Restructuring the Court-Ordered Debt Collection Process

Restructuring the Court-Ordered Debt Collection Process MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • NOVEMBER 10, 2014 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY California’s Court-Ordered Debt Collection Process. Upon conviction of a traffic violation or criminal offense, individuals are typically required by the court to make certain monetary payments as part of their punishment. The total amount owed by the individual is known as “court-ordered debt.” Individuals who owe such debt must either provide full payment or set up installment payment plans immediately upon conviction. If an individual does not pay on time, collection programs are authorized to use various tools (such as additional fines or wage garnishments) to motivate individuals to pay their debt. While counties are statutorily responsible for the collection of such debt, collection duties are often delegated to the courts. Payments collected to satisfy court- ordered debt are subsequently distributed in accordance with state law to support various state and local programs. Weaknesses of the Current Court-Ordered Debt Collection Process. Based on our analysis and discussions with various stakeholders in the collection process, we identified a number of weaknesses in the current court-ordered debt collection process. First, there is a lack of clear fiscal incentives for programs to collect debt in a cost-effective manner or to maximize the total amount of debt they collect. For example, there is almost no direct relationship between a court’s collection effort and the revenue that accrues to them. Second, we find that it is difficult to comprehensively evaluate and compare the performance of existing collection programs due to a lack of complete, consistent, and accurate reporting on how programs collect debt. Finally, we find that the current statutory division of collection responsibilities between counties and courts can undermine the oversight and modification of collection programs—thereby making it difficult to make improvements. Restructuring the Court-Ordered Debt Collection Process. In view of the above, we make recommendations to improve the collections process. First, we recommend that the Legislature shift statutory responsibility for debt collection to the trial courts and implement a new collections incentive model. This restructured process would: (1) consolidate responsibility with the entity best suited for managing collections, (2) provide courts with greater flexibility in how and when they collect debt, and (3) reward courts for collecting cost-effectively or increasing the total amount collected. We recommend that the Legislature authorize a three-year pilot program to test the new incentive model prior to implementing it statewide. Second, we recommend improving data collection and measurements of performance to enable a comprehensive evaluation of court-ordered debt collections. In combination, we believe these recommendations would improve the efficiency of debt collection and increase the total amount of debt revenue collected and distributed to the state and local governments. www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION Court-ordered debt collected from defendants additional improvements can be made to further convicted of traffic violations or criminal offenses improve the collection of court-ordered debt. provides revenue to a number of state and In this report, we (1) provide background local funds, which in turn support a variety of information on court-ordered debt, including how programs including trial court operations and it is collected and who benefits from the proceeds, victim assistance. As a result, the state has an (2) assess the efficiency and effectiveness of the interest in ensuring that such debt is collected in a current court-ordered debt collection process, and cost-effective manner that maximizes the amount (3) make a series of recommendations to improve of revenue available to support these programs. the court-ordered debt collection process which Over the past decade, the Legislature, the judicial could potentially lead to increased collections of branch, counties, and other stakeholders have such debt. In preparing this report, we spoke with made a number of different changes intended to a number of court administrators and judges from improve the court-ordered debt collection process. trial courts throughout the state in order to gain an For example, a cost-recovery program for collecting in-depth understanding of the various complexities delinquent debt (debt not paid on time) was put in of the court-ordered debt collection process. We place by the Legislature. In addition, the Franchise also spoke with county staff, state agency staff, Tax Board (FTB) launched a court-ordered debt and other stakeholders involved in the collections collection program. While many of these actions process. For example, we met with staff of the have helped increase the amount of debt collected, Judicial Council and analyzed collections data they provided to us. CALIFORNIA’S COURT-ORDERED DEBT COLLECTION PROCESS What Is Court-Ordered Debt? increase the total obligation owed upon conviction of a traffic violation or criminal offense. The During court proceedings, trial courts typically amount of this increase can vary widely depending levy a monetary punishment upon individuals on the specific offense committed and other factors. convicted of traffic violations or criminal offenses. Court ordered-debt is classified as All fines, fees, forfeitures, penalty surcharges, nondelinquent or delinquent. Nondelinquent court- assessments, and restitution assessed in the ordered debt consists of a monetary punishment disposition of traffic and criminal cases are known assessed by the court that has not become as court-ordered debt—meaning the total amount overdue. Individuals make timely payments of of money that an individual owes the court. State nondelinquent debt by paying in full by a specified law sets a base fine for each traffic or criminal date or through installment payments as set by the offense and requires the court to add certain court. Delinquent court-ordered debt consists of charges (such as a state penalty assessment) to the any debt that has not been paid on time, including base fine. As shown in Figure 1 (see next page), any missed installment payments. these additional fees and assessments can greatly www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT law also required courts Figure 1 and counties to maintain Various Fines and Fees Substantially Add to Base Fines the structure of the As of March 1, 2014 collection program that Failure to Driving Under was in place in 1996. This Stop at Influence of Stop Signa Alcohol/Drugsa preserved any previously- (Infraction) (Misdemeanor) agreed-upon divisions of Base fine $35 $390 responsibility between State surcharge 7 78 courts and counties. State penalty assessment 40 390 County penalty assessment 28 273 Actual Division of Court construction penalty assessment 20 195 Responsibilities Varies DNA Identification Fund penalty assessment 20 195 Across Counties. As a EMS penalty assessment 8 78 EMAT penalty assessment 4 4 consequence of these laws Court operations fee 40 40 that preserved preexisting Conviction assessment fee 35 30 court-ordered debt Night court fee 1 1 Totals $238 $1,674 collection arrangements, a These examples show the total obligation owed for a selected infraction and misdemeanor. Depending the structure of collection on the specific violation and other factors, additional county or state assessments may apply. programs varies across the EMS = Emergency Medical Services and EMAT = Emergency Medical Air Transportation. state. In some programs, Who Collects Court-Ordered Debt? the court or county individually collects all court-ordered debt in their Counties Statutorily Responsible for jurisdiction. Other programs delegate collection Collections. Prior to 1997, each county bore activities among multiple entities in various ways. responsibility for funding and operating the For example, in some cases, the court is responsible trial court in its jurisdiction. This included the for collecting all debt related to traffic violations responsibility for collection of court-ordered debt. and the county is responsible for collecting all debt Some counties operated the collection program by related to felony offenses. However, while collection themselves, while other counties either operated activities may be delegated among various entities, the collection program in partnership with their either the county or the court will serve as the courts or delegated all administrative control of the primary administrator of the collection program. collection program to their courts. According to Judicial Council staff, courts are In 1997, the state shifted primary responsibility currently the primary administrator of collection for the funding of trial court operations from programs in about two-thirds of the state’s the counties to the state. State law defined the counties. specific programs and services considered Numerous Entities Have a Role in Collections. part of trial court operations and made them a A number of public and private entities participate state responsibility. State law also listed specific in the court-ordered debt collection process. The programs and services excluded from this shift— exact role and responsibilities of these entities one of which was collections. Accordingly, counties varies widely across the state. We provide a general