Analysis Item 44: Department of Revenue Financial Institution Data Match

Transcription

1 Analysis Item 44: Department of Revenue Financial Institution Data Match Analysts: John Borden and Meg Bushman Reinhold Request: Increase General Fund by $400,906 and the Other Funds expenditure limitation by $70,748 for Financial Institution Data Match. Recommendation: The Legislative Fiscal Office recommends that the interim Joint Committee on Ways and Means recommend the Department of Revenue General Fund appropriation be increased by $377,227, and the Other Funds expenditure limitation be increased by $94,427, in a budget reconciliation bill during the 2018 Legislative session, for the implementation of SB 254 (2017), with instructions. Analysis: The Legislature in 2017 enacted SB 254 and the measure was signed into law by the Governor on August 2, The operative date of the measure is July 1, SB 254 requires financial institutions to participate in a data match program with the Department of Revenue (DOR), similar to a process undertaken by the Department of Justice s (DOJ) Division of Child Support for the collection of child support payments. Under the data match program, financial institutions compare a list of delinquent debtors with the names of account holders. If a match is found, DOR may administratively garnish the debtor s account. Financial institutions are reimbursed for their costs up to a specified amount for the quarterly data match. A fee is applied to debtor accounts to pay for the cost of financial institution data match and vender service provider s costs. The financial institution s data match (FIDM) process will apply to all DOR programs, including personal and corporate taxes, withholdings, and Other Agency Accounts which are those accounts DOR collects for other entities. Prior to SB 254, DOR had no way of determining debtor s bank and bank account information. Revenue Estimate The Legislative Revenue Office (LRO) estimated that there would be approximately 103,000 accounts in fiscal year 2018 subject to administrative garnishment by DOR and that 25,799 (or 25%) would be successfully garnished for an average of $1,379 per garnishment. This will mean 1,922 (or 5.93%) new garnishments above the prior year. Total garnishment collections are estimated to be $35.6 million a year. Assuming a start date of July 1, 2018, SB 254 is expected to generate an additional $2 million for the biennium ($1.7 million General Fund), $8.3 million in the biennium ($7 million General Fund), and $10.2 million in revenue in the biennium ($8.6 million General Fund). FIDM administrative fee and cost recovery are not included in these figures, but discussed below. Fiscal Impact Statement During the legislative session in 2017, there was no explicit funding provided for SB 254 as DOR stated that the agency could instead parallel the funding mechanism used for county lien recording fees to pay for the costs of the FIDM. This process involves the use of a General Fund revolving account to pay for the FIDM out of the fund in which collected debts are deposited. In addition, DOR Legislative Fiscal Office Interim Joint Committee on Ways and Means January 2018

2 had some difficulty responding to questions related to startup costs and the impact of the measure on the current administrative garnishment process. The fiscal impact, however, noted that if the funds recovered from debtors are insufficient to cover the costs of this program, the Department may need to return to the Legislature. By returning with a request, DOR is no longer comfortable with using the revolving fund process to fund SB 254 as the agency has previously agreed. Instead, the agency is seeking a more traditional budget approach. DOR Request (January 2018) DOR is requesting a General Fund appropriation of $400,906 and Other Funds limitation of $70,748 for a total request of $471,654. DOR has revised the agency s original request to $377,277 General Fund and $94,427 Other Funds for a total of $471,654. No new positions or full-time equivalents were requested as DOR states that all associated workload increases (garnishment responses and challenges, returned mail, processing additional payments, information technology services, etc.), can be absorbed by the agency. In addition, DOR has stated that there is no additional cost to the Core Systems Replacement project and the GENTAX product contract as this functionality is within scope of the project. DOR s ability to absorb these costs lowered the cost of the fiscal impact. Oregon has approximately 124 financial institutions. Data matching may occur in one of two methods: (a) direct with the financial institutions, whereby DOR will pay actual costs up to $2,500 for the first data match and up to $150 per quarter thereafter; or (b) indirectly through a vendor service that will run the data match and to whom DOR will pay an estimated $55 per financial institution per quarter. DOR s request, however, assumes that all 124 financial institutions will use both the direct and indirect submission methods, which may potentially be a double-counting of cost. DOR also assumes that the financial institutions will incur costs at the maximum reimbursement rate allowed under the measure. DOJ s experience with its data match program has been the financial institutions bill at a rate of only $40 per match. DOR notes that all administrative garnishments will be electronically filed through GENTAX. DOR is requesting one-time startup funding to pay for the initial financial institution data match ($310,000), vendor service contract ($22,000), and postage ($63,394). Ongoing costs are also needed for a payment to financial institutions for data matching ($55,800) and vendor service fees ($20,460). The biennial cost of FIDM totals $153,264, of which $130,274 would be General Fund and $22,990 Other Funds. DOR s request, however, notes an unspecified ongoing need for General Fund for unrecovered administrative fees and costs, discussed in detail below. Implementation There is a high degree of uncertainty related to how SB 254 will impact DOR s current garnishment process. On one hand DOR believes that fewer administrative garnishments will be issued, but those that are issued will be more successful. On the other hand, DOR has stated that the agency is planning to notify 113,204 subject debtors of the FIDM program and anticipates a 13.6% increase in the number of bank garnishments for the four quarters beginning July 2018 through June The agency plans on issuing an additional 2,067 administrative garnishments during this one fiscal year Legislative Fiscal Office Interim Joint Committee on Ways and Means January 2018

