VA Testimony of Edward A. Powell, Jr. before Congress on June 8, 2000

United States Department of Veterans Affairs

STATEMENT BY
THE HONORABLE EDWARD A. POWELL, JR.
ASSISTANT SECRETARY FOR FINANCIAL MANAGEMENT AND
CHIEF FINANCIAL OFFICER
DEPARTMENT OF VETERANS AFFAIRS
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT
MANAGEMENT, INFORMATION AND TECHNOLOGY
COMMITTEE ON GOVERNMENT REFORM
U.S. HOUSE OF REPRESENTATIVES

June 8, 2000

INTRODUCTION

Mr. Chairman, and members of the Subcommittee, it is my pleasure to testify on behalf of the Department of Veterans Affairs (VA) concerning our implementation of the Debt Collection Improvement Act (DCIA) of 1996.

As VA's Chief Financial Officer (CFO), I have been working with VA’s three administrations—the Veterans Benefits Administration (VBA), Veterans Health Administration (VHA), and National Cemetery Administration (NCA) as well as other VA elements to take the steps necessary to ensure our compliance with the requirements of the DCIA. I would like to begin today by summarizing for you our success at reducing debt throughout VA, and then quickly review the major components of our debt portfolio.

SUMMARY OF VA DEBT COLLECTION STATUS

Our hard work and success in debt reduction are reflected in our debt numbers. As of September 30, 1999, total debt owed to VA was $3.3 billion, down from $3.7 billion owed one year earlier. That is a reduction in debt of 11% during FY 1999.

The decline in VA's debt portfolio is due, in large part, to VA's efforts to reduce establishments and collect debt. In the past decade, we have undertaken many initiatives to prevent the establishment of debt, such as: VA now requires eligible veterans to verify their education attendance on a monthly basis in order to continue to receive educational benefits, and we created an outreach program to assist veterans in retaining home ownership prior to home loans becoming delinquent. An example of a collection tool is our ability to apply VA benefit payments to a benefit debt. This has resulted in approximately $250 million in benefit collections per year. For those debts we could not prevent, VA has vigorously pursued collection by employing the powerful collection tools available to federal agencies. For example, VA has contracted with Transworld Inc. for follow-up collection action on Third Party Health Insurance claims over 90 days old which has resulted in VA collecting an additional $23 million at a cost of $1.3 million. This is a return of $18 for every dollar spent.

Over a decade ago, VA set a goal of reducing its delinquent benefit debt portfolio in VBA through an integrated approach employing prevention and collection as strategic objectives. Since then, we have had great success in achieving each objective and meeting the overall goal. VA has reduced its outstanding receivables from $4.7 billion at the end of FY 1991 to $3.3 billion as of the end of FY 1999. This is a reduction of $1.4 billion (or 30%) in outstanding receivables.

Much of VA’s success in benefit debt collection can be attributed to the Debt Management Center (DMC), which was created in 1991 to facilitate consolidation and management of VBA’s debt collection program. The DMC extensively uses all available tools including: automated payment processing and collections systems; benefit and salary offset; credit bureau reporting and private collection agency referrals; compromises and litigation; write-offs; and the Treasury Offset Program. To strengthen the focus and emphasis on the importance of the DMC’s role in VA’s financial management, we moved the DMC organizationally from VBA to VA’s Office of Financial Management. This realignment will enable VA to coordinate debt management initiatives among all the Department’s administrations (VBA, VHA, NCA).

Even though we reduced our debt by 11% last year, there is still much work left to be done. We take the VA debt of over $3 billion very seriously. How we deal with our debt is in large part determined by the different types of debt we hold. Of the $3.3 billion debt outstanding at the end of FY 1999, $1.1 billion was delinquent and $937 million was more than 180 days delinquent. Of the same $3.3 billion, $1.96 billion, or almost 60%, was comprised of Active Vendee Home Loans. These are mortgages held by VA, the majority of which will be sold. Few of these receivables ever become delinquent before being sold. Of the remaining major program debt, $494 million was owed for Compensation & Pension overpayments, $384 million for defaulted home loans, $53 million for Readjustment Benefit overpayments, and $334 million, the bulk of which comprises third-party health insurance receivables, was owed to the Medical Care Collections Fund for the provision of medical care and services. The balance of VA’s debt consists of debt established under programs that individually contribute less than one percent to the Department's total outstanding debt.

VA IMPLEMENTATION OF THE DCIA REQUIREMENTS

My staff has also been working closely with the Department of the Treasury’s Financial Management Service (FMS) to implement the provisions of the DCIA. For example, we worked with FMS to revise the Report on Receivables Due From the Public so it will provide better information on the implementation and effectiveness of the DCIA requirements, not just for VA, but for all federal agencies. Last year, we worked with FMS to refer most eligible VA debt to them for offset and to develop the programming and processes needed to refer those same debts for cross-servicing.

