Sacramento County’s Revenue Recovery:

Recommendations 27

• R1
  DRR should employ alternative solutions to recover the hundreds of millions in outstanding debt owed to the County.
• R2
  DRR should develop and use collection activity reports to effectively manage DRR’s collection activities and workload.
• R3
  DRR management should work together to manage and improve the department’s revenue collection efforts and reduce the outstanding debt owed to the County.
• R4
  The Board and CEO should consider a management review of the Department of Revenue Recovery. Sacramento County Bid Policy Bid or No-Bid: That is the Question. Sacramento County policy is to use a competitive selection process before contracting for services. A decision was made in this case to dispense with the competitive selection. DRR elected to proceed with a $4.4 million no-bid contract to this former IT vendor, now software developer, and incur the expense for the design and development of the DMACS. We find that exempting contracts of this complexity, importance, and magnitude is very problematic. This is particularly true with the DMACS contract, which has been fraught with problems from the outset and has been dysfunctional for seven years at taxpayers’ expense.
• R5
  The Board of Supervisors should require County agencies to use a competitive bid process to contract for services over a specified dollar amount. Revenue Collection Trends and Escalating Debt A Chart Speaks Louder than Words! The DMACS is entering its seventh year of operations, and DRR’s revenue collections consistently fail to reach its annual projected goals. Revenue collections continue to be inadequate because the DRR lacks the essential collection improvement tools. Analyzing the DMACS statistical data and accompanying figures conveyed a low growth for revenue recovery and the resultant rapidly escalating delinquent debt. The DRR proposal explicitly indicated that DRR, and the DMACS, would proliferate the revenue recovery rate from 32% to 38% by 2011. Recovery is 6%, not anywhere near the target. Conversely, the chart below depicts the Debt Management and Collection System’s annual revenue recovery rates have, in fact, failed to achieve the 2008, pre-conversion value of $45 million. DEPARTMENT OF REVENUE RECOVERY ANNUAL REVENUE RECOVERED VERSUS NET UNCOLLECTED DEBT 18
• R6
  DRR should regularly monitor its revenue collection system and adjust collection efforts to reduce the outstanding debt owed to the County.
• R7
  DRR should consider other cost-effective replacement alternatives for the DMACS. Ineffective Revenue Collection, Account Monitoring, and Reporting Focus on the Bottom Line! During the investigation, the Grand Jury learned that after an account is established in the Debt Management and Collection System, the Department of Revenue Recovery does not actively monitor or conduct periodic collection activity reviews of debtor accounts. To date, a collection matter may be reviewed and/or corrected only if a debtor or County client employee contacts DRR for customer assistance. DRR has established payment plans based on an individual’s ability to pay. DRR’s payment plan policy has specific guidelines, but these guidelines are inconsistently applied. Additionally, our investigation revealed that it is common for a debtor to pay minimal amounts, which results in the debtor taking several years to satisfy the debt without consequence. DRR utilizes the Franchise Tax Board (FTB) Tax Offset Program to collect funds on debtor accounts that are beyond 120 days delinquent. Most of the debtor accounts referred to FTB are deemed uncollectible and returned to DRR for further disposition. Despite the unlikely probability of recovering any revenue from these uncollectible accounts, DRR restores them to the DMACS. Witness testimony further verified the DMACS does not produce delinquent account activity reports, which could serve to direct collection staff and improve their revenue collection activity. DRR’s waste of collection resources on uncollectible debtor accounts remains problematic. 19
• R8
  DRR should establish a method for monitoring agency client accounts.
• R9
  DRR should provide its agency clients with updates of debtor account collection activity on a regular basis.
• R10
  DRR should consistently follow their established guidelines for payment plans.
• R11
  DRR should review debtor account activity to determine collectibility and use the FTB Tax Offset Program regularly to effectively improve revenue collections. Unallocated Trust Account: Credit Where Credit is Due! The Grand Jury review of DRR operations uncovered a DMACS account labeled the Unallocated Trust Account (UTA). This DRR account consists of millions of dollars in debtors’ payments that have not been posted to specified debtors’ accounts in the Debt Management and Collection System. On a daily basis, the Department of Revenue Recovery cashiers credit debtor payments with specified account information into the DMACS. However, it is not unusual for DRR cashiers to process a debtor payment without this account information and post it in the UTA. Very little effort is undertaken by the Department of Revenue Recovery’s cashiers to search the DMACS and locate a specific debtor account, and credit the debtor payment instead of the UTA. Payments posted to the Unallocated Trust Account remain there until a debtor contacts DRR to report a dispute on their DMACS account. The DMACS does not produce a daily transaction record or exception report to validate debtor payments were credited to a particular account or posted to the UTA, which requires another division within DRR to manually research and credit the payment to the correct debtor account in the DMACS. Over 53,000 transactions of unresolved debtor payments, although not credited, have been received and deposited into the UTA. That recovered revenue exceeds $5 million on behalf of DRR agency clients. The funds remain undistributed because of missing debtor account or client information. DRR does not consider the research and posting of these payments to be a priority. Our investigation did not find any policy or reason why DRR deposits these payments in the UTA instead of returning the payment to the debtor requesting account information. Absent a DRR policy or procedure regarding the timely handling of insufficient debtor account information, the delay of posting debtor payments and subsequent distribution of this revenue will remain unresolved. 21
• R12
  A debtor account should be identified and matched in the DMACS before payments can be posted in an established time frame.