3 period (LRO estimated 1,445) over the 15,163 garnishments issued in DOR also makes no estimate of the impact of SB 1067 (2017), which will centralize debt collection activity in state government with DOR beginning on July 1, The disconnection between varying DOR implementation assumptions, and then the LRO impact statement, is disconcerting for a measure that has been the subject of legislative discussion for two legislative sessions. There is also a lack of clarity on whether administrative garnishments will be issued on debtor accounts with agreed upon payment plans. The issue with such an approach is that debtors currently on payment plans would then see their debt increase due to having to pay for DOR s cost recovery efforts, despite the fact their accounts are not subject to garnishment unless or until their payment plan defaults. DOR has delayed implementation of SB 254 pending the outcome of this request. DOR s request makes no mention of whether a pre-contract request for proposal solicitation for a service provider has occurred nor does the agency provide a timeline or schedule for implementation and whether the measure will be implemented on time by July 1, Any delay could have implications to the state s General Fund revenue forecast, which includes $1.7 million in General Fund forecasted revenue attributable to SB 254. Administrative Fee Cost Recovery SB 254 allows DOR to recover only FIDM costs rather than the agency s total collections costs. During the 2017 session, DOR expected to recover fees to add to debtor accounts at a rate of 75% based on the recovery rate for recording and release fees charged to debtors. DOR now estimates that 2,067 administratively bank garnishments will be issued and the agency will recover only 16.4% of fees and costs based on the average collection rate for DOR as detailed in the annual Report on Liquidated and Delinquent Accounts Receivable (June 30th, 2016). This number is used because these fees are collected after penalty, interest, and then tax are paid, according to DOR. For the biennium, DOR estimates total administrative fee revenue, based mostly on costs incurred during the biennium, of $471,652 Other Funds, of which $394,301 (83.6%) will be unrecovered during the biennium and $77,351 will be recovered; however, DOR does not expect to begin recovering administrative fees until the biennium. These costs only include those associated with postage, paying banks, and the vendor service and excludes agency staff and other program costs, which SB 254 excludes from recovery. Any unrecovered costs are assumed to be a General Fund expense. One reason cost recovery will occur over time is due to the fact that few debtors pay off their debt in full and by statute, recovered monies must first be posted to penalties, interest charges, taxes, then collection cost recovery. There are several concerns related to DOR s assumptions about administrative fee and cost recovery. First, the recovery rate appears exceedingly low for administrative garnishments on known debtor bank accounts. Second, DOR appears to be assuming that the fund split on cost recovery parallels the agency s administrative fund split. The issue is that DOR may have disproportionately more garnishments from Other Funded accounts rather than General Funded accounts (i.e., tax) than are reflected in an 80%/20% fund split. This is before the impact of SB 1067 on Other Agency Account collections, which potentially may increase the amount of Other Funded garnishments. Finally, any administrative fee and cost recovery will return to the agency as an Other Funds revenue Legislative Fiscal Office Interim Joint Committee on Ways and Means January 2018

4 source, which DOR states will offset only a portion of future General Fund expenditures. In other words, there is an ongoing General Fund obligation and the repayment of General Fund administrative costs is only accomplished indirectly through increased collections deposited into the General Fund. Possible Statutory Issues The Legislature in 2018 may want to consider changes to current law, and prior to implementation, that would allow DOR greater flexibility to recover eligible costs on a flat fee basis rather than an actual cost basis. Improving cost recovery may lessen the General Fund needed to fund unrecovered costs. Recommendation The Legislative Fiscal Office (LFO) recommends that the interim Joint Committee on Ways and Means recommend an increase of $377,227 General Fund and $94,427 Other Funds expenditure limitation for the Department of Revenue and SB 254 (2017) implementation costs be included in a budget reconciliation bill during the 2018 legislative session, with instructions that the funds be one-time costs to be phased-out of the agency s budget and with the understanding that the Department of Administrative Services (DAS) will unschedule $377,227 General Fund until the Department of Revenue is able to provide actual expenditure data to DAS and LFO for the scheduling of funds. Legislative Fiscal Office Interim Joint Committee on Ways and Means January 2018