continue to be statutorily responsible for the description of how each entity participates below. collection of court-ordered debt. However, unless both parties subsequently agree to changes, state 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT • Trial Courts. Each of California’s 58 data collection, helps develop and trial courts (one per county) oversees the implement best practices, helps negotiate disposition of all criminal and civil cases contracts for third-party collection in its jurisdiction. Upon resolution of services, and assists with the distribution of these cases, each court generates an order collected revenues. detailing its decision, which includes any • Collection Vendors. Collection programs court-ordered debt owed by a convicted may contract with private vendors for individual. Once these orders are entered the collection of nondelinquent or delin- into court case management and financial quent court-ordered debt. These vendors systems, courts begin collection activities provide specific services in exchange for themselves or transfer the information in a percentage of the amount they collect. the orders to another collecting entity, such Currently, collection programs typically as a county agency or private vendor. contract with one (or more) of the • County Agencies. As described above, 11 vendors who have negotiated contracts some counties collect some or all of the with Judicial Council. court-ordered debt. In these cases, typically • FTB. Collection programs can also revenue recovery units within the County contract with FTB for the collection of Treasurer/Tax Collector’s Office handle delinquent court-ordered debt. The board the collections for the county. In some offers two different services to collection counties, however, other agencies handle programs. First, the board’s Tax Intercept court-ordered debt collections (such as Program, which is operated in partnership the Local Child Support Agency Office). with SCO, intercepts tax refunds, lottery Counties are responsible for submitting winnings, and unclaimed property from all revenues obtained by a collection individuals who are delinquent in paying program—after deducting its share of the court-ordered debt. An administrative fee revenue—to the State Controller’s Office is charged for each successful intercept. (SCO) monthly. Second, the Court-Ordered Debt • Judicial Council. The Judicial Council Collection Program identifies debtors’ serves as the governing and policymaking assets through automated searches of body of the judicial branch. Although wage and financial records. The FTB then counties are statutorily responsible for administratively issues levies against these collections, state law requires the Judicial assets or orders the withholding of funds Council to oversee collection programs to meet debt obligations. The FTB only by adopting operational guidelines, devel- contracts with courts and county agencies oping performance measures and bench- for the collection of debt that is more marks, and submitting annual reports than 90 days delinquent, and retains up to the Legislature. Its staff also provides to 15 percent of collected revenue to cover guidance and assistance to collection administrative costs of the Court-Ordered programs. Specifically, the staff coordinates Debt Collection Program. www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT • SCO. The SCO receives collected revenues up installment payments, court or collections staff from the counties on a monthly basis and obtain personal, contact, and financial information oversees their distribution to the appro- to establish a payment record for each individual. priate funds. In addition to participating Courts can then use this information to send in FTB’s Tax Intercept Program, the SCO monthly payment reminders or billing slips to help also routinely audits collection programs to individuals maintain timely payments. ensure that they record and designate debt Collection of Delinquent Debt. If an revenues appropriately amongst numerous individual does not pay on time, the collections state and local funds. The SCO assesses process enters the second stage—the collection monetary penalties against collection of delinquent debt. The agency responsible for programs for inaccurate distributions. collecting nondelinquent debt (such as the court or a private vendor) converts the payment record • Department of Motor Vehicles (DMV). into a collections account and transfers it to the Collection programs also partner with entity responsible for the collection of delinquent DMV for assistance in the collection debt. In some cases, the same entity collects both of delinquent court-ordered debt. The nondelinquent and delinquent payments. DMV will suspend the driver’s license Nearly all collection programs utilize a variety of individuals when they receive notifi- of tools to motivate individuals to pay their debt. cation from collection programs that the Most delinquent individuals first receive a mailed individuals have delinquent court-ordered courtesy notice outlining the punitive actions that debt. The DMV typically removes holds they will face if payment is not made by a specific on driver’s licenses after five years if date. (Some collection programs provide this the collection program has not already notification after individuals become delinquent, requested their removal. while others provide notification immediately prior to the individual becoming delinquent.) Under state How Is Court-Ordered Debt Collected? law, delinquent collection activities and sanctions Collection of Nondelinquent Debt. The first can commence after a minimum of ten calendar stage of the collection process begins with the days of that notification. collection of nondelinquent debt. This may occur Often times, collection programs have when individuals choose not to contest a violation relatively little contact information for debtors, and instead submit full payment of their debt (for particularly for those who did not provide the court example, paying a traffic ticket). It may also occur with personal information as part of establishing after the court has issued a final ruling in traffic or installment plans. Programs may also have criminal proceedings. In both scenarios, the exact out-of-date contact information if, for example, the amount owed by the individual is calculated by debtor has moved. Thus, collection programs often the court based on statutory requirements, though need to locate debtors. These programs commonly judges have discretion to reduce or waive some use a process called “skip tracing” to do so. Skip fines and fees. Individuals who plead guilty or are tracing involves using a wide range of public convicted of traffic violations or criminal offenses records (such as phone or criminal records and must either provide full payment immediately or license or credit reports) to locate an individual. set up installment payment plans. When setting Some programs also use tools like predictive 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT dialers, which are automated telephone systems described above. Private or FTB collection that dial phone numbers in an order intended to programs receive a share of any delinquent debt maximize the number of debtors each collection they collect. For example, state law authorizes FTB agent is able to successfully contact. This is because to charge an administrative fee of up to 15 percent the system focuses on connecting collection agents of court-ordered debt collected. (The FTB currently to only those phone numbers where individuals aligns its fee with the actual cost of collections.) actually answer the phone. This enables collectors At any point in the process, debtors may contact to contact debtors efficiently to encourage them to the appropriate collections entity to either make a make payments. These automated systems can also full payment or reestablish installment payments, efficiently direct incoming calls from debtors to the thereby halting collection sanctions. next available collection agent. This helps debtors Discharging Delinquent Debt. A collection seeking to resolve their cases reach a collector more program may determine that the amount of debt quickly and efficiently. it is pursuing is too small to justify the cost of As indicated earlier, when the ten-day collection. In such cases, state law authorizes the notification period has passed without payment, program to seek a “discharge of accountability.” programs can begin utilizing punitive sanctions. When debt is discharged, debtors are still liable for One of the first sanctions typically used by their debts, but the collection program is no longer collection programs is a civil assessment. State obligated to actively pursue the debt. This reduces law authorizes collection programs to impose a how much outstanding court-ordered debt is “on $300 civil assessment against any individual who the books.” Either the collection program’s county fails to either pay court-ordered debt or appear board of supervisors or the presiding justice of its in court without good cause. Another sanction court must approve the discharging of debt. that is typically used early in the process is the Actual Collection Process Varies Across suspension of the debtor’s license by the DMV. Counties. Individual collection programs generally When collection programs notify the DMV of the follow the process outlined above and have access individual’s debts, the DMV suspends the debtor’s to the same types of tools and sanctions as one license. another. However, each program