed our concerns about the lack of 
priority agencies have placed on implementing DCIA.
    DCIA makes available specific means to collect 
delinquencies. These include, for instance, FMS' centralized 
debt collection program known as ``cross servicing.'' But for 
these efforts to be successful, agencies must fully and 
promptly identify and refer all delinquent debt. While DCIA 
requires such referrals, this is not always the case, as 
billions of dollars of eligible delinquent debts are still not 
being referred.
    The three agencies we reviewed have experienced problems in 
this area. For example, USDA's Rural Housing Service may have 
understated by about $348 million the amount of direct single 
family housing loans reported as eligible for referral to 
Treasury's offset program as of September 30, 2000. Also as of 
this date, the agency had not referred any direct single family 
housing loans for cross-servicing, primarily because of systems 
limitations.
    USDA's Farm Service Agency did not have a process or 
sufficient controls to adequately identify and report eligible 
farm loans to FMS as of September 30, 2000. In addition, the 
Farm Service Agency has lost and continues to lose 
opportunities for maximizing collections. For example, it does 
not refer co-debtors on direct farm loans to FMS for offset.
    HHS' Center for Medicare and Medicaid Services had not 
referred, as of September 30, 2000, about $4.3 billion of 
eligible debt, primarily related to Medicare overpayments. 
While it is encouraging that the Agency reported subsequently 
referring about $2 billion of these delinquencies, most debts 
were referred late in the fiscal year. Referrals were limited 
during most of the year primarily due to debt referral system 
problems and a lack of monitoring of contractor referrals.
    Our work took a broader look at two other important aspects 
of DCIA that also warrant substantially greater emphasis: 
implementation of administrative wage garnishment and the 
barring of delinquent non-tax debtors from obtaining Federal 
financial assistance.
    Since 1993, Education has been garnishing wages under 
separate authority from that granted by the DCIA; however, none 
of the nine major agencies we surveyed were exercising their 
authority under DCIA to administratively garnish up to 15 
percent of a delinquent non-tax debtor's disposable pay until 
the debt is fully recovered. This is disappointing in light of 
the fact that experts have testified before this subcommittee 
that wage garnishment can be an extremely powerful debt 
collection tool. Although FMS has recently been working with 
its private collection agency contractors to incorporate the 
administrative wage garnishment into the cross-servicing 
program, none of the agencies we surveyed had authorized FMS to 
use this important tool.
    Regarding DCIA's debtor bar provision, concerns have been 
raised in the past about debtors that were delinquent on more 
than one Federal debt. We continue to have such concerns, 
because none of the key data sources we reviewed currently 
provide the all-inclusive and permanent data that is needed to 
ensure that delinquent debtors are denied additional Federal 
financial assistance.
    Many challenges lie ahead for agencies to successfully 
implement certain provisions of DCIA. While we are encouraged 
by corrective actions being taken or planned by the agencies we 
reviewed, some of these actions are not scheduled to be fully 
implemented until years in the future. Agencies must place a 
greater sense of urgency on managing the delinquent debt 
collections. Toward this end, we plan to recommend corrective 
measures that can be taken by the agencies covered by our 
study.
    Mr. Chairman, this concludes my statement. I would be 
pleased to answer any questions.
    Mr. Horn. Thank you very much, Mr. Engel. That's very 
helpful.
    [The prepared statement of Mr. Engel follows:]
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    Mr. Horn. We now have Richard L. Gregg, Commissioner, 
Financial Management Service, Department of the Treasury. He's 
done a wonderful job over the years.
    Mr. Gregg, we're glad to have you here.
    Mr. Gregg. Thank you, Mr. Chairman. Thank you and members 
of the subcommittee for inviting me this morning to provide an 
update on the Financial Management Service's implementation of 
the Debt Collection Improvement Act of 1996. Your strong 
personal support, together with this subcommittee's support, 
has helped the Treasury implement this successful, government-
wide debt collection program.
    During the 3\1/2\ years I have been at FMS, we have 
developed an efficient, flexible, and expandable debt 
collection program that maximizes collections for the Federal 
Government and meets the needs of our partners. Having 
successfully followed this strategy, we have collected nearly 
$12 billion in delinquent debts since the enactment of DCIA.
    Three factors have contributed to this progress. First, FMS 
has established a strong program foundation, anchored by an 
effective payment offset program and a growing cross-servicing 
operation. Second, the FMS staff has successfully expanded the 
capabilities of the collection systems and has worked with 
program agencies to improve their debt portfolios. And, third, 
the amount of delinquent debt that agencies referred to 
Treasury for collection has steadily increased.
    This morning, Mr. Chairman, I will describe the significant 
new elements of our program, as well as update you on some that 
are near completion. Before I cover those points, however, I'll 
briefly speak about debt collection and its connection to the 
advanced refund credit payments, commonly referred to as the 
``tax rebate program.''
    Beginning in mid-July of this year, FMS spearheaded the 
dispersement of check payments to taxpayers, a project of major 
proportion. As the program draws to a close this fall, 
approximately 100 million payments will have been dispersed. 
Using a very robust and flexible offset system, FMS has offset 
the rebate payments to the Treasury offset program to collect 
delinquent Federal and State debt. More than $470 million has 
been collected to date, with over $260 million of that total 
coming for past-due child support obligations.
    For fiscal year 2001 Treasury has collected $3.1 billion in 
delinquent debt, using all of our collection tools. Of this 
amount, $1.6 billion represents collections of past-due child 
support, $1.4 billion represents delinquent Federal non-tax 
debt, and $52 million was collected through cross-servicing.
    Attached to my statement is a chart showing the progress we 
have made in debt collection over the past 6 years.
    I will now outline several initiatives that have 
contributed to increased collections.
    In March 2001, as required by DCIA, FMS began offsetting 
the payments of Social Security beneficiaries who owed 
delinquent non-tax debts. We have just completed the phase 
implementation, and more than $5 million has already been 
collected.
    Mr. Chairman, the smooth implementation of the program is 
due to the cooperation and strong support FMS has received from 
the Social Security Administration. Also, as authorized by the 
Taxpayer Relief Act of 1997, FMS and IRS launched a continuous 
Federal tax levy program in July 2000 to collect delinquent 
Federal tax debts from individuals and businesses that received 
Federal payments. Presently, IRS levies vendors with payments 
that are dispersed by Treasury and individuals receiving OPM 
retirement payments and Federal travelers. Payments are being 
reduced continually by FMS at a rate of 15 percent. To date, 
more than $16 million has been collected, and our 
accomplishments and success for the levy program, which is just 
getting started, can be attributed to the excellent working 
relationship between FMS and IRS.
    Last year at the June 2000, oversight hearing I reported 
that seven States were participating in the program to offset 
Federal income tax refunds to collect delinquent State income 
tax debt. Twenty States are now participating in the program, 
and participation by additional States will be coming along in 
the following months. More than $118 million has been collected 
thus far, with $94 million having been collected in this 
calendar year, alone.
    In August of this year, FMS began implementation of the 
administrative wage garnishment process. Under this process, 
FMS issues wage garnishment orders, directing a private sector 
employer to withhold amounts from employees' wages. Those 
amounts are forwarded to FMS and are, in turn, sent to the 
Federal agency to which the delinquent debt is owed.
    Private collection agencies under contract with FMS are 
playing an integral role in the implementation. FMS views this 
tool as one with much potential and one that should be used in 
conjunction with other collection tools when those other tools 
have been unsuccessful.
    So that agencies can take full advantage of FMS' 
centralized processes and establish safeguards, we encourage 
them to use administrative wage garnishment through Treasury's 
cross-servicing program.
    Earlier, I stated that payments to vendors and Federal 
Government retirees and Federal travelers are currently subject 
to tax levy. More recently, in September, the program was 
expanded to include Social Security payments. IRS will now 
begin notifying certain Social Security recipients who owe 
delinquent Federal tax debts that their payments will be levied 
continuously at a rate of 15 percent.
    In addition to the IRS notice, FMS will send a notice to 
these recipients each month that a payment is being levied. At 
the same time, IRS is currently working on a process to ensure 
that tax levy does not cause an undue hardship for lower-income 
SSA recipients.
    Another important enhancement to our debt collection 
program which began last month is a fully automated system to 
centralize the offset of Federal salary payments. The first 
payments offset were the salary payments processed by the 
Department of Agriculture's National Finance Center. The 
program will be expanded to include the salary payments from 
Department of Interior, Department of Defense, Postal Service, 
and VA.
    In addition to collecting Federal non-tax debt and 
delinquent child support debts, we will also in the near future 
be able to collect tax debts by levying Federal salaries.
    Assisting the Department of Defense in offsetting DOD 
vendor payments will also enhance debt collection. This feature 
has great promise, and working with DOD we plan to implement 
this offset program next year.
    Barring delinquent debtors from obtaining Federal loans and 
loan guarantees is a high priority for FMS and Federal agencies 
with loan authority. FMS is currently developing a system that 
will allow lending agencies to access information from the FMS 
delinquent debtor data base so that government loans are not 
made to previously identified delinquent debtors. The data base 
is designed to complement existing sources of information 
available to agencies, and system implementation is expected 
next year.
    I would also note that the current contract with private 
collection agencies expired September 30 of this year. The 
awarding of this new contract that went into effect October 1 
is a culmination of many months of meticulous work. FMS 
followed a very methodical plan that included the solicitation 
of input from collection agencies, market research, proposal 
presentations, fee negotiations, and system testing.
    Finally, as required by the DCIA, the annual report on debt 
collection activities of Federal agencies was recently 
submitted to Congress.
    Mr. Chairman, this concludes my remarks. I'll be happy to 
answer any questions you or members of your subcommittee may 
have.
    Mr. Horn. Thank you very much, Mr. Gregg. I appreciate that 
presentation.
    [The prepared statement of Mr. Gregg follows:]
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    Mr. Horn. We now have one of the first Deputy Secretaries, 
the Honorable Claude A. Allen, Deputy Secretary, Department of 
Health and Human Services.
    I know you probably have a lot on your hands and you've got 
a very dynamic Secretary, and I'm sure you are probably working 
23 hours a night, but it is--when I talked to him the other 
day--and Scott was his legislative liaison--he says, ``He's up 
all night.'' So I suspect the Deputy Secretary is also. So 
we're glad to have you here.
    Mr. Allen. Thank you, Mr. Chairman. It's a privilege to be 
here with you. Thank you for the opportunity to testify on 
behalf of the Department of Health and Human Services 
concerning our implementation of the Debt Collection 
Improvement Act of 1996.
