VA Testimony of D. Mark Catlett before Congress on June 5, 1998

United States Department of Veterans Affairs

STATEMENT BY
THE HONORABLE D. MARK CATLETT
ACTING ASSISTANT SECRETARY FOR MANAGEMENT AND
CHIEF FINANCIAL OFFICER
DEPARTMENT OF VETERANS AFFAIRS
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT
MANAGEMENT, INFORMATION AND TECHNOLOGY
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
U.S. HOUSE OF REPRESENTATIVES

June 5, 1998

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 closely with our Veterans Benefits Administration (VBA), Veterans Health Administration (VHA), and other VA elements to take the steps necessary to ensure our compliance with the requirements of the DCIA.

In turn, VA personnel have worked closely with Treasury’s Financial Management Service (FMS) to help in implementing the provisions of the DCIA. VA staffs have reviewed and provided comments on numerous draft, proposed, and interim regulations published by Treasury to implement the DCIA. Staff from our Office of Financial Policy participate in all three interagency working groups (and every subgroup) of the DCIA Issues Resolution Group. The Department has also formed an internal VA DCIA Workgroup to monitor VA’s implementation progress. This internal group continues to meet periodically with FMS staff to resolve any issues and impediments to implementation as they arise. VA’s Office of Financial Policy has also worked with FMS to revise the Report on Receivables Due From the Public so that it will provide better information on the implementation and effectiveness of the DCIA requirements.

VA IMPLEMENTATION OF THE DCIA REQUIREMENTS

Last April, I testified about VA’s preparations for referring debts delinquent for more than 180 days to the Treasury Department. Since then, working together with Treasury’s Financial Management Service (FMS), VA has made significant progress. The Veterans Benefits Administration’s Debt Management Center (DMC) has completed the amendment of its Privacy Act system of records to accommodate the referral requirements of the DCIA. Because VA has been a long-time participant in all available administrative offset programs (IRS, Federal Salary Offset, benefit offset) and has effected many inter-agency matching programs, the Department had already published regulations needed to participate in the Treasury Offset Program (TOP).

VA’s first step in the referral implementation process was to identify those debts that are eligible for TOP and those that are eligible for referral to Treasury’s cross-servicing center. As we previously informed this committee, of the $1.33 billion of VA debt more than 180 days delinquent as of the end of fiscal year 1997, we identified $333.6 million eligible for the administrative offset program, and $698.9 million eligible for cross-servicing. The categories, of course, are not mutually exclusive and many debts are eligible for both administrative offset and cross-servicing.

Debts that are not eligible for referral for TOP and/or cross-servicing may be exempt for a variety of reasons, including: debt is in bankruptcy or foreclosure proceedings, debt is in VA’s mandatory waiver/appellate process, debt is statutorily barred from referral. Further, among the amount that VA reports as over 180 days delinquent is approximately $155 million of third party medical care reimbursement billing (i.e., medical insurance claims) that is not referable to Treasury for TOP or cross-servicing because such "claims" do not represent sum-certain amounts owed. Rather, they are undergoing an administrative process whereby VA and the insurance company mutually determine the existence and amount of the third party liability, if any, under the applicable health care contract. Generally, upon completion of that process, either the third party pays the adjudicated debt amount (usually a portion of the original billed amount) or VA determines that no liability exists. In the unusual case that VA determines a liability exists but the third party refuses to make full payment, the claim is referred for enforced collection.

IMPLEMENTATION OF ADMINISTRATIVE OFFSET REQUIREMENT

Of the $333.6 million identified as eligible for TOP, VA has already referred $261.5 million to Treasury. The amount referred includes all $218 million of eligible debt managed by our VBA Debt Management Center (DMC) in St. Paul, MN, another $1.5 million of VBA debt not managed by the DMC, and almost $42 million worth of 1^st party medical care debt. Of the remaining $72 million not referred, over $50 million is comprised of other debts resulting from the operation of our medical centers (e.g., vendor overpayments, ex-employee debt). This debt was not referred under the existing Interim TOP process because, unlike the DMC debt and first party medical debt, we had never referred this debt under the Tax Refund Offset program. Referral of this debt to the Treasury Offset Program will begin in April 1999 when necessary system changes are in place. The remaining VA debt (approximately $20 million) is comprised of debts from many smaller programs. Given the relatively small amounts in each program and the costs of effecting referral for each type of debt, VA plans to refer most of these debts to TOP through the Treasury cross-servicing center rather than directly to TOP.