can vary in If these individuals continue to remain (1) how much information it collects from debtors, delinquent after the above sanctions are (2) how it uses collection tools and sanctions, implemented, collection programs can apply (3) when it leverages specific sanctions, and (4) the additional sanctions. These can include wage amount of staff or other resources the program garnishments, bank levies, or liens placed on dedicates to collection efforts. These variances lead assets. Typically, collection programs progressively to collection programs collecting different amounts add sanctions used in order to gradually increase of debt and differences in the portion of that debt pressure on debtors to make payments. If a that is nondelinquent versus delinquent. collection program determines that it has been How Much Court-Ordered Debt unsuccessful at collecting payments from an Has Been Collected? individual despite imposing sanctions, the program can refer the account to other collecting entities, Amount Collected Annually. Based on such as a private collection vendor or to FTB. These available data in Judicial Council reports, the entities can impose most of the same sanctions total amount of court-ordered debt collected www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT has increased annually since 2008-09. As shown of debt owed by defendants. This balance may in Figure 2, total collections increased by over decrease when defendants make payments or debt $350 million—from just over $1.4 billion in is resolved in an alternative manner, such as when 2008-09 to an estimated $1.8 billion in 2011-12. a portion of a debt is dismissed because the debtor The $1.8 billion collected in 2011-12 includes about performs community service in lieu of payment. $1.1 billion (59 percent) in nondelinquent debt However, this amount generally grows each year and about $750 million (41 percent) in delinquent as some amount of newly assessed court-ordered debt. However, this data likely understates the total debt goes unpaid and is added to the amount of amount collected—particularly the total amount unresolved debt accumulated from prior years. of nondelinquent debt collected. As we discuss As shown in Figure 3, an estimated $10.2 billion later, this results from the incomplete collection in court-ordered debt remained outstanding at of data—meaning actual collections may be tens the end of 2011-12. This is basically the amount of of millions of dollars higher. Regardless, the total delinquent debt, as adjusted for discharged debts. amount actually collected is only a small fraction How Does the Judicial Branch of the total outstanding balance of debt owed by Measure Success? defendants, as we discuss below. Amount of Outstanding Debt. Every year, Metrics Used by Courts. State law requires the courts estimate the total outstanding balance the Judicial Council to develop performance measures for collection programs. Accordingly, Figure 2 Total Collections Have Increased Steadily in Recent Years the Judicial Council adopted the use of (In Millions) two ratios—the “gross $2,000 recovery rate” (GRR) and the “success rate” Delinquent 1,800 Nondelinquent (SR)—to measure 1,600 the performance of collection programs in 1,400 collecting delinquent 1,200 debt. These indicators are commonly used by 1,000 the collections industry 800 and are designed to measure the ability of 600 a program to success- 400 fully collect payments owed. The GRR and 200 SR are similar in that they both rely on the 2008-09 2009-10 2010-11 2011-12 same three pieces of data: (1) the amount 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT of delinquent debt established and referred for Figure 3 collection activities (“referrals”), (2) the amount of Balance of Outstanding delinquent debt actually collected (“collections”), Court-Ordered Debt Continues to Grow and (3) various changes to the initial amount of (In Billions) debt owed (“adjustments”). Adjustments could $12 increase the amount of debt owed, such as from increased fees assessed on debtors whose checks 10 “bounce” due to insufficient funds. On the other 8 hand, some adjustments could reduce the amount 6 of debt owed, such as from dismissals of debt by 4 the court, use of alternative payments (community service for example), and discharges of debt by 2 collection programs. 2008-09 2009-10 2010-11 2011-12 While the GRR and SR rely on the same data, they differ in how they incorporate adjustments, as shown in Figure 4. Specifically, How Are Court-Ordered Debt the GRR measures the percent of total delinquent Revenues Distributed? debt referred that was addressed through either State law dictates how debt revenue is allocated. collections or adjustments. In other words, the For example, as we discuss in more detail below, GRR does not differentiate how the debt was state law authorizes collection programs that resolved. In contrast, the SR focuses specifically engage in a certain number and type of collection upon the ability of a collection program to resolve activities specified in state law to offset operating delinquent debt through the collection of actual costs related to the collection of delinquent debt. payments. Specifically, this ratio measures the State law also specifies how to distribute revenue amount of delinquent payments actually collected among various state and local funds for specific as a percentage of the amount referred after any purposes (such as the State Penalty Fund and the adjustments have been made. Driver Training Penalty Assessment Fund) and Performance of Collection Programs. In addition to developing performance measures for collection programs, state law requires the Judicial Figure 4 Council to set performance benchmarks for these Collection Performance Measures measures. Accordingly, the Judicial Council established performance benchmarks of 34 percent Collections + Adjustments for the GRR and 31 percent for the SR. In 2011-12, Gross Judicial Council staff calculated that 50 programs Recovery Rate Referrals (86 percent) exceeded both the GRR and SR benchmarks. The exact performance of collection programs varied greatly. (Later in this report, Collections Success Rate we assess whether the GRR and SR as calculated Referrals - Adjustments by the Judicial Council adequately measure the performance of collection programs.) www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT prioritizes the order in which revenue is deposited then recover their operating costs before the in these funds. remaining revenues are distributed to other state Cost-Recovery for Delinquent Debt and local funds. In 2011-12, collection programs Collections. Collection programs are designated in 57 of the state’s 58 counties were designated as “comprehensive collection programs” if they as comprehensive collection programs. These engage in a certain number and type of collection programs retained about 16 percent of the total activities identified in state law. Such activities delinquent revenue they collected to offset their include accepting payments by credit card, costs. attempting telephone contact to inform debtors of Distribution of Collections to State and Local their delinquent status and payment options, and Funds. State law specifies the order in which the using the FTB Tax-Intercept or Court-Ordered payments collected from an individual debtor Debt Collection Program services. The benefit are to be used to satisfy the charges added to the of being a comprehensive collection program is base fine. As shown in Figure 5, state law specifies that state law allows such programs to recover that payments from an individual be (1) first most operating costs related to the collection of used to satisfy victim restitution debts, (2) then delinquent court-ordered debt. State law does not used to offset the cost of delinquent collections allow these programs to be reimbursed for the for eligible collection programs, (3) then used to costs related to collecting certain debts—primarily satisfy the state surcharge, (4) then used to satisfy victim restitution payments. Thus, after collecting all fines and penalty assessments on a prorated sufficient revenues to fulfill a defendant’s victim basis, and (5) finally used to satisfy all fees and restitution obligation, collection programs may reimbursements on a prorated basis. Because Figure 5 State Law Specifies How Debt Revenue Must Be Distributed Distribution Priority Category Major Beneficiary 1 Victim Restitution Victim and State Cost Recovery of Collection Program 2 Delinquent Collection Costs (Court or County) 3 State Surcharge State Fines and Penalty Assessmentsa 4 State, Court, and County (Prorated across category) Fees and Reimbursementsb 5 Court and County (Prorated across category) a Examples of fines and penalty assessments include the base fine and the state penalty assessment. b Examples of fees and reimbursements include the court operations fee and the civil assessment. 