• R13
  DRR should develop and implement a daily transaction/exception report that will list daily collections, the accounts where payments were applied, and identify the payments with inadequate debtor account information that were deposited in the Unallocated Trust Account.
• R14
  DRR should distribute the funds held in the Unallocated Account to its agency clients.
• R15
  DRR should reconcile the over 53,000 transactions in the Unallocated Trust Account
• R16
  DRR should implement a policy or procedure for processing payments that are missing debtor account information.
• R17
  DRR should implement a plan to close the Unallocated Trust Account. Duplicate Accounts Divide and Conquer! During our investigation, we discovered that the DMACS has created over 12,000 duplicate accounts and account charges are valued in excess of $3 million. Several witnesses reported that the duplication of accounts and/or charges is a DMACS programming issue. Additionally, the same witnesses estimated that it would take approximately one year to manually identify and remediate these duplicate accounts and charges. As of December 2015, the DMACS debtor account duplication problem remains unresolved.
• R18
  DRR should correct the reason(s) the DMACS is duplicating debtor accounts and/or charges.
• R19
  DRR should prioritize the resolution of the duplicate debtor accounts and/or charges.
• R20
  DRR should refund all monies owed to debtors that have made payments on duplicate accounts. Refunds for Overpayment Return to Sender! When an overpayment occurs in a debtor’s account, DRR is expected to issue a refund. Until recently, the DMACS did not have a way of reporting the overpayments. The Grand Jury determined that the only time these refunds are issued is when a debtor contacts DRR to dispute the account information and request a refund. DRR recently developed a report from the DMACS called the Refund Review Band (RRB). This RRB lists overpayments on debtor’s accounts. As of October 2015, the Grand Jury determined there were approximately 30,000 accounts due refunds in excess of $1.4 million. Witness testimony reported that due to the substantial number of refunds in the RRB, DRR staff was focusing its efforts on issuing refunds on debtor accounts from July 2015 to present. All refunds that existed on debtor accounts before July 2015 are not considered a DRR priority and these refunds remain on the debtor account without further action. It is inappropriate for DRR to hold money owed an individual and make no effort to pay anything back unless it gets a request. This raises serious ethical and potential legal questions.
• R21
  DRR should use the Refund Review Band effectively and issue refunds for all overpayment monies in an established time frame.
• R22
  DRR should elevate the department’s priority for the refund of all overpayments. Audit Unit’s Review of the System Did the County Get What it Paid For? In early 2014, the County’s Department of Finance (DOF) internal audit unit (auditors) began the initial system review of the DMACS. This system review was the result of DRR’s failure to provide sufficient debtor financial documentation in support of DRR’s request to discharge debtor accounts deemed uncollectible. The auditors’ findings, along with the preliminary report, identified a significant number of issues involving supporting documentation for uncollectible debtor account write-offs, absence of debtor account information, and user access to the DMACS. After the initial system review was completed, the auditors presented DRR with a report of their preliminary findings which were discussed with management. DRR management instructed the DOF to cease the release of the auditors’ preliminary report until DRR had an opportunity to do its own internal system review. The Grand Jury was concerned with the manner in which DRR interfered with the release of the DOF auditors’ report. In November 2014, the auditors continued their system review. During this phase of the system review, the auditors informed the DOF audit management that several system and internal financial accounting control issues were occurring in DRR with the DMACS. It was the auditors’ belief that there could be potential fraud and other financial irregularities. Subsequently, the auditors were directed to immediately cease their system review. No further system review has been performed; no final report was ever issued, and no discussion was held with County executives.
• R23
  DOF should submit the initial DRR system review report to the Board for its review and approval.
• R24
  DOF auditors should prepare a report for the subsequent DRR system review and present it to DRR and the Board for review and approval.
• R25
  DOF should follow all County audit reporting standards when conducting a department review. Poor Monitoring and Oversight of User Access Rights DRR Oversight, Unseen! During the auditors’ system review of the DMACS, they identified several individuals with unlimited user access rights to the DMACS debtor account and collection activity data, without DRR oversight or monitoring. While DRR has taken action to curtail the unlimited user access rights for most DRR employees, it is significant to note that County IT staff and the DMACS developer continue to have unlimited user access rights to the DMACS account and collection activity data. Furthermore, the individuals with unlimited user access rights to the DMACS account and collection activity data can adjust, delete, or modify debtor accounts and collection activity and make changes to the general ledger without restriction, tracking, or department authorization.
• R26
  DRR should monitor and control all user access to the DMACS debtor accounts and collection data with written authorization that includes time limits and revocation of the user access rights upon completion of tasks to be performed.
• R27
  DRR should provide oversight for the County IT and the contract developer’s unlimited user access rights. 26