Debt Collection: Treasury Faces Challenges in Implementing Its
Cross-Servicing Initiative (Letter Report, 08/04/2000, GAO/AIMD-00-234).

According to Treasury's Financial Management Service (FMS), about 89
percent of the $59.2 billion of debts more than 180 days delinquent were
excluded from cross-servicing for fiscal year 1999. The accuracy and the
completeness of amounts reported by agencies (including exclusions) were
not independently verified. As of April 2000, about $3.7 billion of the
$6.4 billion of eligible debt had been referred for cross-servicing.
Many eligible debts were not promptly referred by the agencies, not
referred at all, or not always eligible for cross-servicing. FMS had
requested written debt referral plans from 22 of the 24 chief financial
officers, but the plans were of limited use because they were
incomprehensive, inaccurate, or incomplete. The FMS staff and some
private collection agency contractors did not always follow established
written standard operating procedures. Collection industry statistics as
well as FMS' collection experience so far have shown that collection
rates are generally higher on debts with smaller dollar balances and
debts that are less delinquent. Cross-servicing fees FMS charged to
agencies referring delinquent debts have not covered FMS' estimated
cross-servicing costs and are not likely to in the near future.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-234
     TITLE:  Debt Collection: Treasury Faces Challenges in Implementing
	     Its Cross-Servicing Initiative
      DATE:  08/04/2000
   SUBJECT:  Debt collection
	     Financial management
	     Interagency relations
	     Debt
	     Government collections

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GAO/AIMD-00-234

Appendix I: Objectives, Scope, and Methodology

12

Appendix II: GAO's June 8, 2000, Testimony

15

Appendix III: Comments From the Financial Management Service

48

CFO Chief Financial Officer

DCIA Debt Collection Improvement Act

FMS Financial Management Service

OMB Office of Management and Budget

PCA private collection agency contractor

PMAC PCA Monitoring and Control

SOP standard operating procedures

Accounting and Information
Management Division

B-285723

August 4, 2000

The Honorable Stephen Horn
Chairman
The Honorable Jim Turner
Ranking Minority Member
Subcommittee on Government Management,
Information and Technology
Committee on Government Reform
House of Representatives

On June 8, 2000, we testified before your subcommittee on the Department of
the Treasury's Financial Management Service's (FMS) implementation of the
cross-servicing provision of the Debt Collection Improvement Act (DCIA) of
1996.1 In our testimony, we reported that for FMS' cross-servicing program
to become a fully implemented and mature program, many challenges lie ahead
that must be overcome to assure success in the collection of delinquent
debt.

In our testimony, we pointed out that the success of FMS' cross-servicing
program significantly depends on agencies identifying and promptly referring
eligible delinquent debt to Treasury because as delinquent debt ages, the
likelihood of collection diminishes. In addition, we identified the
following issues that FMS needs to address.

ï¿½ FMS officials stated that as of September 30, 1999, about 89 percent of
the $59.2 billion of debts over 180 days delinquent were excluded from
cross-servicing. However, the accuracy and completeness of amounts reported
by agencies including exclusions from cross-servicing were not required to
be, and were not, independently verified. In addition, several agencies'
reporting of debt balances and related aging was not accurate. For example,
a December 1999 report2 stated that of the 16 agencies reviewed, 5 had
inaccurate accounts receivable balances as of the end of fiscal year 1998,
and 3 did not accurately age their accounts receivable.

ï¿½ FMS reported that as of April 2000, about $3.7 billion of the
approximately $6.4 billion of eligible debt had been referred for
cross-servicing. Because the eligible amount is as of a specific date and
the amount reported as referred is a cumulative amount covering about
3-1/2 years, these two amounts are not comparable. The cumulative figure
includes debts that have been returned to the agencies, such as invalid
debts that were not eligible for cross-servicing. For purposes of comparison
to the debts eligible for referral amount, such debts should not be included
in the eligible debts referred amount.