    We have made a great deal of progress, yet we face some 
unusual challenges due to the structure of some of our largest 
programs. HHS is a unique Federal agency, responsible for the 
health and well-being of all Americans, and our programs and 
operating systems are grounded in the principles of taking care 
of our citizens first and foremost, while remaining accountable 
to the taxpayer to recover moneys due the Federal Government.
    In general, as the custodian of nearly $400 billion in 
outlays annually, HHS has instituted a policy of pursuing debts 
owed aggressively. It is key to our overall financial 
management philosophy to insure the public's moneys are spent 
only for their intended purposes. Our policies have helped us 
to record steadily increases in debt collections from $10.1 
billion in fiscal year 1996 to $15.3 billion in fiscal year 
2000, with more than $10.1 billion recovered as of June this 
year.
    In child support enforcement programs, HHS has been in the 
forefront of the challenge to ensure that children receive the 
financial support they deserve from non-custodial parents. The 
child support enforcement program is a very successful Federal/
State partnership effort aimed at fostering family 
responsibility and promoting self-sufficiency by ensuring that 
children are supported financially and emotionally by both 
parents.
    Among the program's enforcement tools is the Federal tax 
refund offset program. Under this program, tax refunds owed to 
non-custodial parents are intercepted and sent to the State 
child support agency to pay the non-custodial parent's past-due 
child support debts.
    Since the program began in 1982, more than $13 billion in 
past-due child support has been collected, and more than 16 
million tax refunds have been intercepted. In 2001, tax refund 
offset collections for the child support program have exceeded 
$1.5 billion, and this is a new record.
    Our HHS accounts receivables for approximately 4 percent of 
all moneys owed to the Federal Government. This amounted to 
over $10 billion last year. Nearly all this amount was made up 
of moneys due from health insurance companies, hospitals, and 
other healthcare providers. Loans account only for 6 percent of 
the $10 billion, and make up a very small part of the HHS 
portfolio.
    The Secretary and I are personally committed to addressing 
these challenges and to modernizing Medicare's financial 
systems in order to strengthen the management of accounts 
receivable and to allow more timely and effective collection 
activities on outstanding debts.
    At the Centers for Medicare and Medicaid Services, our 
largest agency, accounts for 85 percent of the Department's 
receivables. CMS understands that its auditors and the General 
Accounting Office continue to raise legitimate concerns 
regarding CMS' contractors' financial reporting, particularly 
the status of the contractors' accounts receivable. In large 
part, these concerns can be attributed to the design of the 
financial management system of the Medicare system and Medicare 
program, which relies on outdated, single-entry accounting 
systems. This is why Secretary Thompson is modernizing 
Medicare's financial systems to increase the efficiency and 
accuracy of the financial reporting in accordance with standard 
government accounting practices.
    CMS is moving to implement a new, integrated accounting 
system that will meet all Federal information technology and 
financial management requirements, including the financial 
activities of its claims processing contractors.
    Since Secretary Thompson learned just how old and outdated 
Medicare's accounting systems are, he has made modernizing them 
a priority. In order to improve Medicare's fiscal 
accountability to beneficiaries and taxpayers, we recently 
announced a long-term project to combine Medicare's many 
outdated accounting systems into one single unified system that 
will better ensure that the program pays correctly and enhances 
the management of debt. The project will be piloted and 
implemented in phases during the next 5 years, ultimately 
creating a seamless, modern accounting system of Medicaid. Full 
implementation is projected for the end of fiscal year 2006.
    CMS has two main types of debt--Medicare secondary payment 
debt and non-MSP debt. The debt collection procedures used by 
CMS vary based on the type of debt and are closely tied to the 
relationship CMS has to the debtor. The vast majority of non-
MSP debts are provider, physician, and supplier debt. In these 
instances, CMS typically has ongoing relationships with the 
debtors and may recoup the overpayment or the debt directly 
from the provider, the physician, or supplier by offsetting 
their future Medicare payments.
    On the other hand, MSP debt is comprised of claims that CMS 
paid initially and then subsequently determined that Medicare 
should have been the secondary rather than the primary payer. 
MSP debt is not as easily recouped as non-MSP debt, since MSP 
debt involves debtors with whom Medicare does not have an 
ongoing claim payment relationship. These debtors are typically 
insurers, employers, and third-party administrators.
    CMS has taken aggressive actions to address concerns with 
its debt referral processes by implementing pilot projects for 
debt at selected Medicare contractors and regional offices. As 
a result of the pilot, the agency referred nearly $2 billion in 
total delinquent debt by the end of fiscal year 2000 and 
exceeded the agency's referral goal of 25 percent of all 
eligible debt by $500 million. Due to the overwhelming success 
of the pilot project, CMS made them a permanent requirement for 
all contractors.
    CMS is also addressing the issues regarding past debt 
collection efforts and has taken several concrete actions to 
improve its debt collection processes and to ensure that its 
debt collection efforts are consistent with DCIA. The systems 
and ad hoc spreadsheets used by Medicare's contractors have not 
always produced data that were adequately supported and, as a 
consequence, the agency's auditors have had difficulty 
validating the accounts receivable balances. Our new accounting 
measures will address these concerns.
    In addition, it is important to note that CMS has issued 
enhanced policies and procedures for debt reporting and DCI 
debt referral to all CMS contractors and regional offices. 
These procedures allow the agency to refer more debt more 
quickly to address concerns set forth in the GAO's report.
    To date, CMS has referred more than $4 billion of the 
eligible $6 billion in delinquent debt, as required by the 
DCIA. The DCIA requires the referral of delinquent debt for 
cross-servicing by the Treasury Department for offsetting with 
Federal payment. In these areas, we are proud to say our 
performance continues to improve. HHS established its own 
centralized administrative operations, the program support 
center, as the central debt management organization for the HHS 
in 1996 as a matter of efficiency and cost-effectiveness, and 
subsequently PSC was designated by Treasury as a debt 
collection center for certain types of HHS health-related--
healthcare debt.
    We have made significant improvement in referring 
delinquent debt to PSC for collection, to Treasury for cross-
servicing, and to the Treasury offset program for collection, 
and the rate for all types of delinquent debt referrals for HHS 
has increased by an average of 23 percent from fiscal year 1999 
to fiscal year 2000.
    In addition, while our greatest challenge has been 
identifying and referring healthcare debt, we have referred a 
total of 60 percent of the eligible healthcare debt, or 
approximately $4 billion, through fiscal year 2001. We have met 
our performance goals, and since the DCIA was passed in 1996 we 
have referred more than $4 billion. We will not stop there. By 
the end of fiscal year 2002 our goal is to refer 100 percent of 
eligible delinquent debt.
    In conclusion, HHS has made significant progress in 
managing its receivables, from increasing its collections to 
focusing efforts on analyzing delinquencies and increasing its 
referrals for cross-servicing and offset. The actions we are 
taking and improvements we are making are essential in 
achieving our long-term goals to continue to meet the 
requirements of DCIA. HHS continues to strive for full 
collection of all debt that's owed to the Department on behalf 
of the American taxpayers.
    And I will be happy to answer any questions that I can take 
at this time or get back to you with any additional information 
you may require.
    Mr. Horn. Well, thank you very much.
    [The prepared statement of Mr. Allen follows:]
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    Mr. Horn. I know you have another meeting, and we want to 
get in a lot of questions, so we're going to move right along, 
and after the last presenter we'll then get to general 
questions.
    Mr. Allen. Thank you.
    Mr. Horn. So the Honorable William D. Hansen is Deputy 
Secretary of the Department of Education. He's got another live 
wire as Secretary, since I worked with him a few weeks ago at 
the Bret Harte School in Long Beach, CA, and he had about 800 
little kids and parents included. It was quite a wonderful 
occasion. So I'm sure you've got a lot of things to keep your 
schedule busy. Let us start with the debt collection, because I 
know you have some problems.
    Mr. Hansen. Mr. Chairman, thank you, and thank you for your 
leadership on this issue. It is a privilege to be before your 
committee this morning. And I would like just to start out by 
saying that this is Secretary Paige's top priority in the 
Department, improving the management activities within the 
Department. On April 1st he created a Management Improvement 
Team to identify what the critical issues are that were 
precluding the Department from getting a clean audit for the 
last several years and to also see what we need to do to get 
the Student Financial Aid Programs off the General Accounting 
Office's high risk list, which they have been on for the last 
10 years. These are two of our top five management priorities, 
and everything we are doing is centered around rectifying those 
two long-term problems.
    In terms of debt collection, let me just break down for you 
from our two categories of debt, student loan debt accounts for 
about 99 percent of all of our outstanding debt, and our 
institutional other administrative debt comprises of the last 1 
percent. It is important to keep the size and scope of this to 
mind. We have $180 billion of outstanding guaranteed student 
loans in the Federal Family Education Loan Program, another $75 
billion in outstanding direct student loans, so it is an 
outstanding portfolio of over $250 billion, with 9 million 
additional loans and $35 billion of new loan volume being let 
this year.
    The activities that we are about do center around these two 
programs. It is important to note, as well, that these programs 
are programs that are entitlement programs. They go out to 
borrowers who are not necessarily creditworthy, and so that 
makes the collection of these loans much more difficult than a 
normal commercial loan.
    We do have a parent loan program, which credit checks are 
required, and those who were in default on previous student 
loans are also not eligible for additional loans.
    We also, in this process, need to work closely with our 
colleges and to keep them accountable for their default rates, 
and institutions that have had high incidents of student borrow 
defaults have been removed from the programs. And, in fact, an 
initiative was started back in 1989, and since that time 1,000 
institutions have been terminated from the loan program's 
eligibility because of their high default rates.
    A couple of tools that have been put into place recently 
have been helpful to us, as well. The 1998 amendments to the 
Higher Education Act lengthened the period in which lenders 
attempt to bring loans back into repayment from 180 days to 270 
days before the loan is classified as being in default. The 
1998 amendments also provided more borrower flexibility in 
repayment options and flexibility and other incentives, 
including the timely repayment. They could use electronic 
payment debiting.
    Many of our lending partners have already been initiated in 
these reforms, and we believe that these changes will also 
prove beneficial in helping to keep borrowers in repayment. 
However, we remain concerned with the continued rising cost of 
college and the resulting increase in borrower indebtedness 
that we are seeing.
    The implementation of the Debt Collection Act and other 
initiatives to improve student loan collections have gone a 
long way toward improving the effectiveness of collecting 
unpaid student loans. Just a couple of months ago, in May, the 
Department of Treasury granted Education a permanent exemption 
from the transfer requirements of the DCIA for defaulted 
student loans, and we want approval to continue to service our 
own internal student loan debts because of our successful track 
record.
