Governments Pleased with Collection Performance; Outsourcing More Work to Private Agencies

Municipal government collections is a growing market within the accounts receivable management industry: most government agencies that outsource are happy with the arrangements they have, many are expanding and more governments are outsourcing collections on a continuing basis.

“Our program has been very successful,” said Lynne Reynolds, director of municipal court operations for the city of Boulder, Colo., which started outsourcing its traffic fine collections in 2002.

The success that Boulder and other governments have had with outsourced collections has caught the attention of other governments who are using outsourced collections to increase their revenues, according to Nick Bernardo of Net Gain Marketing, Collingswood, N.J., and publisher of MyGovWatch.com.

“With only a fraction of known U.S. municipalities currently outsourcing, and current outsourcers increasingly hiring multiple vendors, we expect this market to grow indefinitely, at least keeping pace with year over year growth we saw between 2007 and 2008,” Bernardo said.

In 2007, there were at least 200 new government contracts awarded, with placements to agencies of at least $5.7 billion, according to Bernardo. In 2008, those figures grew to at least 280 contracts placed at a value of $6.95 billion. The 2008 figure does not include the Department of Education collection portfolio of $23.8 billion.

The government entities awarding these contracts include the federal government, states, counties, municipalities, along with colleges, universities, regional utilities, and healthcare facilities that all receive direct public funding, Bernardo said.

“One of the things that is happening right now is that government budgets are under massive constraints, so they’re relying on reserves and increasing taxes to raise revenues,” said Michael Klozotsky, analyst for Kaulkin Ginsberg, a sister company of insideARM. Because of the economy, reserves in most governments are low, and raising taxes takes time and is politically sensitive. So accelerating collections is the remaining method to ease budget constraints.

Most government entities don’t have the funding that would be necessary to build a collection program, Klozotsky added. “They don’t have [collections] as a core competency.”

“The collection company works to locate violators with methods we do not have at our disposal,” Reynolds said.

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The collection firms, like Austin, Tex.-based Municipal Services Bureau, has technologies like automated dialers as well as trained collectors that can work on several different government accounts. Most of the individual government entities don’t have enough collections themselves to cost-justify the technology or the dedicated collectors, said MSB president Bruce Cummings.

Even larger municipalities, like Chicago, find it far more efficient to outsource the collections work, Cummings said.

Reynolds explained that their collection outsourcing process also compels people to pay even before the collection agency starts working the accounts

“With most of our cases, the violator is sent a warning letter when their money due date is 45 days late,” said Reynolds.  “The warning letter indicates they need to contact the court as our records indicate they are past their due date.  They are given two weeks in the warning letter to respond.  If their money due date exceeds 59 days, then on the 60th day they will be referred to collections.  The warning letter instructs the violator that we will be turning their outstanding balance over to a collection agency and they will incur additional costs, so please contact us.  In our court, the monies owed will increase by 25 percent. This percentage is the collection referral fee.  It goes to the collection company.”
 
“When we first started this process, I was amazed at the number of individuals that respond to the warning letter,” Reynolds noted. “We had advised them of a hold on renewing their driver’s license, we had sent them a copy of a warrant for their arrest and they still did not respond.  The collection process was something many of these folks cared about and it got their attention.”

Cummings noted that MSB’s collectors are trained to take a consultative approach, not the aggressive approach that has been the subject of negative debt collection articles in newspapers and other consumer publications.

According to Bernardo, government employees also earn more – meaning higher personnel costs, than do private sector employees. Nor does the government compensation plan tend to include bonuses for the best performing collectors, meaning that the top performers are likely to seek private sector positions that reward them for their success.

“People are born capitalists,” Bernardo said. “Bonuses will help motivate them to do a better job.”

“Collections is an additional tool in our tool box,” Reynolds said. “It has been very effective. I am glad that the Colorado state statute grants the use of collection agencies to our courts.”