12 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT the debt in each of these categories must be to specific state and local funds vary annually fully satisfied before revenue is disbursed to the and depend in large part on the number and next category, counties and courts operating the type of traffic violations and criminal offenses collection programs generally benefit only towards committed. It also depends on how individuals the end of the collection process. As a result, if fulfill their debt obligations (such as through an individual makes partial payments or pays in installment payments or paying debt once it installments, counties or courts may pursue debt becomes delinquent). Based on the limited for some time with no guarantee they will actually data that is currently available (and excluding receive their full distribution. This provides courts revenues offset for cost-recovery), Figure 6 shows and counties with only a limited incentive to collect that roughly 40 percent of the total remaining revenue. revenue from court collections in 2011-12 went The base fine and each of the various fees, to local governments (primarily counties) where forfeitures, penalty surcharges, assessments, the underlying offenses occurred, while roughly and restitutions added to it each fall within the 60 percent went to the state. Of the amount that various categories described above. For example, went to the state, nearly two-thirds supported trial the state penalty assessment falls into the fourth court operations and construction. The remainder distribution priority. As a result, it is fulfilled supported various other state programs such when revenue is distributed on a prorated basis to as victim/witness assistance and peace officer all fines and penalty assessments that were owed training. Of the amount allocated to trial courts, by an individual. State law then further specifies roughly half funded statewide trial court projects how the base fine and various additions to it (such as trial court construction and technology will then be distributed among various state and projects), and the other half supported trial local funds. For example, state law requires that court operations. However, only a small portion 70 percent of the state penalty assessment added of the total amount received by each trial court to a base fine be deposited into the State Penalty Fund. The state’s share of this assessment revenue Figure 6 is then subsequently split among nine state Majority of Collections funds (such as the Peace Officers Training Fund Disbursed to the Statea and the Restitution Fund) with each receiving a 2011-12 certain percentage specified in state law. The other State Trial 30 percent of the assessment goes to the county Court Construction County/City General Fund. Collection programs must carefully track and record how collected funds should be deposited in accordance to numerous state State Trial Court Operations laws. Programs submit this information, along with the collection revenue, to the county for (1) distribution to county funds and (2) transfer to Other State Programs the SCO for subsequent distribution to state funds. Entities Benefiting From Collection a Excludes revenues offset to cover costs of collection. Distributions. Total distributions of debt revenue www.lao.ca.gov Legislative Analyst’s Office 13 AN LAO REPORT is tied to how effectively the program is able to is currently considering how to simplify the collect debts. (As we discuss in the nearby box, assessment and distribution of various fines and a task force established by the Judicial Council fees.) WEAKNESSES OF THE CURRENT COURT-ORDERED DEBT COLLECTION PROCESS Based on our analysis and discussions with to Collect Debt. Counties have limited incentive various stakeholders in the collection process, to maximize the collection of court-ordered debt. we identified a number of weaknesses in the As discussed previously, the majority of court- current court-ordered debt collection process. ordered debt revenue collected goes to the state. Specifically, we find that (1) there is a lack of clear Thus, counties have a greater incentive to focus fiscal incentives for cost-effective collections, on collecting other forms of debt that they keep a (2) it is difficult to comprehensively evaluate the greater share of—such as probation fees or medical performance of collection programs, and (3) the billings—at the expense of court-ordered debt. current division of responsibilities between the In addition, the county incentive to collect court- courts and counties can undermine oversight and ordered debt is further reduced by the way state law make modification of collection programs difficult. prioritizes the distribution of debt revenue from Figure 7 provides a summary of our findings, payments made by debtors. Specifically, counties which we discuss in greater detail below. do not begin to benefit from their collection efforts until restitution and the state surcharge obligations Lack of Clear Fiscal Incentives for have been completely paid. If a debtor is making Cost-Effective Collections The current collection Figure 7 process provides limited Weaknesses of the Current Court-Ordered Debt Collection Process fiscal incentives to 9 encourage counties and Lack of Clear Fiscal Incentives for Cost-Effective Collections courts to maximize the • Limited fiscal incentive for counties to collect debt. • Even less fiscal incentive for courts to collect debt. collection of debt revenue • Little fiscal incentive to collect nondelinquent debt. in a cost-effective manner. • Current cost-recovery approach does not incentivize efficiency. Failure of collection • Current incentive structure can penalize cost-effective collection programs. programs to maximize 9 Difficult to Comprehensively Evaluate Performance of Collection Programs collections and operate • Incomplete and inconsistent reporting of total collections and distributions. cost-effectively means • Minimal reporting of nondelinquent collection costs and revenues. • Miscalculation and lack of performance measures for delinquent collections. less financial resources • Lack of evaluation of collection practices. are available to courts • Lack of data on collectability of outstanding debt. and other state and local 9 Current Division of Responsibilities Can Undermine Oversight and programs. Make Program Modification Difficult Limited Fiscal • Limited oversight of collection programs. Incentive for Counties • Program changes more difficult to make. 14 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT partial payments, completely fulfilling these collect is further reduced because the amount of two obligations can result in counties investing revenue it receives from collections is only partially in collection activities over a lengthy period of tied to its performance as reflected in how much time before they even begin to benefit from their revenue it collects. As discussed previously, nearly collection activities. This further reduces the fiscal 40 percent of debt revenues in 2011-12 went to the incentive counties have to invest in collection state trial courts. However, roughly half of these activities because there is no guarantee that such revenues are set aside to fund specific statewide an investment will actually generate a sufficient net trial court projects (such as trial court construction increase in the revenue they retain. and technology). The allocation of such funds Even Less Fiscal Incentive for Courts to occurs primarily on a project-by-project basis Collect Debt. Current statute provides even less based upon statewide priorities and need. Thus, incentive for courts to collect debt. As discussed these funds may not directly benefit the trial courts previously, courts also do not begin to benefit from collecting the revenue. The remaining half of their collection efforts until restitution and state revenue for trial courts is used to fund trial court surcharge obligations have been completely paid. operations. This revenue—with the exception of the In addition, an individual trial court’s incentive to civil assessment—is allocated by Judicial Council to Task Force Reviewing Complexity of Fine and Fee Assessment and Distribution State law requires that certain fines and fees be added to the base fine assessed for a traffic or criminal violation. Various laws dictate how to distribute the base fine and each additional charge among a wide range of state and local funds. Because the distribution of each individual fine varies, it can be difficult for trial courts and collection programs to correctly calculate, record, and track the allocation of these revenues. A number of courts have reported to us that this complexity is exacerbated by a lack of up-to-date technology that would allow these calculations to be automated and updated as laws change. In fact, we are informed that some collection programs do these calculations manually, increasing the likelihood of error. In recognition of the above complexity of the state’s fine and fee structure, the Legislature directed the Judicial Council in 2010 to establish a 21-member taskforce to examine how court- ordered debt is assessed and how the resulting revenues are distributed. (The Legislature initially directed the Judicial Council to establish such a taskforce in 2007, but amended the directive in 2010.) The panel consists of state, local, judicial branch, and other criminal justice stakeholders. Existing state law requires the task force to (1) identify all fines, fees, forfeitures, penalties, and assessments imposed for traffic violations or criminal offenses; (2) identify how these revenues were distributed and used; (3) consult with stakeholders on who would be impacted by a simplified structure; and (4) recommend opportunities to simplify the assessment and distribution of court- ordered debt revenues. The taskforce submitted a preliminary report in June 2011. Although the report did not include conclusive recommendations (such as steps to simplify the assessment and distribution of debt revenues), the task force indicated that it would continue its work in this area and issue a subsequent report. To date, such a report has not been submitted to the Legislature. www.lao.ca.gov