    Moreover, the Department's leadership and success in 
implementing a number of debt collection mechanisms over the 
years has led to their inclusion in the Debt Collection 
Improvement Act. A couple of examples are: 20 years ago we 
started using private collection agencies; 15 years ago the IRS 
tax refund offset was initiated; and, as was mentioned earlier, 
the administrative wage garnishment has been used for the last 
6 years. These tools have allowed us to collect over $5 billion 
in defaulted loans in just the last 5 years.
    The Department began using the private collection agencies 
20 years ago. We presently have 22 collection agencies under 
contract. These collection agencies are evaluated and rated 
according to the overall service that they perform, as well as 
their ability to collect the debt. They receive additional 
incentives, both monetary and in new placements.
    Over the last 24 months, private collection agencies have 
generated over $650 million in collections, and they are also 
very helpful in working with us with our litigation referrals 
with the Justice Department. In fact, in the last 2 years we 
have receipts of over $54 million from these types of 
recoveries.
    We also have been using the Treasury offset and have been 
referring eligible debts to the IRS for tax refunds since 1986. 
In fiscal year 2000, there were $16 billion in past-due 
accounts that had been referred to Treasury, and in fiscal year 
2001 we expect recoveries to exceed $1 billion.
    On the administrative wage garnishment area, we also have 
been conducting this authority granted to it under the Higher 
Education Act years ago. We are currently attempting to collect 
over 150,000 defaulted loans through garnishment, and we've 
also, since 1997, collected $370 million through this activity.
    Another important tool that Congress passed in December 
1999 was the National Directory of New Hires. We had been 
working for 17 years with the Internal Revenue Service to match 
delinquent and defaulted student loan records with current 
addresses, and this has been very helpful, and we likewise 
needed this new tool to work with the Department of Health and 
Human Services with their National Directory of New Hires.
    Mr. Ose [assuming Chair]. Mr. Hansen, if you could 
summarize here----
    Mr. Hansen. OK.
    Mr. Ose [continuing]. That would be great.
    Mr. Hansen. We've also collected, just in this fiscal year, 
$100 million from defaulted borrowers. We've also been using 
the Federal salary offset and credit bureau reporting 
activities to help us to make sure that we are notifying the 
intent and referral of Department reports to the defaulted 
borrowers. We also are looking at some possibilities of loan 
sales on our defaulted loan portfolio.
    In terms of our institutional and administrative debts, 
this is 1 percent of our debt, and we are also--94 percent of 
all of our institutional administrative debts are now eligible 
for cross-servicing to the Treasury, and we anticipate that we 
will be 100 percent there very quickly.
    Mr. Chairman, thank you for this opportunity to testify 
before you today, and we appreciate the leadership of this 
subcommittee and look forward to answering any questions that 
you may have for us.
    Mr. Horn. Thank you.
    [The prepared statement of Mr. Hansen follows:]
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    Mr. Horn. Dr. Mackay.
    Mr. Mackay. Thank you, Mr. Chairman. It is, indeed, my 
pleasure to appear before you today regarding the Department of 
Veterans Affairs implementation of the Debt Collection 
Improvement Act of 1996.
    VA's CFO and staff has worked with all VA elements to take 
the necessary steps to ensure steady improvement toward full 
compliance with the law's requirements. On June 8, 2000, before 
this subcommittee, VA testified to significant progress in 
referring eligible debt to the Treasury offset program. Today I 
am pleased to inform you that next month's final records for 
this fiscal year will reflect that VA has met its goal of 
referring more than 90 percent of eligible debt to TOP and the 
cross-servicing program.
    We have made a great effort to reduce the establishment of 
debts and to collect those that have been established. At the 
end of fiscal year 1996, for example, the year in which the 
DCIA was enacted, VA had $4.2 billion in total receivables, of 
which $2.4 billion was delinquent debt. As of September 30, 
2000, VA has $3.8 billion in total receivables, and $1.4 
billion in delinquent debt. Of the $1.4 billion, $341.3 million 
was attributable to direct home loan mortgages held by VA; $328 
million to compensation and pension overpayments; $139.5 
million to defaulted guarantee home loans; and $46.7 million to 
readjustment benefit, which is educational overpayments; $545.4 
million was attributable to charges for medical care and 
services. The bulk of the last mentioned amount owed to VA's 
medical care collection fund is comprised of claims filed with 
third-party health insurers. These claims are not referable to 
Treasury for cross-servicing or administrative offset because 
they are not some certain amounts owed.
    VA has participated in the tax refund offset program since 
1987. It collected $335 million from 1987 to 1999, when the tax 
refund offset program became part of the TOP program. At the 
end of fiscal year 2000, VA had $328.7 million in delinquent 
debt eligible for TOP referral. We referred $220.5 million, or 
67 percent. By the end of the third quarter fiscal year 2001, 
we had referred $324.7 million, or 93 percent of funds eligible 
for referral. Based on the latest information from the Treasury 
Department, VA referred $390.9 million as of August 31, 2001.
    For the cross-servicing program, VA had $263.4 million in 
delinquent debt eligible for referral at the end of fiscal year 
2000. We referred $45.5 million or 17 percent. At the third-
quarter mark of 2001, VA referred $238.8 million, or 87 percent 
of eligible funds. According to the Treasury Department, VA 
referred $255.1 million as of August 31, 2001. Data for 2001 we 
are confident will show that over 90 percent of eligible debt 
was referred.
    VA and the Treasury Department continue to explore the 
efficacy of referring VA's first party medical debts for cross-
servicing. The nature of these debts makes the cross-servicing 
program especially problematic and expensive. Since such 
referral does not now appear to be cost effective, we must 
determine whether to incur the expense of developing the 
automated processes necessary to refer all eligible first party 
debt.
    VA is also in the process of amending its regulations to 
comply with the revised Federal claims collection standards. 
The amended regulations will include authorizing administrative 
wage garnishment. We will use this new debt collection tool in 
conjunction with the Treasury cross-servicing program.
    VA has had an automated collection system in place since 
1975. VA's Debt Management Center in St. Paul, MN, has operated 
since 1991 and employs every collection tool available to 
Federal agencies. The DMC uses automated payment processing and 
collection systems, benefit and salary offset, credit bureau 
reporting, private collection agency referrals, compromises, 
litigation, write-offs, and referrals to Treasury's 
administrative offset and cross-servicing program.
    This concludes my opening statement. I appreciate the 
opportunity to appear before you to discuss VA's progress in 
implementing the DCIA. I will be happy to answer any questions 
you or members of the subcommittee may have.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you, Dr. Mackay.
    [The prepared statement of Mr. Mackay follows:]
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    Mr. Ose. Mr. Allen, if I recall, you have to leave at 11, 
right?
    Mr. Allen. Yes, Mr. Chairman.
    Mr. Ose. OK. We're going to pay a little special attention 
to you here first.
    Mr. Allen. Thank you very much.
    Mr. Ose. Mr. Allen, over at HHS your debt--excuse me, the 
delinquent debt has increased from about $4.1 billion in 1996 
to $6.1 billion in 2000, roughly a 50 percent increase. Do you 
have any sense of why this has happened and what can you do to 
turn this around?
    Mr. Allen. Mr. Chairman, the major reason for the increase 
of debt that we see in HHS primarily focuses on the Centers for 
Medicare and Medicaid Services. As the GAO report identified, 
much of it focuses primarily on our system issues that we need 
to address. We knew that we had some problems with our system 
and the challenges there, and the solution that we've come up 
with and one way to try to address this is we've purchased some 
off-the-shelf software as part of our healthcare integrated 
general ledger accounting system, or what we call HIGLAS 
project. Until this project is fully operational, we plan to 
continue our performing manual interventions to ensure the 
accuracy and integrity of the debt management process.
    We also know that there are other issues that GAO 
identified, and we are working on trying to resolve those, as 
well.
    Mr. Ose. In terms of the off-the-shelf software for the 
general ledger, you expect that to be fully operational by 
when?
    Mr. Allen. I believe that we're looking at getting it 
operational by the end of 2005, but let me make sure--I'll 
confirm that--it's the beginning of 2006.
    Mr. Ose. And if I understand correctly, you have taken that 
software and you're using it, testing it in one place and then 
you're going to expand the system?
    Mr. Allen. That is correct. We want to test first and then 
expand. Focusing on the accounting systems has been a part of 
Secretary Thompson's agenda from the very first day coming into 
office. CMS has been working with, I believe, 30-year-old 
software, which is unheard of, and so a part of that is clearly 
trying to get a unified system that can accomplish the many 
tasks that CMS is tasked with trying to----
    Mr. Ose. Where are the tests being implemented or run right 
now?
    Mr. Allen. I don't have the specific regional offices.
    We have two parts of it. The part A program is currently 
being implemented in Palmetto, and part B of the program is in 
New England.
    Mr. Ose. Do you have any status report on how it's going?
    Mr. Allen. As I understand it, it is going very well. In 
fact, we are looking to expand the program beyond those two 
regions. We have a plan to do that as we're bringing it up. I 
can get you an update, would be glad to provide that for the 
record for you to give you more details on that for you.
    Mr. Ose. I would appreciate that.
    Mr. Allen. Yes.
    Mr. Ose. I do want to know what the schedule is in terms of 
where does it go next.
    Mr. Allen. Certainly.
    Mr. Ose. Because I can tell you we get calls.
    Mr. Allen. We'll be glad to provide that for the record.
    Mr. Ose. I appreciate that.
    Let's see. Mr. Hansen, over at Education does the 
Department have--how does the Department measure its success in 
terms of identifying delinquent debt and improving its 
collection?
    Mr. Hansen. We have a number of measurement tools. We 
first, in terms of using the Government Performance and Results 
Act, have quantifiable goals that we set into place, and we 
also, from a manager's perspective and a departmental 
perspective, put performance measures into place for each of 
our loan collection agencies, and those measurements are both 
to reward them financially, but also reward them with 
potentially additional work. Those are benchmarks based on the 
type of collection activity they incur.
    Mr. Ose. I want to make sure I'm clear on the kinds of 
loans you're talking about. DOE would be--these are either the 
direct student loans or loans that have been purchased from 
third-party origination sources?
    Mr. Hansen. We have two different student loan programs. 
Students can only get one. The program is such that the college 
has to determine which college they participate in, whether 
it's the old guaranteed student loan program, which is called 
the ``Federal Family Education Loan Program,'' or the Direct 
Loan Program. Most of our activities right now in this effort 
are on the Direct Loan Program, because those are debts that we 
hold directly, as opposed to the loans that are guaranteed and 
held by the private sector.
