Magazine

Collectors Keep a Share

August 15, 1999

ne common form of shared-benefits acquisition in government is contingency contracting, used most commonly to hire private collection agencies. The Education Department, for example, has used such contracts since the late 1970s. The 17 firms under contract with Education receive a fee averaging 23 percent of dollars collected to reel in delinquent student loan payments. The company's fee is added to what the debtor owes. All the money collected over and above the fee goes back to the U.S. Treasury, says Jack Reynolds, who directs the Office of Student Financial Assistance Debt Collection Service. As of the end of May, private collection firms had brought in $334 million for fiscal 1999, compared with $183 million for the same period last year, Reynolds says. He says improved collections are largely a result of the current robust economy.

The Treasury Department's Financial Management Service used many of the lessons Education learned to set up a collection contract on Sept. 30, 1997, with 12 firms to help collect non-tax debts older than 180 days. The 1996 Debt Collection Improvement Act requires all agencies to transfer such debt to FMS for cross-servicing unless they receive a waiver to service their own debts, as Education did last year. "We learned a lot from the Department of Education performance-based contract," says Mary Nelson, manager of the private collection branch of FMS' Debt Service Division.

FMS contractors receive a 23 percent fee based on collections, but added to it are 2 percent for a bonus pool that goes to the top-performing firm during each four-month evaluation period, and a 3 percent cross-servicing fee for FMS' services.

As of April 30, collection firms had collected $6.9 million of the $11.6 million collected through cross-servicing in fiscal 1999. FMS sends accounts to the firms after first trying for 30 days to collect the debts using demand letters and phone calls.

Education and FMS evaluate private collectors every four months. Education awards evaluation points for the amount a firm collects and for a series of administrative actions. FMS bases ratings on dollars collected and administrative resolutions-the number of cases for which firms document that the debtor has become disabled, bankrupt or has died. "We're trying to use private collection agencies to clean up the government's books of debts we can't collect," says Nelson.

Education's rating system also considers customer service. "If there are a lot of complaints, it diminishes your rating," Reynolds says. "We don't want kneecap-breakers." Both agencies reward the top-performing firm with a financial bonus as well additional accounts. Firms can work their accounts for six months at FMS and nine at Education before turning them back to be reapportioned. In most cases, the accounts are recycled several times before being written off as uncollectable.

Both agencies' collection contracts generally last four years-Education's are for two years with two one-year options, Treasury's are for a year with three one-year options. Both allow companies to keep accounts that are in repayment status for up to two years beyond the contract. "In the late 1980s, we learned that as a contract ended, agencies would hammer the accounts in repayment to get full payment," Reynolds says. "We let companies keep an account two additional years if it's in repayment so they can have the income for six consecutive years."

Many firms repeatedly win places on the Education contract, says Reynolds. Quickly locating long-term debtors requires powerful software and extensive manpower, he explains. Nevertheless, new firms always show up. In fact, a new company, which also is a small business, has been top performer for the last two evaluation periods, according to Reynolds.

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