Legislative Analyst’s Office 15 AN LAO REPORT the courts based on factors, such as workload, that necessary are being devoted to collections, less are not related to the amount collected. revenue is available for distribution to the state and Little Fiscal Incentive to Collect local governments. In 2011-12, collection programs Nondelinquent Debt. Because collection programs used about 16 percent of the delinquent debt are not reimbursed for the costs of collecting they collected to offset most of their delinquent nondelinquent debt, they have little fiscal incentive collection costs. However, programs exhibit a wide to use a large share of their resources to improve variation of delinquent collection costs. Programs the collection of such debt, such as by purchasing ranged from using a high of 49 percent to a low kiosks or constructing payment windows to of 6 percent of their delinquent collections on bypass security to make it easier for debtors to pay. collection operations. This suggests that some Rather, programs generally focus their resources programs may be spending more than is necessary on collecting delinquent debt. This is problematic to collect delinquent debt. for two primary reasons. First, the collection of Current Incentive Structure Can Penalize delinquent debt is significantly more expensive and Cost-Effective Collection Programs. Because the difficult than the collection of nondelinquent debt. current structure does not closely tie fiscal benefits This is because more effort is typically necessary to the performance of collection programs and to locate and communicate with delinquent does not incentivize nondelinquent collection, it debtors. Accordingly, focusing on the collection of can penalize collection programs operating in a delinquent debt at the expense of nondelinquent cost-effective manner. Specifically, a collection debt can increase the overall cost of collections. program that focuses on the cost-effective Second, minimal effort to collect nondelinquent collection of nondelinquent debt may benefit debt can also negatively affect the amount of less than a similar program that focuses on the delinquent debt collected. Based on our discussions less efficient collection of delinquent debt. The with collection administrators and experts, court that chooses to focus on the collection activities related to the collection of nondelinquent of nondelinquent debt likely maximizes its debt increase the likelihood of collecting delinquent collection of total revenue and minimizes its debt. For example, collecting personal information operational costs as it collects debt earlier early on to facilitate nondelinquent collections also and reduces the amount of debt that becomes allows programs to quickly and cost-effectively delinquent. Accordingly, it collects relatively little locate and communicate with individuals whose delinquent debt, but contributes more revenue for debt becomes delinquent. According to program distribution to the state and local governments. administrators, the quicker a program reestablishes However, this court is unable to recover most of contact with a delinquent debtor, the more likely its operating costs and will receive a lower amount the delinquent debt will be paid. of civil assessment as it collects less delinquent Current Cost-Recovery Approach Does revenue. In contrast, the other court that chooses Not Incentivize Efficiency. Allowing collection to focus only on the collection of delinquent debt programs to recover operational costs related to likely collects less total revenue and has higher delinquent collections regardless of how high those operational costs as more of its debt becomes costs are and how much debt is actually collected delinquent. Although it collects relatively more provides no incentive to operate efficiently. This delinquent debt, it contributes proportionately is problematic because, if more resources than less revenue for distribution to the state and local 16 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT governments. Despite this, it is able to recover Compounding this problem, there also appears to most of its operating costs. be a lack of consistency in how collection programs report data to the council. For example, programs Difficult to Comprehensively Evaluate appear to report the transfer of collections cases Performance of Collection Programs from one collecting entity (such as the court) to Currently, it is difficult to comprehensively another entity (such as FTB) differently. These evaluate the collection process. In particular, there incomplete and inconsistent records make it is (1) incomplete and inconsistent reporting of total difficult to know with certainty the amount of collections and distributions, (2) minimal data on revenues collected and whether they have been nondelinquent collections, (3) miscalculation of properly distributed among state and local funds. performance measures for delinquent collections, We note that in recent months the Judicial Council (4) a lack of evaluation of collection practices, and has taken initial steps to (1) increase training to (5) a lack of data on the collectability of outstanding promote greater standardization in reporting debt. of data across the various entities involved in Incomplete and Inconsistent Reporting of collections and (2) better reconcile collections and Total Collections and Distributions. The state distribution data. currently lacks complete data on the collection Minimal Reporting of Nondelinquent and distribution of court-ordered debt revenue, Collection Costs and Revenues. Collection which makes it difficult for the state to ensure fiscal programs do minimal reporting of data on accountability. For example, each of the various nondelinquent collections. Specifically, some records maintained by the Judicial Council and collection programs do not report the amount SCO omit different pieces of data. As described of nondelinquent debt they collect and none previously, counties submit debt revenues and report the costs of collecting this debt. This information on how these revenues should be is because there currently are no mandatory distributed among state funds to SCO on a monthly reporting requirements related to the collections basis. However, SCO does not receive—and thus of nondelinquent debt, which is problematic for does not record—the amount kept by counties two reasons. First, without such information it or cities. The Judicial Council also compiles a is difficult to accurately evaluate the ability of separate, unaudited record of how these collections collection programs to collect nondelinquent debt. revenues should be distributed among various Second, the outcomes of nondelinquent collection local government funds and state trial court funds. efforts can directly affect the cost and success However, the council does not keep records on all of delinquent debt collection. Yet, despite this, of the state funds that receive revenues. the judicial branch only evaluates its delinquent Moreover, there appear to be inconsistencies collection programs. Without complete reporting between some of the data that is collected by the and subsequent analysis of nondelinquent Judicial Council and SCO, which further limits collections, the Judicial Council cannot provide the ability of the state to oversee and evaluate a comprehensive and accurate evaluation of the collection programs. For example, in 2011-12, overall performance and cost-effectiveness of the SCO reported about $3.5 million more in collection programs. revenue distribution to one court construction Miscalculation and Lack of Performance account than was reported by the Judicial Council. Measures for Delinquent Collections. Our www.lao.ca.gov Legislative Analyst’s Office 17 AN LAO REPORT analysis indicates that the judicial branch Furthermore, we would note that there is systematically miscalculates the performance a lack of other performance metrics—such as metrics it uses to evaluate the effectiveness of cost-effectiveness measures—that are essential collection programs—the GRR and SR. As used in comprehensively evaluating the effectiveness in the collections industry, the GRR and SR are of collection programs. The state could use such supposed to be calculated based on a program’s cost-effectiveness measures to evaluate whether ability to collect or resolve referrals made within programs were spending the appropriate amount a specific time period, such as during a particular to resolve debt through the collection of actual month or year. This allows entities to compare payments (as shown by the SR) versus resolving performance across different time periods. The them generally through other means (as shown by judicial branch, however, calculates each ratio the GRR). This type of information would enable based on data from different time periods. the state to conduct greater oversight of how Specifically, the branch uses data that captures effectively collection programs pursue debt. collections of (and adjustments made to) all debt Lack of Evaluation of Collection Practices. in the given time period, regardless of whether the As discussed above, a number of collection best debt was referred in the same time period or earlier. practices have been identified (1) in state law for For example, to accurately calculate the GRR for the purposes of qualifying as a comprehensive 2011-12, only collections or adjustments made in collection program eligible for cost-recovery 2011-12 related to debt referred to the collection and (2) by the Judicial Council as additional best program in 