    We do have loans that, when the private sector has 
exhausted the work with the guarantee agencies and the private 
lenders and they go into default and then come back to the 
Department, we will then take those defaulted loans and work 
with our debt collection agents to go after those defaulted 
loans.
    Mr. Ose. In terms of the time table for reporting of direct 
student loans, are you complying with the 180-day requirement 
for referral?
    Mr. Hansen. We are.
    Mr. Ose. In terms of the third-party-generated or the 
guaranteed loans, are you able to comply with the 180-day?
    Mr. Hansen. We are, although the 180-day requirement is--
we've received a waiver from Treasury to collect these loans 
directly ourselves, so those loans aren't going into the CROSS 
program over at Treasury.
    Mr. Ose. And your testimony mentioned that you had 
disqualified 1,000 institutions from granting or participating 
in the guarantee student loan program. Why was that?
    Mr. Hansen. Because they had high default rates. In 1989, 
the Department took administrative action to cutoff schools 
that had default rates over 25 percent for 3 consecutive years. 
Congress passed that into law in 1990, and it has been a very 
helpful tool for the Department to use to drive default rates 
down and put accountability on the college campuses, as well 
as, with our private collection partners.
    Mr. Ose. In terms of the Direct Student Loan Program--and 
I'm not picking on you--I just want to make sure I've got this 
correct. In terms of the direct student loan program, how 
much--say last year or the year before--was referred to 
Treasury as delinquent? Do you have that number?
    Mr. Hansen. We don't transfer.
    Mr. Ose. You do it directly?
    Mr. Hansen. We do it directly, and that's----
    Mr. Ose. OK.
    Mr. Hansen [continuing]. What I mentioned in my testimony 
is that we have the permanent waiver from----
    Mr. Ose. How much in the last 2 fiscal years did you end up 
having to deal with as delinquent loans on the Direct Student 
Loan Program?
    Mr. Hansen. The default rate of the Direct Loan Program 
this year was a little over 6 percent, and last year was almost 
7 percent. And those are the loans that go into default that we 
will put into our own debt collection system activity. We're 
still----
    Mr. Ose. Is that the $70 billion portfolio or the other?
    Mr. Hansen. It's the $70 billion portfolio.
    Mr. Ose. OK.
    Mr. Hansen. And, frankly, the Direct Loan Program is only 
about 6 or 7 years old, so I don't think we've really seen the 
full impact yet on what the requirements are going to be upon 
the Department for that, because a lot of the loans that were 
made in 1994 and 1995 to freshmen and sophomores, they may just 
be entering repayment now and may not be into a mode of 
default, so I think the program is maturing about this point 
and I think we will have a lot more evidence in the next year 
or two on what type of default issues may arise from the 
program.
    Mr. Ose. And, just to make sure that I'm clear, if you've 
got the $70 billion loan program, it's 6 or 7 percent of the 
loans that are coming due within that portfolio, so it's not 6 
or 7 percent of $70 billion, it's 6 or 7 percent of that 
portion of the $70 billion that comes due that year?
    Mr. Hansen. Correct. The way the default rates are 
calculated is on an annual cohort of loans, and there are about 
$10 billion of new direct loans that have been made for the 
last couple of years, and that's our projection for the next 
couple of fiscal years, so there's $10 billion of new loans 
being made for kids going to our college campuses this year. 
Those loans will not get back into the default----
    Mr. Ose. I understand.
    Mr. Hansen [continuing]. Pipeline until--we are currently 
holding about $70 billion in its--I'd have to get the number 
for you for the record on how many of those loans are actually 
in default and recovery right now, but the rate on an annual 
basis has been about 6 or 7 percent of the overall portfolio.
    Mr. Ose. Not of the cohort, but of the overall portfolio? 
Not of that segment that comes due that year, but of the 
overall portfolio?
    Mr. Hansen. But it is in the overall portfolio, a lot of 
those loans are not yet in repayment, so it is kids who are 
still in school, so----
    Mr. Ose. Correct. You understand my question? I'm trying to 
figure out 6 or 7 percent of $10 billion, or is it 6 or 7 
percent of $70 billion, and what I hear you saying is it's 6 or 
7 percent of that cohort that comes due each year, rather than 
the total portfolio.
    Mr. Hansen. Right. There's about $10 billion of the $70 
billion loans that are out there that are in repayment status, 
so the default rate of 6 or 7 percent would be based----
    Mr. Ose. On that $10 billion.
    Mr. Hansen [continuing]. On the $10 billion that are in 
repayment.
    Mr. Ose. OK. Thank you.
    Now, for the deputies here, I want--this is a general 
question. Does it seem as if any of your Departments fully 
comply with DCIA key requirement of referring the eligible debt 
to Treasury as soon as it becomes more than 180 days 
delinquent? Part of that problem, for instance, in Education is 
we've got the guaranteed loans, and maybe they need to go 
through the process.
    What can we do or what can your Department do to bring or 
to get yourselves back into full compliance, and how long will 
it take, Mr. Allen, given the time constraints you're facing.
    Mr. Allen. Thank you, Mr. Chairman.
    I think what we have done at HHS is--and, again, focusing 
primarily on Centers for Medicare and Medicaid Services has the 
largest portion of delinquent debt that we have to go after. 
They've made some adjustments in their 5-year plan. Initially, 
the largest part of our problem has been dealing with the 
backlog, and that has been the biggest concern of dealing with 
the backlog so that we could refer that debt, delinquent debt.
    What has happened is that the Department's 5-year plan, 
which was covered primarily through fiscal year 2004, has been 
accelerated, and CMS has decided to obtain compliance with DCIA 
by the--with the goal of 100 percent referral by the end of 
fiscal year 2002, and to achieve this goal what we've done is 
we've begun to analyze, to review, and refer the backlog of 
debt that we have, and our plans also include identifying all 
the eligible delinquent debt and to refer it by the end of 
fiscal year 2002, and once that is completed we will be up-to-
date with the DCIA requirements.
    Mr. Hansen. We're also working on internal regulations that 
cover our collection activities, and we signed an agreement 
with Treasury back in 1997, and we will be continuing to update 
that on whatever needs we have, but I do think 94 percent of 
our debt collection activities are over right now at Treasury.
    Mr. Ose. Dr. Mackay.
    Mr. Mackay. VA has a long history of working with the 
Treasury Department and enjoys relatively high rates of 
referral in both the TOP program and cross-servicing--93 
percent in TOP for fiscal year--as of the end of the third 
quarter, we anticipate that will hold up for the whole year, 
and we'll be over 90 percent with respective cross-servicing. A 
lot of that is attributed to the development of automated 
processes. That was part of the delay with respect to the 
cross-servicing program. We had data base incompatibility. We 
had to work through with Treasury stacking our referrals in 
5,000 file increments in order to accept that.
    We, during the course of fiscal year 2002, will let a 
series of regulations that are in accordance with FCCS and take 
advantage of administrative wage garnishment.
    There are some certain hardy perennials that may keep us 
from getting to 100 percent, however. We had a pilot program 
this year with regard to first-party debt, which is the 
copayment that veterans will owe us for non-service-connected 
care in our medical centers. During that pilot, we referred 
some $1.1 million worth of first-party debt in the cross-
servicing program, and Treasury was only able to collect a 
little under 1 percent of that, so we are examining now to see 
if it will be worth it in terms of cost efficiency to move to 
an automated process if the collection rates are going to be 
that low.
    Also, there are some several small benefit programs and 
other miscellaneous debt that's largely concentrated in the 
Veterans Health Administration, about $40 million that is 
currently being readied for transfer in cross-servicing. It's a 
question there of we've concentrated on the big areas, the big 
chunks of debt first, and we're just now getting to those.
    We expect to see over 97 percent of eligible TOP debt 
referred in fiscal year 2002, and we have a target of 95 
percent of cross-servicing eligible debt to be transferred in 
fiscal year 2002, so we are at a very high level--not 100 
percent, but a high level in both programs with respect to the 
debt that's eligible, and we--with the exception of the hardy 
perennials, as I call them, we expect to continue to improve in 
fiscal year 2002.
    Mr. Ose. One of the questions that always comes up is, 
frankly, you all make the loans and then you end up referring 
them to Treasury in some cases for collection. What is it that 
the Departments could do to minimize the amount of referrals to 
Treasury? I mean, we've got a whole bunch of other stuff we 
want Treasury to do, so to speak. How do we, frankly, get the 
agencies to collect the delinquent debts or minimize them 
before they end up being referred to Treasury? Mr. Hansen.
    Mr. Hansen. That's a very good question, and I think that 
the activities that we've been about with the wage garnishment 
and the IRS withholding, the authorities that I mentioned to 
you at the new hires data base from HHS that we have, being 
able to extend the time period for lenders to try to carry 
these loans from 180 to 270 days, those are the types of things 
that we have been trying to do to make sure that every tool we 
have in working with our lender partners, working with our 
other Federal tools, that we are able to only tap a very 
minimal pool that goes into--for collection purposes. And----
    Mr. Ose. How long have you had--I'm unclear on something. 
These tools that you just mentioned, you're implementing those 
or you're discussing implementing those?
    Mr. Hansen. The new hires data base was passed by Congress 
in December 1999. This is the first full year of implementation 
of that.
    Mr. Ose. And what kind of results have you had?
    Mr. Hansen. We've--just in this year, our initial numbers 
are that we've brought in $100 million in that program. Our 
estimates are $10 billion over the next 10 years.
    Mr. Ose. And the new hires is essentially if someone comes 
to work for the Federal Government there's an automatic check 
on whether they have outstanding debt?
    Mr. Hansen. No. It's more of using the HHS data base to 
cross-check any of the outstanding millions and millions of 
student loan borrowers to track them down. It's the same type 
of thing we do with the IRS offset.
    The other tool that I just mentioned was passed in the 1998 
amendments of the Higher Education Act, expanding the time from 
180 days to 270 days that the lenders have. That has also been 
proving very successful for us, and we've implemented that over 
about the last 18 months, so those two tools are building on 
all of the other tools.
    Mr. Ose. So the one effort has generated $100 million?
    Mr. Hansen. Correct, in just this fiscal year.
    Mr. Ose. And then the extension of time from 180 to 270 
days, this resulted in what?
    Mr. Hansen. I don't have the number. It has reduced the 
default rate, but it is kind of one of those things where 
it's--we can't really quantify it because it is a number that 
we know that lenders are--our overall default rate has come 
down this last year from about 6.9 percent to 5.6 percent, so 
that's where we're seeing those activities, with the overall 
default rate coming down.
    Mr. Ose. Dr. Mackay, how about over at VA?
