State losing millions to bad debts

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PIERRE — Year after year, people stiff state government in South Dakota for millions of dollars in debts they don’t pay.

How much isn’t readily known. That’s because no central office tracks who owes how much.

Instead, each department, agency or office is responsible for handling its uncollected debts. If no progress is made, they can turn to a collection agency that is under state contract.

Millions of dollars worth of those IOUs have been turned over to a Minnesota company, The Affiliated Group, in recent years.

No one in state government has been keeping tabs on the company, outside of their specific accounts.

Until an inquiry by this newspaper and four other papers, no one in state government knew how much total debt had been placed with TAG.

No one knew how much the company had collected, or how much the company paid itself.

As a result of the newspaper inquiry, the state Bureau of Administration requested and received from TAG a financial spreadsheet showing that data for the period of 2009 through May 2011.

Paul Kinsman, the bureau’s commissioner, said TAG will now start submitting quarterly reports.

No reports were required under the contract previously.

Even with the reports, however, there’s no way for state government to know the accuracy of the data supplied by the company.

That is because the state contract allows the company to operate on a commission system.

The company is allowed under the contract to keep a percentage of what it says it has collected — in other words, pay itself — and then turn in the remainder to the appropriate state account.

The contract’s arrangement allows the company to operate outside the financial scrutiny normally required for contract holders under state laws and regulations.

There are no allegations the company is shortchanging state government. There’s also no systematic way to find out if something was amiss.

The highly unusual situation came to light as the result of a routine inquiry by the newspapers about uncollected debts owed to state government.

Nearly every month, the state Board of Finance grants requests from state departments, universities and other agencies for debt write-offs because collection efforts have failed.

The write-offs range from hundreds of dollars to tens of thousands, depending on the month. The repeated occurrence of write-offs prompted the newspapers’ curiosity about how much debt is owed to state government and the success rate of debt collection efforts.

None of the top people in any of state government’s financial centers seemed to know the answers.

They couldn’t.

The information wasn’t being channeled by the various departments, agencies and offices to any single point in state government. On the other side, the company wasn’t required to submit monthly or annual reports covering the expanse of state government.

None of the state officials contacted about this matter initially seemed concerned that the company was being allowed to operate on blind trust outside the state’s normal system.

The contract was drawn by the state Bureau of Administration three years ago, prior to Kinsman’s return to the bureau.

The bureau provides many services to the rest of state government, from procuring supplies and contracting for office space, to mowing lawns and fixing roofs. The debt-collection contract is one of those services.

While it is a governmentwide contract, the heads of individual agencies and institutions decide whether to use it. They interact with the company directly through digital accounting systems. Those interactions don’t flow through the Bureau of Administration.

That is why Kinsman had to contact the company to get answers.

The numbers show state government placed more than $13.4 million of primary debt with The Affiliated Group during the span of 2009 through May 2011.

The company reported gross collections totaling $543,530. From that amount, the company kept $80,411 as its fees and remitted the rest to the appropriate state accounts.

State government also made more than $9.7 million of secondary placements of debt with the company during the same period. On these debts, which are called secondary because they previously were placed with a different collection agency, the company reported gross collections that totaled $107,474. The company kept $23,296 of that as its fees.

Based on the company’s data, the company was able to collect $651,004 of debts that state government previously couldn’t. For its effort, the company kept $103,707.

The calculation of those fees is outlined in the contract. The general rate is a 15 percent commission, but the payment can be 22 to 30 percent or even higher, depending on the types of debt collected, whether there was litigation and whether there was interest charged.

The financial information hasn’t been state-audited for accuracy. The arrangement established in the contract doesn’t require the company to submit financial information in such ways that are necessary for a state audit to be conducted.

Again, it goes back to the commission system.

The specific transactions involving commissions and remittances on individual collections aren’t tracked on a government-wide basis by the Bureau of Administration, the Department of Revenue or the Bureau of Finance and Management.

That is different from the usual practice in state government. Normally, state payments to contractors flow through a multi-step system of financial checks and balances.

Typically, a state agency submits a request for payment to the Office of State Auditor, where a determination is made whether the request is appropriate. Then the request is forwarded to the Office of State Treasurer for the payment to be made.

Meant as protection against misuse of the public’s money, these separate roles of auditor and treasurer are established in the South Dakota Constitution.