2011-12 should be included in the practices. Generally, there has been a lack of calculation. The judicial branch, however, inputs evaluation to determine whether these collection the amount of collections or adjustments made in best practices are cost effective. In addition, 2011-12—regardless of whether they are related to collection programs have flexibility in deciding debt referred to the program in 2011-12. which best practices they adopt and how they This miscalculation of the formula makes it implement any of the practices they adopt. From difficult to draw meaningful conclusions about the our review of data and conversations with local performance of collection programs from the GRR collection practitioners, programs seem to interpret and SR data reported by the judicial branch. In fact, these best practices differently. For example, not the specific way the branch applies the formula all programs comply with the best practice of generally results in ratios that overestimate the sending monthly bills or account statements to all successful performance of each collection program. delinquent debtors. Of those that do comply with In some cases, courts have actually reported this practice, programs differ in how they provide collection rates exceeding 100 percent, a result that such notice. Without an evaluation of the best would not be possible if the branch appropriately practices identified by the Judicial Council and used these formulas. The judicial branch indicates state law, it is difficult to determine the effectiveness that calculating the GRR and SR in the correct of such practices and whether the specific ways in way would be difficult because a number of courts which individual collection programs implement currently lack the technology needed in their case these practices are cost effective. Although a management or collection management systems to Judicial Council task force convened in 2010 to compile and report such data. examine court-ordered debt initially indicated that 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT it would evaluate the best practices, it is unclear if Current Division of Responsibilities Can or when this study will be conducted. Undermine Oversight and Additionally, we are informed that a number Make Program Modification Difficult of collection programs have identified and As discussed previously, statute currently implemented additional local collection practices— requires that courts and counties maintain the not identified by the state—that they believe structure of the collection program that was in improved their success in collecting court-ordered place in 1996 unless both parties agree to changes. debt. Despite the promise of some of the practices, This results in programs preserving divisions of it does not appear that the Judicial Council has responsibility that can undermine the oversight conducted an evaluation of the cost-effectiveness and modification of such programs. of these practices. Without such an analysis, it is Limited Oversight of Collection Programs. difficult to determine whether these practices, or Existing state law provides the Judicial Council specific methods of implementing such practices, with oversight and policymaking authority over are cost-effective and should be promoted collection programs. However, as the governing statewide. (Please see the text box on the next and policymaking body for the judicial branch, the page for additional information on some of these Judicial Council technically only has authority over promising practices.) actions taken by trial courts. This makes it difficult Lack of Data on Collectability of Outstanding for Judicial Council to effectively oversee counties Debt. A number of collection programs do not involved in collection programs as they generally assess the collectability of their delinquent debt have no control over county decisions. despite the fact that current law allows them to Program Changes More Difficult to Make. discharge debt that would be expensive to try to The statutory preservation of the division of collect. In total, an estimated $10.2 billion in court- responsibilities between courts and counties ordered debt remained outstanding as of the end can also inhibit structural changes in collection of 2011-12. However, a large portion of this likely programs, as it requires that both parties agree to consists of debt whose cost to collect outweighs any proposed changes. For example, it might be the actual amount collected. Pursuing such debt more cost effective for a program to consolidate all is inefficient and reduces the amount of debt of its collections with either the court or the county, revenue available for distribution to the state and instead of dividing collections between both local governments. Compounding the problem, a parties. However, because any structural changes number of programs refuse to discharge any debt to the program require agreement from both the and instead allow delinquent debt to accumulate on county and the court, such changes—even if they their books, increasing the amount of outstanding are in the best interest of the program—would not debt that is uncollectible. Without an analysis of be implemented as long as either the county or the collectability of this debt, it is unknown what court objected to the proposed change. portion of the total outstanding balance should be discharged or the extent to which courts are attempting to collect such debt. www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT Examples of Promising Practices Implemented by Collection Programs Although statute and the Judicial Council identify certain collection best practices, collection programs throughout the state have implemented practices not currently identified by the state as best practices. In our discussions with some collection program administrators, they indicated that in their view many of these practices are also effective. A few examples of such local practices are provided below. Obtaining Payment Commitments Immediately Upon Adjudication. Some collection programs attempt to obtain payment commitments from individuals immediately upon the resolution of their traffic and non-traffic criminal proceedings. Doing so allows the collection programs to work in conjunction with debtors to immediately set up payment plans. This increases the likelihood of debtors making payments to the courts—potentially increasing the amount of debt collected. According to a number of program administrators, failure to secure payment or establish payment plans before the debtor leaves the courthouse greatly increases the likelihood that the debt will become delinquent, and thus more expensive to collect. Some programs—such as in Shasta County—obtain payment commitments early in the process by stationing collections staff inside courtrooms concurrently with court proceedings. Similarly, in Ventura County, debtors are required to exit the court directly into the collections office. Making the Collection Process User-Friendly for Debtors. Other programs utilize various tools to make the collections process more user-friendly for debtors. For example, some programs use tools that make it easier for collections staff and debtors to quickly reach each other, such as predictive dialers. This improves the likelihood that debtors make necessary adjustments (such as amending payment plans) to keep from becoming or remaining delinquent. Programs also use LAO RECOMMENDATIONS In this report, we reviewed the collection of suited for managing collections and provide the court-ordered debt and raised several concerns necessary incentives to increase collections of debt with the existing process. Based on our findings, in a cost-effective manner. Second, we recommend we make several recommendations to improve improving data collection and measurements of the collections process in order to meet the program performance to enable a comprehensive state’s goals of collecting debt in a cost-effective evaluation of court-ordered debt collections. In manner that maximizes revenue for state and local combination, we believe these recommendations governments. First, we recommend realigning the will promote more cost-effective collections and current court-ordered collection process by shifting greater accountability and would increase the responsibility for debt collection to the trial courts amount of revenue collected in the future. Figure 8 and implementing a new collections incentive provides a summary of our recommendations, model. This restructured process would consolidate which are discussed in greater detail below. collections responsibility with the entity best 20 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT (Continued) tools that help make it more convenient for individuals to pay their debt, such as by (1) extending the hours of operation for collections units to make them more accessible to working individuals, (2) allowing the scheduling of court appearances via kiosks or the Internet, (3) providing payment kiosks in court buildings to reduce lines, and (4) routinely attempting to contact delinquent debtors after regular business hours. We note that at least one court even installed payment windows on the exterior of the building to allow individuals to make payments more quickly by not having to enter the courthouse and go through the security line. It is likely that payment convenience increases the probability that debtors will make their payments in a timely manner. Other Changes to Make the Collection Process More Cost-Effective. Some programs implemented other