5 44 Department of Revenue Heath Request: Increase the General Fund appropriation by $400,906 and increase Other Funds expenditure limitation by $70,748 to fund the implementation of Senate Bill 254 (2017). Recommendation: Increase the General Fund appropriation by $377,227 and increase Other Funds expenditure limitation by $94,427 during the 2018 Legislative Session to fund the implementation. Instruct the department to phase out the approved budgetary authority during the development of the budget. Discussion: Senate Bill 254 (2017) gave the Department of Revenue a new tool to pursue delinquent debtors. The bill requires financial institutions to match their account holders with a list of delinquent debtors the department provides on a quarterly basis. This process will make it easier for the department to garnish the bank accounts of delinquent debtors. No additional budgetary authority was provided to the department to implement this new law, as the department had represented it was possible to use proceeds from the garnishments to fund the startup costs of the program within the biennium. After further investigation, the department has determined it is unable to recover their costs in the manner initially envisioned. The initial analysis overlooked the order in which payments come in, where the fees the department will receive for its costs are the last payments the debtor will make, meaning cost recovery could be months or years removed from the initial expenditure. The costs the department is projecting for the implementation include $365,800 for the fees the law requires to be paid to each financial institution to cover their costs, $42,460 associated with data connections to the financial institutions and $63,394 in postage costs for mailing notices to the debtors. The costs for the program will be split between the Personal Tax and Compliance Division and the Business Tax Division based on the estimated use of the data matching, with some limited administrative and postage costs budgeted in other units. The Department of Administrative Services Chief Financial Office recommendation is slightly different from the department s request, at $377,227 General Fund and $94,427 Other Funds, compared to $400,906 General Fund and $70,748 Other Funds. This change was made in consultation with the Department of Revenue to better reflect the use of funding by the tax programs using the data matching. The department has identified some ongoing costs associated with the data matching program. Given uncertainty around those projections, the department is instructed to phase out all budgetary authority associated with implementing the data matching during the development of the budget. Any budgetary need going forward will be informed by the department s actual experience with the program and should be requested as a policy package. Legal References: Increase General Fund appropriation established by chapter 601, section 1(1), Oregon Laws 2017, for the Department of Revenue, Administration, by $53,884 for the biennium. Department of Administrative Services 44-i January 12, 2018

6 Increase Other Funds expenditure limitation established by chapter 601, section 2(1), Oregon Laws 2017, for the Department of Revenue, Administration, by $9,509 for the biennium. Increase General Fund appropriation established by chapter 601, section 1(3), Oregon Laws 2017, for the Department of Revenue, Personal Tax & Compliance Division, by $240,058 for the biennium. Increase Other Funds expenditure limitation established by chapter 601, section 2(3), Oregon Laws 2017, for the Department of Revenue, Personal Tax & Compliance Division, by $4,899 for the biennium. Increase General Fund appropriation established by chapter 601, section 1 (4), Oregon Laws 2017, for the Department of Revenue, Business Division, by $83,285 for the biennium. Increase Other Funds expenditure limitation established by chapter 601, section 2(4), Oregon Laws 2017, for the Department of Revenue, Business Division, by $80,019 for the biennium. Department of Administrative Services 44-ii January 12, 2018

7 Department of Revenue 955 Center St NE Salem, OR December 6, 2017 The Honorable Senator Richard Devlin, Co- Chair The Honorable Representative Nancy Nathanson, Co- Chair Joint Interim Committee on Ways and Means 900 Court Street NE H- 178 State Capitol Salem, OR Dear Co- Chairpersons: Nature of the Request The 2017 Legislature passed Senate Bill (SB) 254 authorizing the creation of a data match system with financial institutions. This system, called Financial Institution Data Match (FIDM) will allow us to match debtors to account information at financial institutions to identify garnishment sources. The department did not receive funding for this program when the bill was passed. It instead proposed using potentially available general fund resources as a methodology to manage this program, like how county lien recording fees are collected. If the funds recovered were insufficient to cover the costs of the program, it was noted that we would be given the opportunity to return during the 2018 Legislative Session with an updated estimate of costs for implementing FIDM. Additional analysis indicates that fee recovery will not occur in the biennium as originally estimated, but only after FIDM is operating. Receipts will likely not be received until after the commencement of the biennium and they will not be at a rate sufficient to fully reimburse startup costs. Additionally, when the original fiscal analysis was prepared, we did not anticipate the level of funding that would be necessary. We have since learned that we do not have ability to use our general fund to pay for this up front, as reimbursement is not expected in the biennium. Agency Action The bill requires financial institutions to participate in a data match program established by the Department of Revenue that identifies assets held by debtors. The program is similar to one operated by the Child Support Division of the Department of Justice. Under our data match program, financial institutions will compare a file of debtor information we provide them against names of account holders. We would be notified of any matches, and we can then garnish the debtor s account.