ï¿½ Many of the eligible debts were not promptly referred by the agencies or
simply not referred by certain agencies. In addition, the debts referred
were not always eligible for cross-servicing because they were not valid and
legally enforceable. In an effort to encourage debt referrals, in the spring
of 1999, FMS requested written debt referral plans from 22 of the 24 Chief
Financial Officer (CFO) Act agencies.3 The plans were of limited use because
(1) FMS had no assurance that agencies had properly identified all nontax
debts that were eligible for cross-servicing, (2) many of the plans did not
include debt amounts or time frames for referral, and (3) FMS did not use
the plans to closely monitor actual agency referrals.

ï¿½ As the sole operator of a governmentwide cross-servicing debt collection
center, FMS had well-developed written standard operating procedures (SOP)
for its collectors and requirements for its private collection agency
contractors (PCA). However, its staff and some of the PCAs did not always
follow established procedures and requirements or effectively use certain
debt collection tools. For example, we found no evidence that FMS'
collectors had tried to contact about 48 percent of the debtors from our
sample after the demand letters were issued. We also found that about 96
percent of the compromised debt files that we selected and tested did not
indicate why FMS collectors compromised debts or the basis used to determine
how these debts met FMS' criteria for compromising.

FMS recently changed many of the SOP's earlier requirements to perform
various collection techniques from "will" be performed to "may" or "should"
be performed. In addition, in 1999 FMS changed its written SOP to reduce the
50-day holding period to 30 days for performing cross-servicing procedures
before referring the debts to a PCA. These actions and our discussions with
FMS officials indicate that FMS is relying heavily on PCAs. However, FMS has
not performed an analysis to determine the potential effect such reliance
may have on net collections to the federal government. Such analysis may be
warranted given that (1) as debts are not actively worked by FMS and are
awaiting referral to PCAs, they continue to age and thus typically become
more difficult to collect and (2) the federal government pays a 25-percent
fee on debt amounts collected by the PCA that the government is not always
able to recoup from the debtor.

ï¿½ Our analysis of FMS' distribution of debt accounts to PCAs from February
1998 through February 2000 showed that one PCA had received a significantly
higher percentage of the debts with smaller balances and debts that were
less than 1 year delinquent. Collection industry statistics as well as FMS'
collection experience to date have shown that collection rates are generally
higher on debts with smaller dollar balances and debts that are less
delinquent. Concerns relating to the distribution method have been raised by
some of the PCAs. During our interviews with the 11 PCAs, we found that when
asked how the debts should be distributed, the general consensus among them
was that the distribution should consider the characteristics of the debts,
such as age of delinquency, type of debt (consumer or commercial), agency
referring the debt, and debt balance. Many of the PCAs indicated that
stratifying the available debts by agreed-upon characteristics would result
in each of the PCAs receiving a proportionate mix of the debts and would
foster a more competitive environment.

ï¿½ The cross-servicing fees FMS charged to agencies referring delinquent
debts have not covered FMS' estimated cross-servicing costs and are not
likely to in the near future.

This report contains our recommendations to the Commissioner of FMS to
assist FMS in implementing a viable cross-servicing operation. We performed
our work from April 1999 through May 2000 in accordance with generally
accepted government auditing standards. The objectives, scope, and
methodology for our work are contained in appendix I and our testimony is
reprinted in appendix II.

In commenting on a draft of this report, FMS concurred with most of our
recommendations and for several of those recommendations provided comments,
which are discussed in further detail in appendix III. However, FMS did not
concur with key parts of our recommendation to perform a comprehensive
review of the cross-servicing process. Given the results of our testing of a
statistical sample of delinquent debts which showed limited collection
activity as contemplated under DCIA and FMS' own procedures, we continue to
believe FMS needs to assess its debt collection strategy and its standard
operating procedures.

To help ensure that eligible delinquent debts are identified and promptly
referred by the agencies for cross-servicing and that reporting on the
status of delinquent debts by the agencies and FMS are reliable, we
recommend that the Commissioner of FMS take the following actions.

ï¿½ Work with the Office of Management and Budget and the agencies' Offices of
Inspector General to develop and implement a process for obtaining periodic
independent verification of the accuracy, completeness, and validity of
debts reported by agencies as eligible and excluded from the DCIA
cross-servicing provisions.