changes to help them operate more cost-effectively. For example, rather than have judges calculate the amount of court-ordered debt owed by an individual upon conviction, as well as set specific payment terms during court proceedings, some programs delegate such responsibilities to designated administrative staff. This helps reduce operating costs by more efficiently utilizing judicial court time. Marin County reported that such delegation of duties in traffic cases greatly reduced the number of cases appearing before a judge, thereby reducing the amount of court time needed to resolve such cases. Additionally, some programs vary in their use of collection sanctions. For example, collection programs may apply a $300 civil assessment once debt becomes delinquent. Los Angeles County encourages delinquent individuals to resume payments by offering to partially waive the civil assessment imposed if debtors made payment in full within a certain time period after becoming delinquent. This incentive helps increase the amount of debt collected while reducing the amount of effort required to collect the debt. R ealign C ouRt -o RdeRed and counties unless both agree to changes, thereby d ebt C olleCtion P RoCess allowing the Legislature to hold, one entity respon- sible for effective collections of court-ordered debt. Shift Collections Specifically, we recommend the Legislature amend Responsibility to Figure 8 Trial Courts Summary of LAO Recommendations We recommend that 9 the Legislature consolidate Realign Court-Ordered Debt Collection Process • Shift collections responsibility to trial courts. responsibility for collec- • Pilot new collections incentive model. tions with one entity. This 9 would eliminate current Improve Data Collection and Measurements of Program Performance • Require consolidated reporting on collections. statutory requirements • Require reporting on nondelinquent collections. that maintains the division • Improve performance measures. of collection responsi- • Direct Judicial Council to conduct a comprehensive evaluation of collection best practices. bilities between courts • Conduct a collectability analysis. www.lao.ca.gov Legislative Analyst’s Office 21 AN LAO REPORT state law to shift responsibility for collections from Pilot New Collections Incentive Model the counties to the trial courts. Under our proposal, New Incentive Structure for Collections. the courts would retain the ability to contract with Given our concerns about the current lack of the county or other local agencies, FTB, or third fiscal incentives for collecting court-ordered party vendors for actual collection duties. However, debt, we recommend replacing the existing the trial courts would retain primary responsibility cost-recovery model with a new incentive-based for the collection program. This means that one model. Under the new model, each court would entity—the courts—would be accountable for the retain a portion of the overall revenue it collected performance of collection programs. annually depending on its performance relative to We recommend giving the courts primary a fixed base year. Regardless of the total amount responsibility for collection of court-ordered debt of revenue collected, each court would be able to for the following two reasons. retain the amount necessary to offset their actual • Courts Best Positioned to Interact With costs of collecting—up to the amount they received Debtors. The court is in the best position to through the current cost-recovery model in the interact with a debtor to accept payment, fixed base year. However, once a court collects establish a payment plan, and collect the the same amount of total debt (both delinquent debtor’s personal information immediately and nondelinquent) it collected in the fixed base upon adjudication of the case. Shifting full year, the court would then be able to retain a responsibility for collections to the courts set percentage of the amount of new revenue it could facilitate such initial contact. This collects above the amount collected in the fixed type of immediate contact directly impacts base year. As a result, the incentive payment would the ability of programs to maximize their not reduce the amount allocated to state and local collection of both nondelinquent and delin- funds. This “incentive percentage” would serve as quent debt in a cost-effective manner. a reward for improved collections performance and would be specified in statute. As a result, the • Provides Increased Oversight of Collection Legislature could use the incentive percentage Programs. Shifting responsibility for to influence how much courts spend to pursue collections to trial courts would allow debt collection. For example, if the Legislature the Judicial Council to take on increased wanted the courts to be more aggressive at oversight of all aspects of collection pursuing delinquent debt, it could increase the programs, which could lead to greater incentive percentage to encourage courts to consistency and accountability. For dedicate more resources towards collections. example, it could direct underperforming Courts would have complete discretion in how courts to make improvements in their they use these incentive funds. For example, collection programs. Such a shift would courts could offset their costs for collecting this also allow the Judicial Council to enforce additional revenue, fund further improvements in consistent and comprehensive data their collection programs, or support other court reporting—improving the accuracy of the programs. These funds would be retained by the collected data. courts prior to the distribution of the remaining revenue to state and local funds, with the exception of revenues—such as victim restitution—that 22 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT have first priority under current law. Only The courts participating in the pilot would be those collection costs currently eligible for cost required to collect and report relevant data to the recovery would be eligible under the new model. Judicial Council, such as the amount of nondelinquent For example, collection costs related to victim and delinquent payments collected and the costs restitution debt would remain exempt. of such collections. This information would help Implement Pilot of the New Incentive demonstrate whether the new model provided the Structure. We recommend that the Legislature appropriate incentives needed to increase overall debt authorize a three-year pilot program to test the collection and how the amount of revenue received new incentive model prior to implementing it by the state and local governments was affected. The statewide. This is because the current incomplete Legislature could then make modifications (such and inconsistent reporting on collections, as well as adjusting the incentive percentage to a more as the miscalculation of existing performance appropriate value) based on the results of the pilot measures, make it difficult to determine the prior to statewide implementation. optimal value for the incentive percentage. In New Structure Creates Incentive to Be addition, a pilot is necessary as it is difficult to Cost Effective. The proposed incentive model estimate the potential impact that our proposed would provide various incentives for courts to incentive model would have on the total amount of operate cost-effective collection programs. Most debt collected and the amount distributed to state importantly, the model effectively eliminates the and local funds. To help answer these questions, we distinction between nondelinquent and delinquent propose that the pilot include six courts (as selected debt. This would encourage programs to reduce by the Judicial Council) that vary in size, the collection costs by focusing more on less expensive robustness of their existing collection programs, nondelinquent collections. and other characteristics to enable a comprehensive To help illustrate this effect, Figure 9 (see next evaluation of the impacts of the model. page) provides a hypothetical example of how the Based on our analysis of limited data, we sought current law approach compares to the proposed to identify an incentive percentage for the pilot that incentive model. In our example, a collection would provide programs with sufficient incentive program operating under current law collects to continue collecting debt revenue until it was no $100 million in court-ordered debt at a cost of longer cost-effective for the state that such debt be $18.5 million. However, under current law, the pursued. We believe that the rate of 25 percent meets program is only able to offset its cost for delinquent this criterion because it would maximize the benefit collections ($15 million), and cannot offset its to state and local governments while covering the cost for nondelinquent collections ($3.5 million). operational costs of programs that appear to have Under the LAO model, the program collects the made cost-effective investments in their collection same amount of total revenue, but increases the efforts. Thus, for the purpose of the pilot program, proportion of revenue collected as nondelinquent. we recommend that the incentive percentage be Because of the ability it has to spend money on set at 25 percent. Accordingly, participating courts collection activities more cost-effectively, the would be able to deduct $0.25 for every dollar program can reduce its total costs of collection to collected beyond the amount collected in the fixed $15.2 million. The program saves $3.3 million in base year—recommended to be 2011-12 for the local resources