I wish to point out VA has been a long-time participant in all available administrative offset programs including IRS, Federal Salary Offset, and benefit offset, and has effected many interagency matching programs. VA continues to actively pursue Federal Salary Offset pending its inclusion in the Treasury Offset Program (TOP).

Of the $937 million debt that was more than 180 days delinquent at the end of fiscal year 1999, approximately $329 million (or 35%) is currently eligible for the TOP and $460 million (or 49%) is currently eligible for cross-servicing. The categories, of course, are not mutually exclusive and many debts are eligible for both administrative offset and cross-servicing. The debts not eligible for referral for TOP or cross-servicing are exempt for a variety of reasons, including debt in bankruptcy or foreclosure proceedings, debt in VA’s mandatory waiver/appellate process, and debt statutorily barred from referral.

IMPLEMENTATION OF TREASURY OFFSET PROGRAM

As of December 8, 1999, VA referred $250 million for TOP (this figure is part of the $329 million referenced above). The $250 million included all $199 million of eligible debt managed by the DMC, $47 million of first party medical care debt, and $4 million of debt referred for cross-servicing that was subject to subsequent TOP referral by Treasury. By the end of this fiscal year, VA expects to implement the new automated file formats required by Treasury and to be compliant with the offset referral requirement of the DCIA.

IMPLEMENTATION OF CROSS-SERVICING REQUIREMENT

To date, VA’s cross-servicing referrals to Treasury total $4 million worth of debt from the Health Professional Scholarship Program. We targeted these debts for referral first because they are among the most collectible of VA’s debts and the easiest to refer. These debts are highly collectible because the majority of the debtors are employed in the health care services profession and should be able to pay their debts. Thus far, Treasury has collected approximately $225,000 of the $4 million referred since May 1998. This indicates that delinquent debts cannot be easily collected.

The DMC currently houses approximately 80% of VA debt over 180 days delinquent and eligible for cross-servicing. This debt will be referred for cross-servicing in September 2000 when Treasury and the DMC will have completed the development of automated processes needed to update each other’s databases.

Although it is taking longer than we had hoped to refer the bulk of our portfolio for cross-servicing, we have continued to refer our debts for the Treasury Offset Program and for Federal Salary Offset which have historically proven to be a highly effective external source of collection for VA debt.

I think it is important for the Subcommittee to recognize our Debt Management Center is a highly efficient and effective operation that already executes all the functions required of a cross-servicing center. The DMC has generated an average of about $10 in cash collections (excluding collections from VA benefit offset) for every dollar of operating cost.

Cash collections - $58.0 million

Operating costs - $6.1 million

The DMC’s recent collection rates for overpayment debts are approximately 67% for compensation and pension debt and over 95% for readjustment benefit (education) debt. These collection rates represent the ratio of collections to establishments. To achieve these results, the DMC employs every collection tool available to federal agencies which includes the same federal collection tools Treasury will employ for cross-servicing VA debts. We believe the DMC collects a high percentage of debt before it becomes seriously delinquent.

As for the remaining 20% of eligible VA debt not managed by the DMC, VA staff and Treasury’s FMS staff are now determining how we can best achieve referral. We are also considering whether VA should request the Secretary of the Treasury to exercise his authority to exempt most of this debt from the referral requirement, since it may not be cost-effective to refer certain VA debt types for cross-servicing. Specifically, we want to examine the desirability of referring VA's first party medical debts of which approximately $45 million are eligible for cross-servicing. These debts often resemble a "revolving credit" account in that they incur additional charges on a periodic basis as medical services are provided. The nature of these debts makes the cross-servicing process especially problematic and expensive.

As a first step in determining the feasibility of referral, we have been executing a pilot project in which we referred for cross-servicing $1.1 million of VA's first-party medical debts that are not subject to recurring charges. Treasury has collected approximately $10,000, or less than 1%, of this amount since August 1999. The results of the pilot project will be reviewed by Treasury and VA before the end of FY 2000 to determine if VHA should incur the expense of developing the automated processes necessary to refer all eligible first-party debt, or whether VA will request a waiver for this type of debt.

The first-party medical debt and the debt managed by the DMC comprise most VA debt potentially eligible for referral. Therefore, once the DMC has referred its debt in September, VA will be over 90% compliant with the cross-servicing requirements of the DCIA. The remaining debt is made up of a few smaller benefit programs not managed by the DMC, and miscellaneous VHA debt such as vendor debt, employee debt, and non-federal sharing agreement debt. We plan to refer most of this debt for cross-servicing during fiscal year 2001.

This concludes my statement. I will be happy to answer any questions the Subcommittee may have.