    Mr. Mackay. We have a Debt Management Center which 
functions as an enterprise, part of an enterprise fund, and so 
it has a service ethic, and starting over 10 years ago, in 
1991, actually, or 10 years ago, it has been making use of a 
pretty full panoply of tools, from an automated collection 
system, as I mentioned in my testimony, to automated payment 
processing. It has a professional staff, benefit offset, 
Federal salary offset, the use of cavers and----
    Mr. Ose. The question I really have, though, is: Is it 
working? I mean, is it actually working in terms of collecting 
these delinquent debts? Are these steps that VA has taken----
    Mr. Mackay. No, these--this is an actual functioning, up-
and-running center----
    Mr. Ose. OK.
    Mr. Mackay [continuing]. In St. Paul, MN.
    Where we have some difficulty or where we have some 
issues--and it was highlighted in a recent GAO report--is with 
respect to third-party health insurance payments, where we have 
a--it's a quasi-medical, legal and administrative process where 
these medical services are performed for veterans in our 
medical centers. It's non-service-connected conditions and we 
have recourse through their insurance program. There we have 
some----
    Mr. Ose. Your earlier comment was that you had $1.1 million 
[sic] outstanding from that particular function, of which you 
were collecting about 1 percent.
    Mr. Mackay. No, that's first-party payment, and that was a 
pilot program that we had in order to try to cross-service that 
a bit.
    Mr. Ose. OK.
    Mr. Mackay. This is about $545 million that's owed to our 
medical care collection fund. That's the gross amount.
    Mr. Ose. Is this of a subvention nature, or is it just a 
direct copayment kind of thing?
    Mr. Mackay. No, it's of a subvention nature. This is 
recourse against a health insurer. And there we have had some 
performance issues, some management issues, several of which 
were highlighted in a recent GAO study. We have a decentralized 
system where each individual medical center, because of 
familiarity with the patient records and the case, is a billing 
entity. We need to centralize that. We need to improve markedly 
our billing times, documentation, coding, and billing, and we 
also need to emphasize net collection. Many times, with respect 
to third-party payments like this, the gross amount needs to be 
tempered with how much is possible and how much you would 
expend in pursuit of realizing certain net collections, so that 
is an area where we are attacking.
    I feel like--and I think the record bears out--that we have 
availed ourselves of just about all of the methods and tools 
that are available to go after debt that's associated with our 
benefit payments, the entitlements that the Veterans Benefits 
Administration puts out--compensation of pension, direct home 
loans, loan guarantee. Where we have issues, where we need to 
improve our debt collection and we have not organized ourselves 
to go after it in a coordinated way, is in the healthcare side.
    Mr. Ose. On that----
    Mr. Mackay. Both with respect to first party, and 
especially with third-party payors.
    Mr. Ose. On that $545 million third-party issue, how much 
was it last year?
    Mr. Mackay. I'd have to----
    Mr. Ose. My real question is: Is the number growing or is 
it shrinking?
    Mr. Mackay. Well, we had an accounting adjustment that 
makes the figures year-to-year hard to compare, but it is 
fairly stable.
    Mr. Ose. You don't know, do you, whether it's going up or 
down?
    Mr. Mackay. No. It's fairly stable from this year to last 
year. There was an accounting----
    Mr. Ose. What does ``fairly stable'' mean?
    Mr. Mackay [continuing]. Adjustment 2 years ago.
    Mr. Ose. Does that mean----
    Mr. Mackay. It means it's about a half a million--it's 
about a half a billion dollars, Congressman.
    Mr. Ose. And it's staying at that level?
    Mr. Mackay. The gross collections.
    One of the things to understand is these are--each one is a 
case.
    Mr. Ose. I understand.
    Mr. Mackay. You come in. You have medical care. There are 
issues of coding. There are issues of----
    Mr. Ose. I actually worked on insurance. I was on a board 
of directors of an insurance company.
    Mr. Mackay. OK. Well then you understand that----
    Mr. Ose. Right.
    Mr. Mackay. Yes, the better figure would be net 
collections, and no, we don't have a good idea of what our net 
collections will be of that $545 million in gross outstanding 
debt.
    Mr. Ose. So we don't know whether we're improving or static 
or going backward in terms of the overall backlog, if you will.
    Mr. Mackay. If you would allow me, I'd have to submit 
something that would be----
    Mr. Ose. All right. That would be fine.
    Mr. Mackay [continuing]. More detailed.
    Mr. Ose. That would be fine. I would appreciate that. That 
would be helpful to me.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] 81549.070
    
    [GRAPHIC] [TIFF OMITTED] 81549.071
    
    [GRAPHIC] [TIFF OMITTED] 81549.072
    
    Mr. Ose. Mr. Engel and Mr. Gregg, we're not ignoring you. I 
just had some questions I wanted to ask your--before I come to 
you, I do have one more for Mr. Hansen. That is--the higher 
education limits in 1998 provided the Education Department the 
ability to verify with IRS income information submitted by 
applicants for student assistance, and the question--what we're 
trying to do is make sure that they were eligible. However, 
we're not aware on this side of the dias that this provision 
has yet been implemented, largely due to a variety of legal or 
practical issues. What progress has the Department made in 
resolving this?
    Mr. Hansen. Mr. Chairman, this is an important tool for us. 
We've included it in our management plan that we released to 
the Congress. We'll be talking about it again in a couple of 
weeks. It was also referenced in the President's budget that 
was submitted in April for fiscal year 2002. We have been 
working with Treasury on this issue, and we've agreed to 
conduct some statistical study of tax filers in the year 2002. 
This is--there are reporting requirements on it, a document 
called the FAFSA--it's the Federal Aid for Financial Student 
Aid. This is what 20 million student aid applicants have to 
fill out every year for a Pell Grant or student loan.
    Mr. Ose. You're the guy that came up with that?
    Mr. Hansen. We're trying to improve it. I've got six kids, 
myself. We're trying to improve it. But one of the most 
important pieces of this is there are income questions on the 
FAFSA that are supposed to be pulled right off of the IRS in 
terms of income, and so what we're trying to do is to, in the 
aggregate, to do some data matches to see if this will be a 
helpful tool for us or not. I think in our preliminary 
suggestions they're telling us that it will be a helpful tool 
for us, and GAO has been working with us, as well, on this 
issue.
    Mr. Ose. Is it GAO that sets that up, or are you more 
working with the Department of Treasury and the IRS?
    Mr. Hansen. We're working with Treasury, but GAO has 
pointed out that this can be a helpful tool for us. And, in 
fact, we are going to pilot eight schools in fiscal year 2002/
2003, and those eight schools have been identified, and so 
we'll hopefully have some information at the end of this school 
year to share with the subcommittee.
    Mr. Ose. All right. Of the 20 million students who are 
involved in the loan program at those eight schools, how many 
are involved?
    Mr. Hansen. I would have to get that information to you.
    Mr. Ose. Mr. Gregg, how about it? Is that--I mean, over at 
Treasury--you're at Treasury, right?
    Mr. Gregg. Yes.
    Mr. Ose. You're Treasury. Is that going to be a useful 
tool?
    Mr. Gregg. Well, they're working primarily with IRS on 
that, not FMS.
    Mr. Ose. Not Financial Management. OK.
    Mr. Gregg. But I think it will be another step in the right 
direction.
    Mr. Ose. Mr. Engel, you're over at GAO. What do you think?
    Mr. Engel. I'm not familiar with that particular 
recommendation, but it sounds like that would be an effective 
tool.
    Mr. Ose. One question that I do have that just stands up 
and screams to be asked, so I'm going to ask it. In terms of 
your portfolios, there's so much that you write off every year. 
I mean, it's uncollectible, period. When the agencies make that 
determination, do you report that relief of debt or that 
extinguishment of debt to the IRS for tax purposes?
    Mr. Hansen. We do, but we--sometimes we'll even hold debt 
for as long as 15 years because of these tools that we have 
available to us with the IRS offset, with wage garnishment, but 
if and when the point comes that we cannot do anything further 
with that debt, that is our last recourse, and that is to turn 
it over to the IRS so it is then deemed as taxable income on 
that person's tax form.
    Mr. Ose. In the Education Department, how many such 
situations have been finalized?
    Mr. Hansen. I'll have to get that for the record, Mr. 
Chairman. It's not a large number, because we really try to do 
everything on the front end, as you asked previously, so that 
we don't get to that point, but I'll get the number to you for 
the record.
    Mr. Ose. The reason I asked the question is that if you are 
15 years into a borrowing, there's a certain timeline that 
drags on your tax returns. I don't have to keep mine longer 
than, I think, 7 years, even though I've got a mini storage 
full of them, but at some point or another we've kind of lost 
the statute of limitations on some of this stuff. Is that the 
case? I see people behind you shaking their heads.
    Mr. Hansen. There is no statute of limitations for these.
    Mr. Ose. OK. And so we get our--we actually get the 
referral over at IRS, and then IRS is free to go ahead and----
    Mr. Hansen. Correct.
    Mr. Ose [continuing]. Amend somebody's return accordingly?
    Mr. Hansen. Right.
    Mr. Ose. OK. Is that the case over at VA, also?
    Mr. Mackay. Yes, sir. We use a very similar methodology to 
write off debt--refer to IRS, and they'll issue a 1099. And, of 
course, in cases where the debtor--we have evidence that the 
debtor is deceased or the debt is cleared in bankruptcy, 
obviously we write-it-off at that point.
    Mr. Ose. Can you discharge income tax liability through a 
bankruptcy? Does anybody know the answer to that question?
    Mr. Mackay. No, I don't know.
    Mr. Ose. Well, we'll find out. We'll find the answer out to 
that question. All right.
    Commissioner Gregg, if you would, what more do you think 
FMS can do to get agencies to comply with the Debt Collection 
Act requirements, particularly the referral requirement? My 
concern here is the timely referral of delinquent debts to you 
so that you guys can move forward accordingly. How do we make 
that move or operate more smoothly?
    Mr. Gregg. Mr. Chairman, I think the--step back just for a 
minute. The first couple of years after DCIA was passed was--
not a lot of progress was made. I think in the last year to 2 
years pretty good progress was made for most of the 
departments, and what we've done is sat down with each of the 
large CFO agencies and worked with them to set up a goal, and 
that was arrived at jointly, and then to have them work to 
reach that goal. And I think, both in the case of--for example, 
VA has come a long way since just a year-and-a-half ago, and it 
was a cooperative effort, the same with HHS and some others.
    So I think one of the things is the constant kind of 
working together. I think the periodic oversight hearings that 
we have has also helped. It has kept this on the forefront. So 
those would be the things that I think just keeping at it, from 
my perspective, because when we look at the referrals from a 
few years ago to what we have today, especially in the cross-
servicing, they have improved quite dramatically.