ï¿½ Revise FMS' reporting of debt amounts referred for cross-servicing to
reflect the extent to which eligible debts reported by agencies as of a
specific date have been referred to FMS.

ï¿½ Establish and implement procedures for obtaining, reviewing, and
monitoring written debt referral plans from CFO Act agencies and all non-CFO
Act agencies with significant accounts receivable activity, to help ensure
that (1) the plans are complete, agree with debt amounts agencies have
reported as eligible for cross-servicing, and specify timetables for
referral of all such debt, (2) actual agency referrals are compared with
agency plans, and explanations for any significant deviations from planned
referrals or revisions to the plans are obtained from the agencies, and (3)
appropriate agency officials are notified and requested to initiate
corrective actions when agencies do not substantially comply with their
referral plans.

To help ensure that debt collection efforts are efficient, cost-effective,
and performed by the most capable entity (i.e., FMS, a PCA, or any agency
approved to be a debt collection center) we recommend that the Commissioner
of FMS perform a comprehensive review of FMS' cross-servicing process to
determine whether FMS' current debt collection strategy and standard
operating procedures are appropriate for optimizing collections. This should
be done by

ï¿½ analyzing the types of debts referred to FMS (e.g., by age of delinquency,
debt balance, etc.) and the collection rates experienced on those debts;

ï¿½ assessing the level of effort FMS collectors should perform by considering
the number of collectors assigned, the number and types of debts individual
FMS collectors can be expected to effectively cross-service, and
fluctuations in the volume of debts referred by agencies and the related
impact, if any, on FMS collector workloads;

ï¿½ revising, if necessary, the SOPs based on the assessment of the level of
collection efforts FMS collectors should perform while maintaining
appropriate internal controls and accountability over FMS collection
efforts;

ï¿½ identifying specific types of debts, if any, that should be sent promptly
to the PCAs for cross-servicing and determining the appropriate level of
involvement by FMS collectors on such debts;

ï¿½ enforcing compliance with established collection procedures performed by
FMS collectors and taking appropriate corrective actions when deviations
from established procedures are found;

ï¿½ enforcing compliance with established procedures for FMS staff to monitor
PCAs' collection activities and taking appropriate corrective actions when
PCAs deviate from established requirements; and

ï¿½ periodically analyzing FMS' cross-servicing costs and related fee
structure.

To help ensure that a proportionate mix of debts is being distributed to the
PCAs and competition among the PCAs is more fully promoted, we recommend
that the Commissioner of FMS

ï¿½ work with the PCAs to determine what characteristics of the debts -- age
of delinquency, type of debt (consumer or commercial), agency referring the
debt, or debt balance--should be considered when distributing debts to PCAs
for collection and

ï¿½ establish and implement a process to periodically analyze the distribution
and collection data to determine whether adjustment to the distribution
model is needed.

In commenting on a draft of this report, FMS concurred with most of our
recommendations and for several of those recommendations provided comments,
which are discussed in further detail in appendix III. However, FMS did not
concur with key parts of our recommendation to perform a comprehensive
review of the cross-servicing process to determine whether FMS' current debt
collection strategy and standard operating procedures are appropriate for
optimizing collections.

Specifically, FMS stated that its procedure for working a debt at its debt
operations center for 30 days prior to sending it to a PCA is appropriate
and that it should make full and appropriate use of the private sector. FMS
stated that because debts are referred by federal agencies sporadically and
randomly, an assessment of the level of effort FMS collectors should perform
is impractical. In addition, FMS stated that most workload issues have
occurred when new agencies begin to use cross-servicing and refer thousands
of their old debts to FMS at one time. Further, FMS stated that it is
prohibitively costly for FMS to temporarily staff up for these large numbers
of referrals.