that could be redirected to other purposes of this pilot. local court activities. www.lao.ca.gov Legislative Analyst’s Office 23 AN LAO REPORT 10 percent, for a total Figure 9 of $110 million, by LAO Incentive Model Provides Incentive to (1) increasing its total Be Cost-Effective collection costs from the (In Millions) $15.2 million in the above LAO Incentive example to $16.7 million Current Law Model Collections and (2) dedicating more $35.0 $60.0 resources to collect debt Nondelinquent Delinquent 65.0 40.0 when it is nondelinquent. Total Collections $100.0 $100.0 Because it collects more Costs of Collections revenue, the program is -$3.5 -$6.0 able to retain $2.5 million Nondelinquent collection costs Delinquent collection costs -15.0 -9.2 as an incentive payment Collection cost payment 15.0 15.0 for increasing the Net Cost to Collection Program -$3.5 -$0.2 amount it collected. This allows the program to New Structure Creates Incentive That Would save $4.3 million in local resources that could be Increase Collections. The new model also provides redirected to other activities. Furthermore, the courts with an incentive to increase the amount of additional revenue that was collected increases the debt revenue collected. First, the proposed model amount that is now available for distribution to the ties the amount a court is able to retain directly state and local governments. to its ability to increase total collections. This encourages courts to consider how to improve the i d C mPRove ata olleCtion way they operate their program rather than simply m and easuRements of continuing to use methods they are familiar with. P P RogRam eRfoRmanCe Second, courts would be particularly motivated to increase collections because of the discretion Require Consolidated Reporting on Collections they would have to use the revenue they retain We recommend the Legislature make the from increased collections. Finally, because the Judicial Council responsible for coordinating the model ties the revenue retained to the total amount collection and consistent reporting of statewide of debt collected—rather than just the amount data on court-ordered debt. In addition, we spent on delinquent collections—programs recommend that the Legislature direct the would no longer have an incentive to neglect Judicial Council, SCO, and collection programs nondelinquent collections. Because nondelinquent to consolidate and reconcile reporting on court- debt is easier to collect, focusing more resources ordered collections. Consolidating reporting on it would likely increase overall collections as requirements with the Judicial Council will ensure well as the proportion of debt that is collected as consistent, complete, and accurate data reporting nondelinquent. on court-ordered debt. This will help the council Figure 10 illustrates how the new model provide the Legislature with the information provides a program with incentive to increase necessary to demonstrate with certainty the overall collections. In this scenario, we assume amount of revenues collected, the costs of such the program increases its overall collections by 24 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT collections, and whether collected revenue has new incentive structure, the state should focus on been properly distributed among state and local evaluating overall debt collections. funds. In addition, making the Judicial Council Improve Performance Measures responsible for overseeing reporting is particularly appropriate in light of our recommendation to shift We recommend the Judicial Council collections responsibility to the trial courts. improve its collections performance measures by calculating GRR and SR in line with industry Require Reporting on standards. Specifically, we recommend that the Nondelinquent Collections annual report of GRR and SR for each collection In transitioning to the new incentive structure, program be calculated using only those collections we recommend the Legislature direct the Judicial or adjustments made within that year related to Council to require collection programs to report debt that was referred to the collection program on nondelinquent debt collections. Reporting in that same year. This will prevent the standards data on the collection and cost of collection of from overstating the success of collection nondelinquent debt would enable the state to better programs. However, we acknowledge that some evaluate the overall performance of collection courts indicate that they may not be able to programs. This is critical because all court-ordered provide this data due to a lack of technology, debt originally starts as nondelinquent and such as collections management systems that ultimately becomes delinquent when an individual are able to track and report such information. In fails to pay. Thus, actions taken and investments addition, the Judicial Council should develop and made to increase nondelinquent collections directly implement additional performance measures— impacts the amount of delinquent debt collected such as return on investment, cost-benefit, and and the cost of such collections. However, we collection effectiveness ratios—that would apply would note that upon full implementation of the to courts statewide. This would both allow for a better assessment Figure 10 of each program’s LAO Incentive Model Provides Incentive to effectiveness and enable Increase Collections the comparison of the (In Millions) performances of all court- ordered debt collection LAO Incentive Current Law Model programs. Additionally, Collections all performance measures Nondelinquent $35.0 $66.0 should be calculated Delinquent 65.0 44.0 using data for both Total Collections $100.0 $110.0 nondelinquent and Impact on Collections Program delinquent collections to Nondelinquent collection costs -$3.5 -$6.6 ensure a comprehensive Delinquent collection costs -15.0 -10.1 evaluation of the success Collection cost payment 15.0 15.0 Incentive payment — 2.5a and effectiveness of entire Net Cost to Collection Program -$3.5 $0.8 collection programs. a Incentive payment is equal to 25 percent of increased collections of $10 million. This would ensure the www.lao.ca.gov Legislative Analyst’s Office 25 AN LAO REPORT courts are able to better evaluate and improve their collection programs reported nearly $10.2 billion collection programs. in outstanding court-ordered debt obligations. A collectability analysis—conducted internally Direct Judicial Council to by collection programs or externally by private Conduct a Comprehensive Evaluation of collection vendors—could provide a more accurate Collection Best Practices understanding of how much of this outstanding We recommend that the Legislature direct balance could potentially be collected and at the Judicial Council to conduct a comprehensive what cost. This analysis would consider a variety evaluation of collection best practices currently of factors including: the age of the account, implemented across the state, as well as those prior collections activities used, prior sanctions utilized by specific programs locally. The results imposed, the socio-economic characteristics of of such an evaluation would allow the council the debtor, and other debt owed by the debtor. to determine (1) which currently employed best While a collectability analysis may be costly practices or methods of implementation are most and take time, such information would prevent cost effective, (2) under what circumstances collection programs from using resources on such practices would be most cost effective, uncollectable debt and allow them to determine and (3) whether to approve additional statewide where they should direct their resources in order collection best practices. The Judicial Council to increase collections. The analysis could also could then direct and assist collection programs allow the Legislature to consider whether it would to expand implementation of those best practices. like to provide additional financial resources This, in turn, could increase the total amount of for collection programs to pursue this debt. For debt revenue collected and distributed to various example, the Legislature could adjust the proposed state and local funds. incentive percentage to encourage programs to continue collecting up to the point it deems is in Conduct a Collectability Analysis the best interest of the state. Finally, the Judicial We recommend that the Legislature direct Council could use the data on collectability to the Judicial Council to work with collection establish guidelines recommending or requiring programs to conduct an analysis to determine programs discharge debts that meet approved the collectability of outstanding court-ordered criteria. debt. As noted above, by the end of 2011-12, CONCLUSION Based on our review of the existing collections recommend realigning the current court-ordered process for court-ordered debt, we believe that debt collection process to the courts, piloting a new improvements can be made to help increase collections incentive model, and improving data collections of such debt and to subsequently collection to enable comprehensive evaluations of increase the amount available for distribution the performance of collection programs. to various state and local funds. Specifically, we 26 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT www.lao.ca.gov Legislative Analyst’s Office 27 AN LAO REPORT LAO Publications This report was prepared by Anita Lee and reviewed by Drew Soderborg. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 28 Legislative Analyst’s Office www.lao.ca.gov