    Mr. Ose. So are we making--are we getting closer to the 
180-day timeline, or----
    Mr. Gregg. That's really another question. I think one of 
the things that happened when DCIA was passed was that in the 
earlier referrals to us, both in TOP and cross-servicing, was 
that agencies were cleaning out their closets, and we got some 
real dregs, and we spent a fair amount of effort to work with 
our private collection agency to weed a lot of that debt out. 
In some cases the documentation wasn't there. In other cases it 
was just so old that the--despite all the tools that we have, 
the collection rates were not great.
    For cross-servicing, I think 60 percent of the debt right 
now is between 4 and 11 years old, and so that makes it very 
difficult to collect----
    Mr. Ose. Four and 11 years old, or 4 to 11 years 
delinquent?
    Mr. Gregg. Four to 11 years delinquent.
    Mr. Ose. Now you understand why I'm interested in the 180-
day referral.
    Mr. Gregg. And as we get--for example, right now we're 
getting, I think, 91 percent of the eligible debt referred to 
us for TOP and about 71 percent referred to us for cross-
servicing. As that continues and as we get higher and higher 
percentages, then the age of the delinquent debt should 
decrease, and therefore increase the chances of collection.
    Mr. Ose. From a comparative standpoint, let's say the Bank 
of Walnut Creek had a delinquent debt, how long would it be 
before they refer it to collection?
    Mr. Gregg. I'm sorry. I didn't----
    Mr. Ose. Let's say a private bank--pick one. I mean, I 
don't care which one you pick. How long would it be before they 
refer it to their collection department?
    Mr. Gregg. I don't know, but I expect not very long.
    Mr. Ose. Would it be 180 days?
    Mr. Gregg. Probably sooner than that, but I think at least 
within 180 days after delinquent they would have it there.
    Mr. Gregg. Well, what our analysis shows is that the 
agencies are referring less than 10 percent of their debt by 
the 180-day deadline--excuse me, less than 10 percent of their 
delinquent debt by the 180-day deadline, and I'm trying to 
figure out, if we can't get it identified and referred, we're 
just going to have more and more in the 4 to 11-year category.
    Mr. Gregg. I think that as the percentages continue to 
increase and we keep raising the bar each year with the 
agencies, then actually the age of the referrals will decline, 
as well. I can't guarantee that, but we certainly believe that 
will be the case. And I think the--from Treasury's perspective, 
for example, in the case of Education, they do a very good job, 
and what we would like is at the end of--after debt is 180 days 
delinquent, give it to us right away so then we have greater 
opportunities, either from our cross-servicing operation or for 
our offset, to get that collected, and that we continue to 
stress that and to work toward that.
    Mr. Ose. Do you have any information about how delinquent 
debt is valued as time goes by? For instance, a 30-day 
delinquent debt is worth $0.97 on the dollar, or 60-day 
delinquent debt is worth $0.92 on the dollar, just 
statistically?
    Mr. Gregg. I don't have that. I think it really depends on 
the portfolio so much that I wouldn't venture a guess.
    I think, for example, in the case of Department of 
Education, you could actually make a case that, at least for 
some period of time, the collection rate increases because the 
students get to a position where they actually have money 
coming in.
    Mr. Ose. That's a good thing, by the way.
    Mr. Gregg. Yes. I know that first-hand. In other portfolios 
I think that's not the case. So we did a study a number of 
years ago, or had PricewaterhouseCoopers do a study for us that 
looked at the collectability--didn't answer your specifically, 
but looked at the collectability of debt based on the age, and 
I can provide a copy of that for you for the record, but----
    Mr. Ose. What were the conclusions? Do you recall?
    Mr. Gregg. I forget exactly, but it was--I think with the 
age of the debt, the average age of the debt, the collection 
rate of 2 or 3 percent--my memory is it was within the bounds 
of what they found in the private sector, but that was, like, 3 
years ago and my memory is a little bit vague on that, but I 
can provide that for the record. But it was low. And actually I 
think we have been exceeding that rate for the last several 
years.
    Mr. Ose. But the agencies are still only referring 10 
percent of the delinquent debt within the existing 180-day 
timeline?
    Mr. Gregg. I don't have that number right in front of me, 
but I do know that it is something that we need to improve and 
our collection rate would improve, as well.
    Mr. Ose. All right.
    Now, in terms of the referrals, is the 180-day timeline 
unrealistic in terms of referrals?
    Mr. Gregg. No, sir, I don't think it is. I think one of the 
issues that we had when DCIA was passed was that for many 
departments, not all, but for many departments debt collection 
was not a high priority, and just getting good data on what was 
in the portfolios, whether or not the records really supported 
the collection of debt, whether or not they had sufficient 
records, I think there was--and there still is going on, to 
some extent, a major cleanup. But I don't think that the 180 
days is unrealistic after delinquent debt.
    Mr. Ose. Now, one agency refers debts to Treasury--and I'm 
sorry I don't have the name of the agency--oh, our friend Mr. 
Moseley. OK. One agency refers debts to Treasury once a year. I 
mean, clearly that's not compliant with the Debt Collection 
Act, so we will visit with Mr. Moseley about that.
    Mr. Engel. I have a little bit of information on those 
figures that you were looking for.
    Mr. Ose. Mr. Engel.
    Mr. Engel. Based upon a study that we had done last year 
and some statistics that were out in the industry, I believe 
the typical collection for 30 days delinquent is about 50 
percent. Now, these are rough averages. When you get up to 300 
days, it's about 20 percent. And then when you start getting 
out past a year, 400, it's more about 5 percent. It 
significantly goes down after about a year's worth of 
delinquency.
    Mr. Ose. So you lose--after 30 days you start losing about 
3 percent a month in terms of value?
    Mr. Engel. That's about right.
    Mr. Ose. And that's off the face amount of the debt?
    Mr. Engel. Right. That would be off of the face amount.
    Mr. Ose. All right.
    Mr. Gregg. Mr. Chairman, one other point on that--it was 
just handed to me--we are working with OMB to provide 
information for each department on the referral and the age of 
the debt, and that's going to be taken up by the President's 
Management Council in the near future. We are pulling together 
information agency by agency.
    Mr. Ose. All right.
    Now, Mr. Engel, you made a comment that the agencies that 
you've reviewed have not given a high priority to implementing 
the Debt Collection Improvement Act provisions. What can be 
done, either on our side of the dias or yours, to encourage 
these agencies to give this debt collection a higher priority? 
And I'll tell you what my concern here is. It is if these 
programs don't work ultimately the taxpayers are going to say, 
``Stop the program,'' and I don't want to get to that point, so 
how do we implement this stuff?
    Mr. Engel. Well, I think Mr. Gregg had mentioned a couple 
things. These hearings such as this do provide an opportunity 
for oversight and to put a little pressure on these agencies.
    Another thing, though, that should be considered is to see 
if we could identify some leading agencies that are doing an 
effective job, either whether they are primarily following the 
act's tools and using the act's tools, they've got a high 
percentage of amounts that are promptly being referred over for 
collection----
    Mr. Ose. So you figure out their template and then you take 
it over to another agency?
    Mr. Engel. Basically I'm looking for establishing best 
practices that could then be used by the agencies that are 
having a little more difficulty. Hold them accountable to meet 
those best practices that come in through hearings such as this 
to monitor the progress that they're doing.
    Mr. Ose. What's the status of your best practice study?
    Mr. Engel. We haven't started one yet, but it may be 
difficult at this point to identify who those leading agencies 
are, but I think in some cases some of the members here--
Education in some areas I think does a good job.
    One thing that I wanted to point out as it relates to a lot 
of the percentages that we've heard today being thrown around, 
while I certainly think that the agencies should be commended 
on bringing those percentages up, which we've seen for the most 
part most of them have done, and Government-wide the same 
thing, I think we do have to sit back and put in perspective we 
are into the--past the 5th year of this act's implementation, 
and really the act calls for, after 180 days, for anything that 
you've labeled as eligible, which what we're talking about on 
these percentages has already been determined to be eligible, 
that those should all be sent over 100 percent. So 90-some 
percent is commendable, but when you're setting goals we really 
should be establishing goals that are making you compliant with 
the act.
    Mr. Ose. Thank you.
    Mrs. Maloney for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman. I really wish that 
Mr. Horn was here so that I could thank him. Together we 
authored the Debt Collection Improvement Act of 1996, and I'm 
greatly interested in the topic. This common-sense bill 
centralizes the Federal debt collection at the Department of 
Treasury and gave all agencies the tools needed to collect 
billions of dollars in delinquent non-tax debt.
    We are told now that agencies are breaking the law. Of the 
27 agencies surveyed by the subcommittee, not 1 is complying 
with the act's basic requirements for referring 180-day 
delinquent debt to the Treasury Department, and I find this 
truly troubling.
    I do applaud the progress that has been made. During fiscal 
year 2000 the Federal Government as a whole collected $22.5 
billion in non-tax delinquent debt, which represents a $5.2 
billion increase over fiscal year 1999. However, delinquent 
fines and past-due other debts to the U.S. Government are still 
not being collected. Of the $31 billion in debt eligible for 
the administrative offset program, only $22.5 billion or 72 
percent has been referred for offset, and this is C-minus work.
    The Debt Collection Improvement Act gave agencies the tools 
needed to clamp down on people who owe the Government money. In 
this time of fiscal uncertainty, C-minus work is unacceptable. 
The Federal Government must continue to aggressively improve 
its debt collection efforts.
    I understand one of the questions that Mr. Ose asked 
earlier is: How does the public sector compare to the private 
sector in debt collection? And that is that we just don't move 
as fast.
    Just from the testimony of Mr. Engel that I just heard, 
that as each day goes by the opportunity to collect becomes 
more difficult, so really the 180-day referral should be, you 
know, enacted. They should respond to it, because that 
increases the likelihood that we can collect it.
    [The prepared statement of Hon. Carolyn B. Maloney 
follows:]
[GRAPHIC] [TIFF OMITTED] 81549.073

    Mrs. Maloney. What can we do to get the agencies to send it 
over after 180 days? It's the law. They're just not doing it. 
So I'd like to know any ideas that you have.
    I am seriously considering introducing a bill that would 
add performance standards so that we could monitor this more 
carefully and possibly, you know, force agencies to comply. And 
if they didn't comply--let me just ask, are there any agencies 
here--GAO's here, right?
    Mr. Engel. Yes.
    Mrs. Maloney. Are all of you GAO?
    Mr. Engel. No.
    Mrs. Maloney. OK. Who is GAO?
    Mr. Engel. I am.
