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Question of the Month ~ October 2016

 

Q. How do states in the Midwest go about collecting the debt owed to them?

One long-standing, widespread state strategy to collect debt has been the use of offset programs — ensuring that any pending payments to individuals or entities (tax refunds, for example) are used to cover their delinquent obligations.
In fiscal year 2015, for example, Iowa’s Offset Program collected $47.2 million in debt, a 162 percent increase from FY 2006. Two primary factors have contributed to this increase in debt recovery. First, certain casino winnings must now be used to pay an individual’s debt. (Other offsets can come from tax refunds, lottery winnings, and payments to vendors for goods and services.) Second, Iowa allows local governments to participate in the program. This local involvement also takes place in states such as Kansas, Minnesota and Wisconsin.
Wisconsin’s Debt Collection Initiative was authorized seven years ago and requires participation by all state agencies. Under this initiative, the Department or Revenue is responsible for recovering debt, first by reaching out to individuals and seeking voluntary payment. “Involuntary” methods are the next step — for example, taking a portion of the person’s wages or issuing a levy on the debtor’s bank.
Across the Midwest, states now centralize their debt-collection operations — by encouraging or requiring state agencies to send their bad debt to a single state entity for collection. These centralized operations are run through 1) treasury and revenue departments (Illinois, Indiana, Michigan, Minnesota, Nebraska, North Dakota and Wisconsin; 2) an attorney general’s office (Ohio); or 3) departments that provide administrative and other services to state government agencies (Iowa, Kansas and South Dakota).
South Dakota’s Obligation Recovery Center opened in July (the result of last year’s
HB 1228). The center’s first customer is South Dakota’s Unified Judicial System, which will pass along unpaid restitution payments and court fines. All state agencies soon will be referring bad debt to the center.
Overseen by the South Dakota Bureau of Administration but run by an outside firm, the center will be funded by a 20 percent cost recovery fee charged to debtors. It has the authority to sue, file liens and maintain an electronic debt management system. And under the law, people who owe the state money can be denied driver’s, fishing and hunting licenses.
States also can enter into reciprocity agreements with the U.S. Department of Treasury — with both parties agreeing to offset payments to individuals or entities that have debts with a state or federal agency. As of FY 2015, only Illinois, Minnesota and Wisconsin had such agreements with the federal government. However, all U.S. states recover some debt from the U.S. Department of Treasury’s Offset Program. About $3 billion was collected on behalf of states in FY 2015; more than half of this total was related to delinquent child-support payments. The federal program also helps collect unpaid state income taxes and retrieve debts related to unemployment insurance and food stamps.

 

Article written by Tim Anderson, CSG Midwest publications manager. Question of the Month highlights a research inquiry received by CSG Midwest.