TO:                  Chief Fiscal Officers
                       All State Agencies, Universities and Institutions

FROM:            Edward Renfrow
                       State Controller

SUBJECT:       Accounts Receivable, Collections and Debt Setoff Study

In response to Senate Bill 39 which ratified Chapter 105A of the General Statutes ("An Act to Revise the Setoff Debt Collection Act") during the last legislative session and responsibilities related to GS 147-86.26 (Statewide Accounts Receivable Program), the Office of the State Controller (OSC) has initiated a comprehensive study related to accounts receivable, collection of debts and debt setoff procedures for the State government environment.  The study will address whether it is desirable and feasible for the State to establish a central clearinghouse for compiling debt set-off information required by the Department of Revenue and a comparison of current accounts receivable, debt collections and debt setoff procedures to that of both public and private sector best business practices.

The firm of Coopers & Lybrand has been retained to assist the OSC conduct what is estimated to be a three month study.  This project began on February 4, 1998 and is scheduled for completion by early May, 1998.  The OSC is now in the process of coordinating interviews with central management groups and agencies that report substantial accounts receivable activity.  Agencies not included in the interview process will be ask to participate in the study through the completion of a survey document.  The project approach is discussed later in this correspondence.

Background

The OSC is responsible for the uniform North Carolina Accounting System (NCAS) and related subsystems, that maintain complete accounting information on the State of North Carolina government entity.  The uniform NCAS includes the financial policies, procedures, and computer software that affect all departments and agencies of the State.  The continued application of modern business practices to the State’s financial processes is a primary objective of the OSC.  As additional responsibilities are assigned to the OSC, projects are initiated to determine whether statewide financial processes can be modified to achieve added economies and/or efficiencies.

OSC Senate Bill 39 Responsibilities

• A State agency must submit a debt owed to it for collection under this Chapter unless the State Controller has waived this requirement or the Attorney General has advised the State agency not to submit the debt because the validity of the debt is legitimately in dispute, because an alternative means of collection is pending and believed to be adequate, or because such a collection attempt would result in a loss of federal funds.  The State Controller may waive the requirement for a State agency, other than the Department of Human Resources or a county acting on behalf of that Department, to submit a debt owed to it for collection under this Chapter if the State Controller finds that collection by this means would not be practical or cost effective.  A waiver may apply to all debts owed a State agency or a type of debt owed a State agency.
• A State agency must register with the Department of Revenue and with the State Controller.  Every State agency must report annually to the State Controller the amount of debts owed to the agency for which the agency did not submit a claim for setoff and the reason for not submitting the claim.
• The State Controller is directed to study whether it is desirable and feasible for the State to establish a central clearinghouse for compiling debt set-off information required by the Department of Revenue to comply with Chapter 105A of the General Statutes.  In conducting the study, the State Controller shall consider which State agency is the most appropriate agency to serve as a clearinghouse and the costs and benefits of developing a clearinghouse, including the extent to which separate agencies must establish duplicative functions in the absence of a central clearinghouse. The State Controller shall report the findings of this study to the Revenue Laws Study Committee and the Revenue Laws Study Committee shall report any recommendations on this issue to the 1998 Regular Session of the General Assembly.

The statewide Accounts Receivable (AR) statutes (G.S. 147-86.20 through .27) provide direction for the agencies of the State to account for, report, manage and collect receivables using statewide policy guidelines.  OSC responsibilities include:

• Prescribing accounts receivable policies, procedures, and guidelines;
• Providing technical assistance to agencies and institutions regarding the statewide management of receivables and proper revenue recognition policies;
• Preparing quarterly and annual reports of the State’s receivables;
• Monitoring and analyzing the receivables of agencies and institutions, and;
• Maintaining an accounts receivable system that can record and report the State’s receivables in accordance with GS 147-96.20 through .27.

Outstanding receivable balances represent a significant asset for the State of North Carolina. The State’s Comprehensive Annual Financial Report for June 30, 1997 reflects $3.973 billion of receivables on the balance sheets of the various funds.  Obviously, this asset should be recognized and appropriate attention should be given to maximizing all available revenue streams.