    Mrs. Maloney. OK. Mr. Engel, would your agency comply with 
the law if we were to deduct 5 or 10 percent from the 
Secretary's or executive level staff's salaries if improvements 
in debt collection practices were not made? I mean, how do we 
get people to comply with the law? Do we have to, you know, 
come in with some type of incentive or disincentive or sanction 
almost if they don't comply? What are your ideas on how we get 
them to comply? Do you think that a performance standards bill 
would help? What are your ideas?
    Mr. Engel. I think establishing goals and performance 
standards to monitor would probably be a step in the right 
direction.
    One of the problems that the agencies have faced--and we 
heard that from several of the witnesses here today--have been 
problems with systems, the inability of their systems to be 
able to capture the information, to allow it to refer over. 
Some of the agencies that we had performed work at, when the 
systems were developed they had not been developed to be 
compliant with DCIA.
    But, again, we're several years into this act by now. I 
think those systems type problems hopefully should be addressed 
by this point, but that could be one area where, again, as I 
was speaking--I think when you were coming in--where we were 
talking about establishing leading agencies. Maybe there are 
some agencies that have gone through the development stage of 
improving their systems to be DCIA complaint that could assist 
some others that are experiencing the problems.
    Mrs. Maloney. Anyone else like to comment? I mean, you said 
we should have goals and standards. We already to. The bill 
says 180 days, and your testimony said that after 180 days the 
degree or probability of collecting it becomes less and less 
and less, so the 180-day deadline is important. So if they 
don't have systems, what about letting them keep part of the 
money they collect? I mean, how can we get people to comply 
with the law, to, you know, run government like a business?
    Mr. Gregg. Mrs. Maloney----
    Mrs. Maloney. I'm sounding like a Republican up here, Mr. 
Ose, but, I mean----
    Mr. Ose. We'll take you. We'll take you. [Laughter.]
    Mr. Gregg. I have a----
    Mrs. Maloney. But, you know, it seems to me like a simple 
thing. Somebody owes you money. I just know in the private 
sector when I owe somebody money they're on the phone. They 
don't even wait 180 days. Within a week they're after you. So, 
I mean, why don't we get a little more aggressive about it? And 
I thought we had standards in the bill, anyway.
    Any thoughts by anybody?
    Mr. Gregg. Mrs. Maloney, Dick Gregg from Treasury. I think 
a couple of things come to mind. One is that the--part of it is 
not only in terms of referring to us, but actually taking 
ownership of the debt. In the case of HHS and child support you 
have a real strong advocate there for debt collection because 
they can see where the money is going, which is kind of an 
interesting thing. I'm not saying that others--I think 
Education does an excellent job. But part of it is 
decentralized agencies without that same fervor for collection, 
and then referral.
    I think the idea that having some kind of clear and 
positive incentives for agencies that do well, that would be, 
like, one measure. I'm not sure what it would be, but it 
could--something that would actually get back to the parts of 
the agencies that do this work and not have OMB cut the rest of 
their budget if they get that award.
    I think, to me, that is just something that would actually 
help and be a positive incentive, because my own view is that 
agencies are, in fact, trying. Most of them are trying. But 
sometimes they are hampered by systems and just other 
priorities that get in the way, so I would personally favor 
some kind of a clear, positive incentive.
    Mrs. Maloney. Yes. Any other comments?
    Mr. Ose. The gentlelady's time----
    Mr. Engel. I'll just point out one other thing. You know, 
the 180 days is what the law is saying you are required to send 
over those debts to Treasury to use some of these other tools, 
but you can send debts over prior to that. Debts could be sent 
over to use for tax refund offset, Administrative Wage 
Garnishment, which is one of the things we talked about today, 
could be used. None of the nine major agencies we surveyed was 
using that. So there are other tools that I think right now the 
agencies are not utilizing which they could be utilizing prior 
to even the 180-day delinquency period.
    Mrs. Maloney. Could I do a followup question? You know, but 
what we're seeing is that they're not--forget the prior. We're 
seeing they're not making the 180 day.
    Mr. Gregg, you came up with the idea of letting agencies 
keep part of what they collect for a goal that they think is 
important. Would you leave that up to the agency to come up 
with what the goal is, or would you have Congress dictate that, 
you know, Education goes into more student loans, or whatever, 
you know? Or would you--what are your thoughts on it? And then 
I yield back quickly to Mr. Ose, because I think it is a very 
important point that he raised.
    Mr. Ose. If the gentlelady will yield, there is a provision 
in the act for gain sharing in terms of recovery, and Mr. 
Gregg, if you'd like to expand upon that.
    Mrs. Maloney. Yes.
    Mr. Gregg. Yes. Actually, that's what I had in mind is to 
effectively use the gain sharing and to do--and have it 
administered. I think the responsibility there is with OMB--and 
to do that in a way that maybe sets one standard. It may be it 
can be as clear as any agency that meets the 100 percent goal 
of referring all debts within 180 days of being delinquent 
would be entitled to 5 percent of the debt that's--well, 5 
percent of what has been collected or some measure of that.
    But I think that the authority is there and just, from my 
understanding--and it's not a real thorough understanding--is 
that in some cases where it has been used and OMB gave it with 
one hand and took it away with the other, so it didn't feel 
very good for the agency.
    Mrs. Maloney. OK. I hear you. Thank you.
    Mr. Ose. Mr. Gregg, in terms of that gain sharing 
authority, have any agencies attempted or perfected 
implementing that?
    Mr. Gregg. It is my understanding that SBA had some success 
with that for debt write-off, and that was a couple years ago. 
I don't--it's also my understanding that recently no--there 
hasn't been any success in using that with OMB, again, except 
for--well, in cases when it has been used, it was--end up 
reducing their regular appropriation by the same amount, but I 
can get more information on that and report back to you.
    Mr. Ose. But SBA, you're indicating, had or has a template 
or a program that they attempted to implement?
    Mr. Gregg. Yes, I believe that they had, and that was a 
year or 2 years ago where they got some funding that I don't 
think was offset by OMB. They got some funding for the write-
off.
    Mr. Ose. Would you please forward that to us?
    Mr. Gregg. Yes.
    Mr. Ose. Track that down and forward that to us?
    Mr. Gregg. Yes, sir.
    Mr. Ose. I would appreciate that.
    I want to go back to a--we've been talking about, frankly, 
debt under the act that is considered eligible for referral. We 
have not yet talked about debt under the act which is excluded. 
One of the questions I have is whether or not the determination 
of exclusion is being properly applied. Mr. Engel, do you have 
any--has the--you guys made some recommendations about 
verifying the manner in which exclusions were made. Have your 
recommendations been implemented? Is the exclusion provision 
being properly applied? If not, how are we doing on it?
    Mr. Engel. OK. First off, yes, we did make some 
recommendations relating to verifying the validity of the 
information for exclusions being reported by the agencies. FMS 
has taken some steps. One thing they did was, on the agency's 
Treasury report on receivables beginning, I believe it was with 
fiscal year 2000, agencies are now--the CFO or an equivalent 
has to certify that the information in that report is accurate 
and complete. Now, that includes the exclusion amounts and the 
amounts reported eligible for referral.
    We still believe, though, too--and we had a recommendation 
we made last year and OMB and Treasury I believe are in process 
of looking at this--that OMB and Treasury work together to try 
to get the inspector generals to perform some level of 
independent verification of these exclusion amounts, whether it 
be part of their financial audits or some other process, 
because the significance of the amounts that are being excluded 
are, you know, a major portion of the debt that is outstanding.
    Now, in addition, this year, performing work for the 
subcommittee at the selected agencies, we went in to try to 
establish and do some testing of our own to see if agencies 
were having accurate reporting of their exclusions. At one 
agency, RHS, we could not perform that testing because they did 
not maintain the supporting documentation----
    Mr. Ose. For the record, ``RHS'' is Rural Housing Service.
    Mr. Engel. Rural Housing Service. I'm sorry.
    Mr. Ose. Right.
    Mr. Engel. They did not maintain the supporting 
documentation for the exclusions that they had reported on the 
9/30/2000 report.
    At the Farm Service Agency we were able to go in and, for 
several of the major exclusion categories--bankruptcies, 
foreclosures--we had actually performed a statistical test of 
four States that we had selected, the exclusion amounts that 
had been reported, and found at about a 50 percent error rate 
in the exclusions that were being reported. Many of these 
involved bankruptcies where the bankruptcy had already been 
discharged, in some cases years ago, so those receivables 
shouldn't even have been reported as a receivable and 
exclusion. They shouldn't have even been in the amount.
    We also found ones, though, that were going the other way 
where there were bankruptcies that were dismissed, and in that 
case those should now be eligible debts and should be being 
referred over to the Treasury.
    Mr. Ose. In other words, a borrower had filed a Chapter 11 
or 13 or 7 or something, and the court had said, ``This is an 
inappropriate filing,'' and refused to certify?
    Mr. Engel. Yes.
    Mr. Ose. OK.
    Mr. Engel. The bankruptcy was being dismissed.
    Mr. Ose. Thank you.
    Mr. Engel. We also found foreclosures that had either gone 
through the foreclosure period and were no longer foreclosures 
but were still being shown as an exclusion for foreclosure.
    Our conclusion was there are concerns we have with the 
accuracy of the information being reported as exclusions by the 
agencies. While we did not perform a specific test over at the 
Center for Medicare and Medicaid because the HHS IG is in the 
process of completing a report which was going to cover work in 
that area, we did identify also over there some instances where 
exclusions were inaccurately reported. We found, again, 
dismissed bankruptcies that should have been not reported as 
exclusions any more.
    So we do have the concerns that we had raised last year. We 
believe there should be some level of independent verification 
performed to get a better idea as to how accurate this 
information that's coming over on these Treasury Report on 
Receivables is, given the significance of the amounts that are 
being excluded.
    Mr. Ose. Your sample size in these agencies--for instance, 
at HHS--was how big?
    Mr. Engel. At HHS, at the--not HHS. It was the Farm Service 
Agency, and it was 15 counties out of 123 counties, and we 
pulled a statistical sample of cases which totaled 263 cases, 
and concluded about a 50 percent error rate.
    Mr. Ose. Just a minute. We're getting organized here. All 
right. So you had about a 50 percent error rate on that 
particular sample. Is there any reason to think that the 
sample, itself, was reflective of the general portfolio?
    Mr. Engel. We feel it certainly is representative of the 
four States that we had selected.
    Mr. Ose. Which four States?
    Mr. Engel. Let's see--California, Texas, Louisiana, and 
Oklahoma.
    Mr. Ose. All right. Mr. Chairman, I'm going to venture in 
an area I might not ought to--that's proper English. But the 
people who are responsible for creating those portfolios, are 
they still in those agencies?
