Localities, Strapped For Cash, Turn to Collections

Cities and counties hope to fill budget gaps by recovering unpaid debts.
by | February 10, 2012

Rahm Emanuel has been a congressman, a White House chief of staff and a mayor. Now, he’s taken on another role: debt collector.

He isn’t going door-to-door chasing people who’ve welched on their debts -- though the fiery Chicagoan would likely do well in that role. Instead, he’s leading a major effort to ratchet up the city’s collection of nearly $749 million it’s owed for unpaid parking tickets, water bills and ambulance services, among a slew of other charges.

As Chicago entered the 2012 fiscal year, it faced a staggering $635 million deficit. Some of the remedies the city has pursued to close that gap will likely be noticed by many residents, such as reduced library hours and higher utility fees. But the city is also hoping to find savings through debt collection, which is unlikely to be noticed by those who don’t owe.

Chicago officials project that by taking more aggressive efforts to collect debt owed to the city, they can collect at least $33 million this year. Typically it collects $16 million to $18 million.

Chicago’s not alone. In the wake of the recession, localities across the country have started the process of turning to debt collection as a way they hope to plug budget holes caused by decreased revenue.

“It’s another arrow in their quiver in the way they can address some of their problems, said Jacqueline Byers, research director for the National Association of Counties.

In December, Washington, D.C. CFO Natwar Gandhi estimated that legislation proposed to improve the city's debt collections would generate an extra $10 million annually. Last year, a Houston task force called for an overhaul of the city’s debt collection strategy, citing the more than $900 million owed to the city. And in 2010, a special commission in Los Angeles recommended 65 steps the city could take to improve on its collections, given the $541.1 million in non-tax money owed to the city.

Chicago began taking its more aggressive approach last month. The city has started reporting delinquent debtors to credit agencies – it hasn’t done that in the past – and it’s referring more cases to law firms that specialize in collections. The city’s also restricting licenses for businesses that owe the city money, and it’s hoping to find efficiencies by consolidating its debt collections within a single city department.

Emanuel has even taken a special interest in targeting city employees who owe. In November, he announced that just weeks after starting an effort to target the local government workforce, Chicago had recovered more than $1 million of the nearly $3 million owed.

“This wasn’t a one-time budget fix,” said deputy comptroller Holly Stutz in an email to Governing.  “This was a new approach to collecting debt.” She said the city anticipates collecting a minimum of $33 million due to the overhaul, and Emanuel’s administration has pledged to never let debt mount to the previous levels.

Meanwhile, it’s not just big cities that are getting in on the action. Essex County, N.Y., with a population of less than 40,000, is seeking to hire a law firm to help recoup money owed to the county-owned nursing home. Linda Wolf, the county’s purchasing agent, said as those debts have mounted, it's become clear that the task is just too big for the county's staff to handle.

Counties in Arizona, Florida, Wisconsin and Washington, among other places, have also sought out the services of private debt collectors in recent years.

Indeed, the situation has created something of a boom for collection agencies and law firms that specialize in collections. Last year marked the fifth consecutive year cities collectively saw decreases in revenue. Debt collection is an attractive way for them to generate revenue that wouldn’t otherwise be available to them.

And because many localities lack the resources or the training to collect the oldest, most difficult-to-recover debt, much of the work is outsourced to private companies that are typically paid a percentage of what they recover, minimizing the up-front costs for localities.

In 2010, debt collection agencies recovered about $54.9 billion of debt. Of that, about 2.1 percent -- more than $1 billion -- was from government work, according to an industry study.

Mark Schiffman, a spokesman for the Association of Credit and Collection Professionals, the industry trade group, said government collections are a growing part of his members’ work. “It makes sense, given what’s been reported on how much states are owed and cities are owed and the holes in the budget it creates,” Schiffman said.

Pursuing debt collections can also be attractive, given the fact that while cities can scrimp and save in a variety of areas, there aren’t many ways to boost revenue other than tax hikes or fee increases.

Schiffman said debt collection companies take detailed instructions from governments to determine how aggressively they should pursue the debt, since the same people they’re contacting about money owed are also local voters.

Still, debt collection doesn’t come without its pitfalls, and the industry has faced several high-profile controversies. Linebarger Goggan Blair & Sampson, LLP – one of the heavyweights in municipal debt collection – is still dogged by the 2004 scandal in which a partner pleaded guilty to attempting to bribe San Antonio city council members in exchange for favorable votes on a new contract.

And a 2005 report from New Jersey’s Commission of Investigation found that managers in the state's taxation and revenue divisions were given nearly $66,000 in gifts like golf outings, cigars and booze from a debt collector called OSI that was on contract with the state. In exchange, those officials allegedly turned a blind eye to the company’s excess billing, according to the report.

Meanwhile, collections aren’t always a sure thing. The Houston Chronicle reported that, a year after the city pledged to collect its $900 million debt, it’s become clear that most of it is too old to ever be collected, and it’s unlikely the city will ever recoup more than $200 million.

But positive experiences still abound. In Birmingham, Ala., the city hired a local collector to collect a particularly difficult category of debt: money owed to the city by businesses outside the city limits. Because of jurisdictional issues, the city can’t take a heavy-handed approach.

The results have been a pleasant surprise, said Henry Young III, the city’s deputy finance director.

Since June 2010, the city has turned about 4,300 accounts to its debt collection firm, which has collected about $593,000 from 601 accounts. The effort has been so successful that the city is looking at placing a contract with a debt collector for fines and fees owed to the municipal court.

“We weren’t expecting a huge return,” said Young. “It’s been pretty successful, and we’re looking forward to expanding.”

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