States have begun to look to accounts receivable assets as an opportunity to enhance funding streams.  By ensuring that all funds owed to the State are collected in a timely fashion, using the best possible management practices, states can maximize remaining funding streams to a greater degree.  Best practices that have been applied in the private sector can be utilized in the public sector.  States are looking to standardize and simplify accounts receivable processes, just like their private sector counterparts.  States are also looking at alternative organizational structures to help them improve their ability to maximize accounts receivable collections. Considerations include:

• Consolidation of receivables for a debtor into a single collection case to eliminate redundant research and collection activities.
• Consolidation of receivables information across agencies and across debt types.
• Standard application of interest and penalty charges across debtors and debt for all agencies.
• Standardized enforcement actions (use of collections notices, offsetting activities, liens, license revocations, etc.).
• Use of private collection firms to collect outstanding debt.
• Creation of centralized collections groups to recover outstanding receivables on behalf of the State as a whole.  This best practice has been pursued, in varying degrees, by New Jersey, New York, Virginia, Minnesota and Michigan.
• Transfer of collections responsibility to collections agency/centralized collections facility early in the debt lifecycle (within 90 days), and

Recognizing the responsibility to perform the study required by Senate Bill 39, the OSC has expanded the scope to look at the potential for applying best business practice to the State’s AR collections effort as well as other AR program issues.  The project approach is outlined below.

• Phase 1 - Perform Project Planning and Initiation

The purpose of this phase is to further document the approach and schedule the specific tasks included in the project.  The deliverable for this phase is a detailed project plan or roadmap that will guide the execution of the remainder of the project.
 

• Phase 2 - Review Current Processing

The objective of this phase is to review the current processes, technology and costs associated with performing accounts receivable processing and bad debt collection in the State environment.  Although this project results in two separate areas of deliverables (bad debt verses accounts receivable), much of the data gathering is performed with the same people within the individual agencies.  This review will consider billing/invoice processes, aging of accounts receivable, accounts receivable write-off procedures, analysis of individual collections activities, debt setoff procedures and technology and personnel support for these activities.
 

• Phase 3 - Document Best Business Practices

The objective of this phase is to document best practices within other government and commercial organizations on accounts receivable processing and bad debt collection.  The data collected will include process, cost, technology, transactional volume and staffing data from the best practice organizations.  This data will be gathered through industry research, publications, commercial data sources and Coopers & Lybrand proprietary databases.
 

• Phase 4 - Perform Gap Analysis

The objective of this phase is to identify the gaps in processing, cost, technology, transaction volume and staffing between best practice organizations and North Carolina in the areas of accounts receivable processing and bad debt collection.  While the gap analysis will encompass many areas within accounts receivable processing and bad debt collection, it will focus on high payoff areas.
 
• Phase 5 - Develop and Quantify Recommendations Bad Debt Setoff

The objective of this phase is to identify improvements in North Carolina bad debt processing.  The recommendations will respond to the issues raised in Senate Bill 39 regarding the use of a clearinghouse for debt setoff processing.  Recommendations will focus on high payoff opportunities that may be defined as either having potential for significant cost reduction, having potential for dramatically increasing service levels or increasing revenue to the State.  Each recommendation will include an impact analysis to document the costs, benefits and risk of implementing the recommendation.  Additional findings will document concerns identified during this project which are subjects for further analysis.
 

• Phase 6 - Develop and Quantify Recommendations for Accounts Receivable Processing

The objective of this phase is to identify improvements in North Carolina accounts receivable processing.  The recommendations will focus on the opportunities that exist to implement a statewide accounts receivable system based on best business practices. Recommendations will focus on high payoff opportunities that may be defined as either having potential for significant cost reduction, having potential for dramatically increasing service levels or increasing revenue to the State.  Each recommendation will include an impact analysis to document the costs, benefits and risk of implementing the recommendation.  Additional findings will document concerns identified during this project which are subjects for further analysis.

There are two primary deliverables associated with this effort:

• Final report in presentation format that documents the bad debt collection recommendations (including their impact) from this project.  This report will be completed by April 15, 1998.
• Final report in presentation format that documents the accounts receivable processing recommendations (including their impact) from this project.  This report will be completed by May 15, 1998.

CC:    Marvin Dorman, Jr., State Budget Officer
          Honorable Michael F. Easley, Attorney General
          Muriel K. Offerman, Secretary, Department of Revenue
          C. Ronald Aycock, NC Association of County Commissioners
          S. Ellis Hankins, NC League of Municipalities