One of the very reasons that FMS should perform a comprehensive review of
its cross-servicing processes is that large fluctuations in the number of
debts referred at any particular time by agencies do occur and can have a
significant impact on workloads. As we reported, our tests of the 200
selected debts found that FMS collectors did not always adhere to FMS'
cross-servicing SOP. For example, we found that FMS collectors (1) did not
always attempt to contact debtors or perform skiptracing to locate debtors
who did not respond to demand letters and (2) did not always promptly refer
all debts to the Treasury Offset Program or PCAs. FMS pointed out in its
comments that FMS relies on the PCAs because they have a greater ability to
react to fluctuating volumes. That being the case and in consideration of
our testing results, FMS would benefit from a comprehensive review of its
cross-servicing process to make informed decisions about how to
strategically target its efforts and effectively use available resources,
FMS collectors and PCAs.

As we reported, FMS maintains information on debt collection activities for
both the FMS collectors and the PCAs. With this information, FMS can perform
various analyses of the FMS and PCA debt collection activities, including
analyses similar to those we conducted during the course of our work. For
example, our analysis of collections of debt found that several agencies had
referred debts with large average balances for which no amounts have been
collected by either FMS or the PCAs. We also found that collection rates
were generally higher on debts with smaller dollar balances and on those
that are less delinquent. FMS could use this type of historical information
to rank new agency debt referrals that should be worked on immediately over
those that should be worked on as time permits and those that should be
immediately referred to the PCAs over those that should be worked on by FMS.
Further, through its outreach efforts to encourage debt referrals by
agencies, FMS officials stated that it requested debt referral schedules
from agencies for fiscal years 2000 and 2001 detailing the specific debt
amounts to be referred and the related time frames. FMS could use the
information from the agency debt referral schedules to project future
workloads to help the FMS collectors and PCAs plan for fluctuations in debt
referrals and conduct their operations in a proactive rather than reactive
manner.

The intent of our recommendation is that FMS establish a management review
process whereby FMS' debt collection strategy and related SOPs are evaluated
and refined, as needed, to maximize the effectiveness of cross-servicing and
to meet the priority management objective of improving debt collection by
effectively using the tools provided by DCIA to reduce the amount of
delinquent debt and increase collections. Our recommendation was also made
to help ensure that

ï¿½ appropriate actions are taken by FMS management to correct problems and
issues identified in our report;

ï¿½ debt collection procedures make sense based on an assessment of the level
and mix of debt collection efforts that should be performed by FMS and the
PCAs;

ï¿½ debts are promptly referred to the entity (i.e., FMS, a PCA, or any other
agency approved to be a debt collection center) that has been determined as
the most capable of maximizing collections based on an assessment of past
performance;

ï¿½ FMS and PCA debt collection efforts are monitored, established policies
and procedures are complied with, and management objectives are being met
efficiently and effectively; and

ï¿½ debt collection efforts are conducted at the least cost to the federal
government.

As stated in our report, our analysis of FMS cross-servicing fees and
related operating costs found that collection volume would need to rise more
than sevenfold above its fiscal year 1999 collections to put FMS
cross-servicing operations on a full cost-recovery basis. Carrying out these
efforts successfully should help FMS come closer to achieving at least
break-even operations for the cross-servicing program.

We are sending copies of this report to Senator Fred Thompson, Chairman, and
Senator Joseph I. Lieberman, Ranking Minority Member, Senate Government
Affairs Committee; Representative Dan Burton, Chairman, and Representative
Henry A. Waxman, Ranking Minority Member, House Committee on Government
Reform; the Honorable Jacob J. Lew, Director, Office of Management and
Budget; the Honorable Lawrence H. Summers, Secretary of the Treasury; Donald
V. Hammond, Fiscal Assistant Secretary, Department of the Treasury; Richard
L. Gregg, Commissioner, Financial Management Service; the Honorable Jeffrey
Rush, Jr., Inspector General, Department of the Treasury; and other
interested parties. Copies will be made available to others upon request.

Please contact me at (202) 512-3406 if you or your staff have any questions
on this report. I can also be reached by e-mail at [email protected]. Key
contributors to this assignment were Kenneth R. Rupar, Paula M. Rascona,
Matthew F. Valenta, Michael S. LaForge, Gladys Toro, and Sophia Harrison.