8 Joint Interim Committee on Ways and Means December 4, 2017 Page 2 of 4 Without a data match program in place, we spend unnecessary time and funds issuing garnishments to multiple financial institutions to search for debtor accounts, not knowing for certain if an account exists. We pay the financial institutions for the search, regardless of whether an account is found. Under the authorizing legislation, we ll pay financial institutions $2,500 for the first data run and $150 per quarterly data run thereafter. We plan to contract with a vendor to facilitate the data match, to which we ll pay $55 per financial institution per quarterly data run. We re authorized to charge a fee to the debtor to recover the costs of administering the matching program, as long as the debtor is notified in advance of the existence of the debt and maximum possible fee. We plan to put the notice of the fee on the notice and demand for payment letter that is issued to all debtors. After the debtor has received notice, the accounting system will be updated to charge the debtor the amount of the fee, thereby increasing the amount they owe and necessarily, the accounts receivable balance. Debtors may make payments in installments over time to pay their debt in full. Under the law, payments received first post to penalty, then interest, then tax. Thus, payment of collection fees generally occurs late in the collection process. Therefore, we can t say for certain when we ll begin to see receipts from the payment of these fees; however, we expect that will happen beginning in the biennium. We plan to begin billing for the fees 75 days after we receive funding for the FIDM implementation because of the time needed to update the notice and test the changes and program and test the new accounting codes to track the fee. The bill takes effect July 1, Costs for this program include vendor start-up costs and ongoing fees, quarterly payments to financial institutions participating in the program, and a one-time mass mailing to debtors notifying them of the program and the maximum fee that may be charged. Costs are estimated to be $471,654: $400,906 (85 percent General Fund) for one year of expenses and $70,748 (15 percent to Other Funds) for the biennium. One- time costs biennium FI fee ($2,500), per FI (124 per DCBS): $2,500 x 124 $310,000 Estimated vendor one- time startup costs $22,000 Total cost for one- page notice to debtors of fee: 113,204 x $0.56 $63,394 Total one- time costs $395,394

9 Joint Interim Committee on Ways and Means December 4, 2017 Page 3 of 4 Ongoing costs biennium FI fee ($150), per FI (124), per quarter (3): $150 x 124 x 3 $55,800 Vendor fee ($55), per FI (124), per quarter (3): $55 x 124 x 3 $20,460 Total ongoing costs $76,260 Effect on revenues biennium DOR expects to recover 16.4% of fees and costs. This is the average of all collection rates* from 2004 through 2015 and 2017 reported in the LFO report on L&D debt. Reimbursement will be OF received in and offset future GF expenditures, however not in full. * (collection rate = (collections/(beginning balance + additions)) $77,351 Action Requested The department requests that the Legislature approve the funding necessary to support the implementation of SB 254 (2017) by increasing our General Fund appropriation by $400,906 and Other Fund limitation by $70,748, and recognizing the effect on revenues through fee recovery over time of $77,351 beginning in the biennium. Fee recovery receipts will be Other Fund and offset future ongoing General Fund expenditures, but not in full. Thus the request for funding to implement FIDM is $471,654. Legislation Affected Increase General Fund expenditure limitation made to the Department of Revenue for the General Services Division in the Administration Appropriation established by Section 1 (1), Chapter 601, Oregon Laws 2017 (enrolled Senate Bill 5535), for the biennium beginning July 1, 2017 by $16,165. Increase Other Fund expenditure limitation made to the Department of Revenue for the General Services Division in the Administration Appropriation established by Section 2 (1), Chapter 601, Oregon Laws 2017 (enrolled Senate Bill 5535), for the biennium beginning July 1, 2017 by $2,853. Increase General Fund expenditure limitation made to the Department of Revenue for the Administrative Services Division in the Administration Appropriation established by Section 1 (1), Chapter 601, Oregon Laws 2017 (enrolled Senate Bill 5535), for the biennium beginning July 1, 2017 by $37,719. Increase Other Fund expenditure limitation made to the Department of Revenue for the Administrative Services Division in the Administration Appropriation established by Section 2 (1), Chapter 601, Oregon Laws 2017 (enrolled Senate Bill 5535), for the biennium beginning July 1, 2017 by $6,656. Increase General Fund expenditure limitation made to the Department of Revenue in the Personal Tax and Compliance Appropriation established by Section 1 (3), Chapter 601, Oregon Laws 2017 (enrolled Senate Bill 5535), for the

10 Joint Interim Committee on Ways and Means December 4, 2017 Page 4 of 4 biennium beginning July 1, 2017 by $347,021. Increase Other Fund expenditure limitation made to the Department of Revenue in the Personal Tax and Compliance Appropriation established by Section 2 (3), Chapter 601, Oregon Laws 2017 (enrolled Senate Bill 5535), for the biennium beginning July 1, 2017 by $61,240. Respectfully submitted, Nia Ray, Director Oregon Department of Revenue