    Mr. Engel. Responsible for----
    Mr. Ose. I mean, if we've got a 50 percent error rate in 
their portfolio, are the people making the decisions on the 
exclusions still making the decisions on the exclusions?
    Mr. Engel. As far as I know.
    Mr. Ose. What were the States? California?
    Mr. Engel. California, Texas, Oklahoma, and Louisiana.
    Mr. Ose. And this is the Farm Service Agency?
    Mr. Engel. Yes.
    Mr. Ose. There is another item here in the report that was 
prepared by committee staff, question No. 9 of the survey, 
``Does your agency have a process for barring delinquent 
debtors from receiving further Government assistance?'' Three 
agencies responded no. Which agencies are those?
    Mr. Engel. That was not our survey. I'm not sure.
    Mr. Ose. Do we know the answer to that?
    Male Voice. Yes.
    Mr. Ose. All right.
    Thank you, Mr. Chairman.
    Mr. Chairman, if I might continue?
    Mr. Horn [resuming Chair]. Absolutely.
    Mr. Ose. Staff has indicated to me that the three agencies 
that do not bar delinquent debtors from further Government 
assistance are the Railroad Retirement Board, the Securities 
Exchange Commission, and the Social Security Administration. Do 
you have any information on the management practices dealing 
with delinquent debt at those three agencies?
    Mr. Engel. No, I don't. We did not look at those as part of 
this review.
    Mr. Ose. How might we go about establishing for these three 
agencies an effective means of offset so that other Federal 
agencies aren't extending assistance to delinquent debtors at 
these three agencies?
    Mr. Engel. If I understood the question that was asked, it 
was are they supplying the information that's necessary for 
other agencies when they are making loans to----
    Mr. Ose. That would be the first step.
    Mr. Engel. Right.
    Mr. Ose. I would agree. How do you get that information 
disseminated to the other agencies?
    Mr. Engel. Well, under the act there are several sources 
that agencies can use. There's the credit bureau reports that 
that information should be referred to. I don't know those 
particular agencies whether there's some particular exclusion 
that would say they could not refer. I don't know of any, but 
the credit bureau reports, HUD's--the Housing and Urban 
Development has a system called ``cavers'' that also agencies 
can report into and lending agencies can look at to see if 
there's delinquent debts. And then another source will be here 
soon in the future, Treasury's Offset Program. They're going to 
have a debtor bar provision program which agencies will be able 
to go into and utilize to determine whether there is delinquent 
debts for someone that they're----
    Mr. Ose. On Treasury's debtor bar program, you say it is 
going to be?
    Mr. Engel. Yes.
    Mr. Ose. What does that mean?
    Mr. Gregg. We'll implement that next year.
    Mr. Ose. When?
    Mr. Engel. I don't have the----
    Mr. Ose. January or December?
    Mr. Gregg. Probably toward the end of the year.
    Mr. Ose. So we're talking about December 2002 for the 
Treasury to implement a debtor bar system.
    Mr. Gregg. The fourth quarter of the fiscal year.
    Mr. Ose. All right. So that would be what? I mean, I 
don't--I know calendar years, and I haven't yet made the 
adjustment to the Federal fiscal year. Tell me what month.
    Mr. Gregg. July and August, in that timeframe, September 
maybe at the latest.
    Mr. Ose. OK.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you very much, Mr. Ose, for conducting this 
hearing.
    I'd just like to know one or two things to the panel. Is 
some of the problems that other agencies have is not just not 
maybe knowing about the Debt Collection Act, but having their 
financial systems that don't seem to work? And should we have a 
basic software on how that's handled? And perhaps the financial 
management situation, you could do that. What do you think, Mr. 
Gregg? Should we get that kind of software that will--you know, 
you can move it over to your area, in particular? What can we 
do to improve that?
    Mr. Gregg. The complexity of the debt and the debt 
portfolios that are out there and the--not only the Debt 
Collection Improvement Act, but also dealing with tax levy and 
offsetting State tax, there's a lot of complexity, and I 
would--I think the interfaces, the automated interfaces that we 
have and that we continue to improve between us and the 
agencies actually allows them for the fairly easy transfer of 
debts to us.
    I don't think, you know, from getting debts to us, I don't 
think that's a major problem. It's the old mainframe 
applications that every agency or many agencies have, and 
they're trying to upgrade those and the difficulty of how much 
data is there, how flexible they are. I think that's a whole 
different area, and agencies are--including Treasury are all 
over the map on that and just how good information they have to 
figure out the age of the debt and manage it properly.
    Mr. Horn. When Mr. Ruben was Secretary of the Treasury, he 
took quite a feeling for this situation and urged the others in 
the administration to move that debt over to your fine 
operation. Have you had an opportunity with Secretary O'Neill 
to perhaps do the same thing with a letter from the Secretary 
of the Treasury? He's in pretty good stead with the President 
of the United States, and it wouldn't take much to move that 
debt over.
    Mr. Gregg. We haven't done that yet, but I think, having 
talked to Secretary O'Neill about some of the impediments that 
we have kind of generally within FMS, when we talked about some 
of the things we could do in debt collection, I think that 
would be something that he would be interested in doing.
    Mr. Horn. I think all of us in Congress would be 
interested. We thought we had a surplus going around here, and 
your collection of debt might help us a lot, and so I would 
think most Members of Congress who have, I don't know, 50 
different projects they want to do, they will--should help us 
on this debt collection bit, or at least should not whine a 
lot. And where it sits out sometimes in agencies--and I 
understand that, and when I see students that can't quite get 
the loans back and farmers that lose the farm--I grew up on a 
farm, and I don't like to see that happen, but it happens, and 
the law is the law, so we need to move ahead.
    Is there anything else, Mr. Gregg, that we could do to get 
this thing moving a little more?
    Mr. Gregg. As I mentioned when you had to be away, Mr. 
Chairman, looking at it from my perspective, I realize that it 
has been 5 years now since the legislation was passed. At the 
same time, what you had was a pretty dramatic change, and 
regardless of how well or how poorly an agency might be doing 
in debt collection, it was theirs, and the thought of turning 
that over to another agency to handle wasn't the first thing 
that they wanted to do.
    I think there are--that has been dealt with. I think in the 
last couple of years we've made good progress, and we just need 
to keep raising the bar and, as I mentioned before, maybe 
working with OMB, having some kind of a very high standard and 
give some kind of incentive back to agencies that do an 
excellent job and keep that very simple.
    Maybe one measure that says, ``If you do this, you get X 
percent, and if you don't, then you don't,'' that would be 
something that I would encourage.
    We have----
    Mr. Horn. I thought we had it in the act. Now, is it not in 
there?
    Mr. Gregg. It is in there.
    Mr. Horn. Yes.
    Mr. Gregg. It just hasn't been used very effectively.
    Mr. Horn. Yes, because that at least gives them a few 
percentages, and percentages can have millions, and in some 
cases billions, so that would be very useful. And it was the 
carrot to encourage all of the both independent Cabinet 
officers or the rest would see that it helps them, and 
especially in modernizing their software or hardware and 
computing. And so I would think the Secretary, in putting out a 
letter or something, might well underline that because it's 
just like reprogramming at the end of the year. There's a lot 
of things that always need to be done in an agency, and using 
some of that money, and that's how we got through the Y2K thing 
years ago, because the director of the budget and I agreed that 
you should--first, let's not sit around here for a year waiting 
to go through our processes, not alone OMB processes, but just 
getting the job done. And so I'm glad to know you have picked 
up on that percentage, because that would help.
    Mr. Gregg. Yes, sir.
    Mr. Horn. Is there anything any of you would like to make 
for the record that hasn't been asked, although I know we've 
kept you a lot this morning? Anything you want to comment? This 
is your chance? OK, Mr. Mackay, anything you want to add to 
this dialog?
    Mr. Mackay. No, sir, Mr. Chairman. I just appreciate the 
opportunity to come before the committee today. We at VA have 
worked very closely with Treasury, and I think that's reflected 
in our improvement over the last several years, and we intend 
to continue that track record.
    Mr. Horn. I must say I mentioned some of the other 
Secretaries that you worked for. You sure work for a dynamo in 
VA. He's the only one in my 10 years here that picked-up the 
phone and said, ``I have something I'm looking right at for the 
Long Beach veterans,'' about the structure out there on the 
earthquakes and all, and I'm going to sign-off on $15 million, 
I think it was, and that's the first time I ever had a Cabinet 
officer pick-up a phone, but he works, and he works it very 
well.
    Mr. Hansen, what--do you have any things we should know and 
help?
    Mr. Hansen. I do think, in responding to the previous 
conversation, I do think some type of what works or standards 
would be helpful to agencies, because I do know, from just my 
prior history and others, that sometimes agencies do need some 
direction in its activities.
    A lot of the things that I've testified about on what the 
Department has done on the wage garnishment and the IRS offset 
and the debt collection privatization activities were all done 
before any of this, and sometimes agencies may feel that 
they're a little bit at sea without having some overall 
coordination, so I think that would be very helpful to put out 
the best practices, and I think the question of the three 
agencies that weren't aware of this, I think there needs to be 
to put out the best practices and get the agencies' attention.
    There are also a number of things that I think most 
agencies that do in their own respective activities are--ours 
in collecting student loans, for example--this might be 
helpful, as well, for us to put together a what works booklet 
on--we have a very elaborate system of what we go through on 
our due diligence with our lenders, what we do with our 
guarantee agencies, what we do with our servicing companies 
before we even get to those points, so it might be helpful to 
construct that type of a what works document, as well, that 
could even preempt the need to transfer debt over to Treasury.
    Mr. Horn. Well, that's a good recommendation.
    There's a lot of work to be done if we are to be so 
successful in collecting the billions of dollars in delinquent 
debts that are owed to the American taxpayers, and I look 
forward to working with all members of the new administration 
to achieve that important goal, and I think we are going to 
move up the hearings, so we'll keep it moving so that everybody 
and all the ones that aren't here we can get them to come 
aboard the ship.
    I want to thank now the staff that has done this hearing 
today. J. Russell George, staff director and chief counsel, way 
down at the end there; and Bonnie Heald, deputy staff director 
and director of communications; and on my left, your right, 
Henry Wray, professional staff that worked on this one; and 
Mark Johnson, our clerk; and Jim Holmes, our intern; and David 
McMillen, minority professional staff; and Jean Gosa, minority 
clerk; and our court reporter is Mike Willsey. We appreciate 
your work. It is tough to get everybody's name and everything 
they've said right, and you all do it fine.
    So thank you very much. We are adjourned.
    [Whereupon, at 12:01 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
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