The commission system used for debt collection doesn’t follow the government’s normal process. When the company keeps the commission money up front, those payments for services don’t go through the auditor or treasurer.

State Auditor Steve Barnett said his office has no way to know how much the company keeps in commissions or what the amounts are based on.

Likewise, the company’s remittances and commissions aren’t spot-checked by the state Department of Legislative Audit through its normal work safe-guarding the accuracy and legality of state finances. Legislative Audit is an agency under the Legislature and is separate from the auditor.

There is no paper trail of state records showing the company’s commissions, according to top officials at Legislative Audit. They said their agency doesn’t have the legal authority to audit the private company’s records.

The company’s state contract, however, does require the company to keep all records for five years after the conclusion of the contract.

The contract also specifically gives any state authorized representative the access and the right to examine, audit or transcribe any “directly pertinent” information held by the company.

And the contract requires a series of reports from the company to each specific department or agency about its accounts.

Kinsman said he believes the contract would allow for a state audit. “We have not done so in the past to my knowledge,” he said.

The debt-collection system could be rearranged for auditing purposes.

That would require individual state offices to receive from the company the full amounts of collections. In turn, each state office could go follow the normal process of going through the auditor and the treasurer to pay the appropriate amounts of commissions to the company.

That would make debt collection more costly and burdensome for the government and potentially less profitable for a collection company, Kinsman said.

Some commission amounts shown on the company’s data are less than $100 per agency for an entire year.

“I am checking to see if other states operate under the same payment system as we or if we are different,” Kinsman said.

Contacts with eight other state governments found four states used a commission system similar to South Dakota’s approach, while four states required remittances of the collections followed by a payment from the state to the collection company, according to Kinsman.

“Based upon this, when we re-do the RFP next year, we intend to request proposals both ways,” he said. “But even if we stay the current course for financial reasons, we have obtained some additional language from other states that will beef up our financial oversight.”

TAG was selected in 2009 as the contractor through a standard request-for-proposals process by state government. Seven companies responded, and three were asked to give oral presentations to a selection committee of state personnel.

Kinsman said the bureau conducts some review of TAG and gets involved in resolving issues between the company and state account. He said TAG’s performance is analyzed and the company’s work has been “on par” with the previous contractor.

TAG’s state contract was renewed Feb. 28 for one year and runs through Feb. 29, 2012. The contracting process is scheduled to open for proposals again in 2012.

State records from 2008 show there was some dissatisfaction with the previous contractor, Progressive.

State agencies go through their own collection processes before they turn debts over to the collection agency. Eventually, state government gives up on large amounts of debt. They have to take another step before clearing their books.

In those instances, the department or agency goes to the state Board of Finance and requests authority for a write-off.

That happens at nearly every monthly meeting of the board.

On June 21, for example, the board approved debt writeoffs totaling about $45,350. They included $26,810 for the Department of Corrections; $1,268 for Black Hills State University; and $17,272 for South Dakota State University.

The corrections write-offs were for court-ordered parental support and medical expenses related to juveniles assigned to DOC.

The department has hundreds of thousands of dollars in such debt placed with The Affiliated Group for collection, and has received write-offs for many hundreds of thousands of dollars in the past.

In May 2009, DOC received authority to write-off $519,200 in uncollectible debt. In July of that same year, DOC received further authority to write-off $218,787. One month later, DOC got approval to write-off $21,362.

The department sends monthly notices to all active accounts and sends late-payment notices of 30-, 60- and 90 days after juveniles have been released or discharged from DOC.

The department subsequently turns over uncollected debts to The Affiliated Group to pursue.

If TAG returns the debt as uncollectible or the debtor is bankrupt, DOC then seeks a write-off, according to corrections official Scott Bollinger.

Through the first six meetings of 2011, the Board of Finance has approved writeoffs totaling $229,695 from various departments, agencies and universities.

In 2010, the write-offs totaled about $235,950; in 2009, about $813,734; in 2008, about $707,288; in 2007, about $913,286; and in the last six months of 2006, about $216,720.

That’s a total of $3.1 million written off in the past five years. One of those was a $900 check that Tanya M. Long wrote on July 15, 1996.

She bought scratch-off lottery tickets in Sioux Falls, from the South Dakota Lottery’s redemption office there.

Tags: news, state, debt, budget