Gary T. Engel
Associate Director
Governmentwide Accounting
and Financial Management Issues

Objectives, Scope, and Methodology

Our objectives were to determine (1) the status of nontax delinquent debts
that agencies have referred to Treasury for cross-servicing and Treasury's
actions to encourage these referrals, (2) Treasury's cross-servicing process
for collecting referred debts, (3) Treasury's method for allocating debts to
PCAs for collection, and (4) Treasury's estimated cross-servicing costs and
related fees earned on collections.

To accomplish our first objective, we interviewed FMS officials concerning
the processes and procedures that were used to encourage federal agencies to
refer delinquent debts for cross-servicing. We obtained and reviewed reports
that FMS used in working with agencies to identify debts that were eligible
for cross-servicing and to encourage agencies to refer all such debt. These
reports included the Debt Performance Indicator Report and Summary Analysis
of Delinquent Debt for the Federal Government. We also obtained and reviewed
written debt referral plans that had been submitted to FMS by certain
federal agencies.

To accomplish the second objective, we interviewed FMS officials on their
processes for collecting delinquent debts. We reviewed all pertinent
policies and procedures including FMS' Cross-Servicing Implementation Guide
(April 1997, Revised January 1999); Standard Operating Procedures: Debt
Collection (December 1998, Revised May 1999 and February 2000); the Private
Collection Agency Operations and Procedures Manual (March 1998, Revised
March 1999); and FMS' contract with PCAs.

To determine whether FMS collectors performed collection activities and used
appropriate collection tools in accordance with FMS' established policies
and procedures, we randomly selected a sample of 200 delinquent debts from a
population of debts referred for cross-servicing from April 1, 1998, through
May 31, 1999.4 We also used this sample to test, when applicable, whether
PCA contractors documented performance of required debt collection
activities in their respective debt collection systems as required by their
contracts with FMS. In addition, we selected a random sample of 78 debts
from a population of debts that had been compromised5 by FMS collectors to
test whether the collectors followed FMS' policies and procedures when
compromising debts.6 We reviewed debt history files, including Debt History
Reports generated by FMS' cross-servicing computer system, to determine
whether FMS collectors performed the required collection activities (e.g.,
telephoning the debtor, obtaining support for compromises, etc.).

To accomplish the third objective, we obtained a written description of the
debt account distribution methodology from FMS and its contractor and
compared it with the distribution process portion of the PCA Monitoring and
Control (PMAC) software source code. During our fieldwork, FMS tested its
distribution methodology by manually distributing a sample of debt accounts
and distributing those same accounts using a test copy of the PMAC system.
We reviewed documentation of FMS' test for reasonableness. We also obtained
copies of pertinent data from the PMAC system (from February 1998 through
February 2000) and performed various analyses of the debt account
information, including distribution of the debt accounts to the PCAs, age of
delinquencies, and collection rates.

To accomplish the fourth objective, we interviewed FMS officials on their
methodology for estimating costs and recognizing fee revenues. We reviewed
the contractor's study that Treasury used to estimate costs for fiscal year
1999 to ensure that all significant relevant costs were included in the
estimate. We also obtained and analyzed fee revenue and collection
information for fiscal year 1999 from FMS' cross-servicing databases and
used this information to determine the amount of increase in collections
necessary for FMS to fully cover its costs.

We performed our work in accordance with generally accepted government
auditing standards from April 1999 through May 2000. We did not
independently verify the reliability of certain information provided to us
by FMS (e.g., estimated costs, debts eligible for cross-servicing, total
debts referred for cross-servicing, and information in FMS' debt referral
and collection databases). We requested comments on a draft of this report
from the Commissioner of FMS. FMS' comments are discussed in the "Agency
Comments and Our Evaluation" section of this report and reprinted in
appendix III.

GAO's June 8, 2000, Testimony

Comments From the Financial Management Service

The following are GAO's comments on the Financial Management Service's
letter dated July 12, 2000.