IMPLEMENTATION OF CROSS-SERVICING REQUIREMENT

The DMC continues to work with OMB and Treasury to explore the possibility of becoming a cross-servicer of government debt under the DCIA. In regard to this objective, the DMC submitted a debt collection business plan to OMB and, in April 1997, submitted a cross-servicing application to Treasury. We have since been involved in discussions with OMB and Treasury, and we have been advised that a decision should be made by Treasury shortly regarding the cross-servicing application. At the same time, OMB has endorsed the DMC as a franchise fund activity. This was reflected in the FY 1999 Congressional budget.

The DMC currently houses almost 88% of VA debt over 180 days delinquent (excluding third party medical claims, the unique nature of which are addressed in this testimony, and active vendee home loans which are managed by a mortgage servicing contractor). The DMC is a highly efficient and effective operation that performs all the functions required of a cross-servicing center. In recent years, the DMC has generated an average of about $15 in cash collections (excludes collections from VA benefit offset) for every dollar of operating cost. Inclusion of administrative offset collections in this calculation brings the historic collection ratio to over $40 for every dollar of operating cost. The DMC’s recent collection rates for overpayment debts are almost 70% for compensation and pension debt and over 85% 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.

VA recently completed the Department’s first referral of debt for cross-servicing by referring $1.7 million worth of debt from the Nurse Scholarship Program. VA has been working closely with Treasury’s Financial Management Service to accomplish referral of the remaining $697.2 million of eligible debt. The DMC sent a test referral file to Treasury in April 1998, but because of the volume of debt involved (an estimated 66,000 cases for the first referral), VA cannot refer this debt for cross-servicing until automated processes are developed for Treasury to send collection and other account information back to VA, and for VA to send account updates to Treasury. Both VA and Treasury expect that all system modifications and new processes needed to accommodate the cross-servicing operation will be put in place during the summer of 1998. We expect that the DMC will refer approximately $525 million for cross-servicing soon thereafter.

VA is currently working with Treasury FMS to determine how we can best achieve referral of the remainder of VA’s eligible debt, and to determine if VA should request that the Secretary of the Treasury exercise his authority to exempt some of this debt from the referral requirement since it may not be cost effective to refer certain VA debt types for cross-servicing (e.g., 1^st party medical debt).

DEBT SALES

VA looks forward to working with OMB and Treasury to ensure implementation of that portion of the DCIA authorizing the sale of delinquent debt.

Unrelated to the sale of delinquent debt under provisions of the DCIA, VA currently has a highly efficient process for selling non-delinquent active vendee home loans. In 1992, legislation was enacted (Public Law 102-291) which authorized VA to directly guarantee securities issued in connection with vendee loan sales. Previously, VA could guarantee payment on the loans but not the securities which were issued and sold to investors. A new issuing vehicle named "Vendee Mortgage Trust" was created and features which have become standard for Agency mortgage securities were introduced.

VA executes three loan sales each year. In three FY 1997 sales, VA sold 13,997 loans with an aggregate balance of $981.23 million and netted $1.022 billion or $104.17% of par. In the first FY 1998 sale, VA sold 5,951 loans with an aggregate balance of $426.16 million and netted $449.6 million or 105.5% of par. Issuance costs for the sales have now been lowered to less than 0.19% (19 basis points) of the aggregate balance of loans sold.

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

CONCLUSION

Mr. Chairman, that concludes my prepared statement. My colleagues and I will now be happy to respond to any questions Committee members may have.