1. As we reported, no formal process currently exists for independent
verification and reporting on the accuracy, completeness, and validity of
debts reported by agencies as eligible and excluded from the DCIA
cross-servicing provisions. As stated in our report, FMS stated that as of
September 30, 1999, about $52.8 billion or approximately 89 percent of the
$59.2 billion of debt over 180 days delinquent was excluded from
cross-servicing. Because of the magnitude of the amounts reported as
excluded, FMS needs to develop a definitive plan to obtain independent
verification of this information. The intent of our recommendation was not
for FMS to help verify the accuracy of these reported amounts on an
as-needed basis. Rather, our intent was that FMS, as the sole governmentwide
debt collection center, would lead and coordinate efforts among FMS, OMB,
and each of the respective agency OIGs in the development and implementation
of a formal process for obtaining independent verifications of agency
reported amounts.

2. Assisting agencies by clearing debts that never should have been referred
has been one aspect of FMS' many functions. However, our intention was that
our recommendation would be read in a broader context and that analyzing the
eligible debts referred and the associated collections on those debts is
just one of the steps that should be performed when conducting a
comprehensive review of FMS' cross-servicing process and strategy to
determine what types of debts and the level and mix of debt collection
efforts that should be performed by the FMS collectors. See our discussion
in the "Agency Comments and Our Evaluation" section.

3. FMS' discussion of its process in its comments reflects the procedures
called for by its revised SOP. However, one of the reasons that we
recommended that FMS perform a comprehensive review of its cross-servicing
processes was that our testing found that FMS staff did not always follow
the FMS SOP before it was revised or properly use certain debt collection
tools. As we stated in our report, we found that the written SOP at the time
of our testing was well developed. For example, the SOP required that "the
collector will try to reach the debtor by telephone, if there was no initial
response from the demand letter." However, during the course of our work and
as stated in our report, FMS revised many of its SOP requirements to perform
various collection techniques from "will" be performed to "may" or "should"
be performed. Our recommendation that a comprehensive review of FMS'
cross-servicing process be conducted was made out of concern that FMS has
not fully evaluated the impact that such changes to the SOP could have on
the level and type of collection efforts performed by FMS collectors and the
ability of FMS management to maintain proper accountability and controls
over FMS collector activities under the revised SOP.

Similarly, an FMS collector waiting for debtors to respond to a demand
letter does not indicate that the debt is being actively worked and is not
an effective debt collection technique. As stated in our report, our tests
of the sample of 200 delinquent debts found that only 22 of the debt history
files indicated that the debtors initiated contact with FMS. Further, in our
sample of 200 delinquent debts, the debt history files indicated that demand
letters for 46 or about 23 percent of the delinquent debts tested were
returned as undeliverable. As we stated in our report, one of the most
critical steps in collecting delinquent debt is communicating with the
debtor after the required demand letter is sent. Our recommendation that a
comprehensive review of FMS' cross-servicing process be conducted was based
in part on the results of our testing, which found that FMS collectors did
not always attempt to contact debtors or perform skiptracing to locate
debtors who did not respond to demand letters.

FMS should make full and appropriate use of the PCAs. Our recommendation
does not contemplate the duplication of PCA collection activities or
competition with the PCAs. Rather our point was that FMS perform a
comprehensive review of its cross-servicing processes and strategy to make
informed decisions about the most effective and efficient way to collect the
delinquent debts. With the results of such a review, FMS will be in a
position to (1) quantify the number and type of debts for which FMS could
reasonably perform collection activities, (2) determine the types of
procedures that should be performed, and (3) establish reasonable time
frames for FMS collectors to perform the collection activities. See our
discussion in the "Agency Comments and Our Evaluation" section.

4. See comment 3 and our discussion in the "Agency Comments and Our
Evaluation" section.

5. See our discussion in the "Agency Comments and Our Evaluation" section.

6. During the course of our work, FMS did not provide us with any evidence
that management had identified any of the same types of problems with FMS
collector activities as were identified in our report. One of the objectives
of our recommendation that management perform a comprehensive review of the
cross-servicing process was for FMS management to determine whether there
are instances of noncompliance with established policies and procedures and,
if so, that it make needed changes to strengthen controls over FMS collector
activities. See comment 3 and our discussion in the "Agency Comments and Our
Evaluation" section.

7. During the course of our work, FMS did not provide us with any evidence
that management had identified any of the same types of problems with PCA
collection activities as were identified in our report. For example, only
when we notified FMS that certain PCAs were not obtaining credit bureau
reports for debts with balances over $500 as part of required skiptracing
did FMS issue a technical bulletin to PCAs reminding them of this
contractual requirement. One of the objectives of our recommendation that
management perform a comprehensive review of the cross-servicing process was
for FMS management to determine whether there are instances of noncompliance
with established policies and procedures and, if so, that it make needed
changes to strengthen controls over PCA collector activities. See comment 3
and our discussion in the "Agency Comments and Our Evaluation" section.

8. Although FMS states that it reviews cross-servicing costs and fee
structures annually, the intention of our recommendation was that FMS should
analyze its costs and related fee structure in conjunction with its overall
assessment of FMS' debt collection strategy. As stated in our report, our
analysis of FMS cross-servicing fees and related operating costs found that
collection volume would need to rise more than sevenfold above its fiscal
year 1999 collections to put FMS cross-servicing operations on a full
cost-recovery basis. In conducting this assessment, FMS should consider the
costs of its operations and the revenues collected and make any necessary
adjustments to help ensure that its collection efforts are providing the
optimal return to the federal government. See our discussion in the "Agency
Comments and Our Evaluation" section.

9. The establishment and implementation now of a periodic process to analyze
the distribution and collection data should help to place FMS in a position
to introduce the kinds of changes needed to address the issues identified by
our analysis of the FMS distribution model. These analyses may help FMS
management identify changes needed in the distribution model to further
competition among the PCAs. These analyses should also provide FMS
management with useful information to make more informed decisions on the
amount of flexibility that will be needed in its future contracts and
systems to institute distribution model changes as the need arises. To the
extent that the analyses identify systems and legal issues, FMS should take
whatever steps necessary to address those issues.

10. The information in our report about the results of our testing is
correct as written. See our comment 3 and our discussion in the "Agency
Comments and Our Evaluation" section.

11. We have revised our report to clarify that the written SOP was changed
in 1999.

12. The information about the results of our testing in our report is
correct as written. See comment 3 and our discussion in the "Agency Comments
and Our Evaluation" section.

13. The information in our report regarding the fees that the federal
government pays to PCAs for collection services and its ability to recoup
such fees is correct as written. As FMS stated, if the debtor pays the full
amount of the debt recorded in FMS' systems which includes any related fees,
the debtor is paying the PCA fee. However, FMS has not provided us with any
evidence or analysis showing that the government's inability to recoup the
25 percent fee is limited to those situations that involve compromise
agreements. In any scenario where a collection fee is paid, failure by the
debtor to pay the entire amount due results in the federal proceeds being
reduced by the associated collection fees.

We recognize that a centralized debt collection operation also involves
certain management activities that are performed in addition to its
collection activities. Therefore, it is even more important that FMS perform
a comprehensive review of its operation so that its processes optimize
collections in a more efficient and cost-effective manner. See comment 3 and
our discussion in the "Agency Comments and Our Evaluation" section.

(901822)

1. Debt Collection: Treasury Faces Challenges in Implementing Its
Cross-Servicing Initiative (GAO/T-AIMD-00-213 , June 8, 2000).

2. PCIE/ECIE Review of Non-Tax Delinquent Debt, The President's Council on
Integrity and Efficiency, the Executive Council on Integrity and Efficiency,
and Department of the Treasury Office of Inspector General (December 1999).

3. According to FMS officials, no referral plan request was made to the
Department of Education because it was deemed to be in substantial
compliance with DCIA. In addition, no written request was made to the
Department of the Treasury. According to FMS officials, FMS actively worked
with the bureaus within Treasury to encourage debt referrals.

4. We selected debts with referred balances greater than $100 because this
is the dollar threshold amount of debt FMS refers to its PCAs.

5. A debt compromise involves the government agreeing to accept less than
the full amount of its claim in satisfaction of the entire debt.

6. The population sizes from which we selected referred delinquent debts and
compromised debts were 61,269 and 644, respectively. Both samples were
selected to allow projections of key results to the populations from which
they were drawn with 95 percent confidence.
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