Federal debt represents the biggest growth market for accounts receivable management right now.
8/27/2019 11:00
In this month’s Collector magazine, Mike Ginsberg, president and CEO of Kaulkin Ginsberg Company, reports on trends in federal government debt and how it is a growing market for the accounts receivable management industry.
“In many ways, the federal government resembles a large business enterprise. It generates revenue—primarily through individual, corporate and excise taxes,
fees and penalties, rather than sales. It also incurs expenses, which come in the form of labor costs, investments, interest and transfer payments, and guarantee or reinsurance claims. Much like a business’s ledger, the government’s budget can show profits (surpluses) or losses (deficits). The government also lends money to individuals and businesses through its various departments and agencies, and, like many more typical creditors, it may struggle to collect on its loans or other receivables, especially when they become delinquent.
As of 2017, the government retained over $200 billion in tax receivables and more than $1.5 trillion in non-tax receivables.
Although much of the accounts receivable management (ARM) industry primarily follows the U.S. Department of Education (DOE) debt collection procurement developments, there were hundreds of other contracts—many restricted to small businesses—awarded for ARM services.
The total number of government delinquencies and allowances for uncollectible amounts hovered between $115 billion and $140 billion annually from 2000 until 2007, before spiking to nearly $340 billion by 2013. This growth was primarily driven by the rapid expansion of DOE delinquencies, a trend that has since continued after a fall in 2014 due to simple modifications by the U.S. Department of the Treasury in its calculation methodology.
In addition to federal student loan debt, there are other government segments with considerable delinquency portfolios. Specifically, the Internal Revenue Service allowance for uncollectible amounts grew over time, increasing 5.6% annually, on average, from $59 billion in 2000 to the aforementioned nearly $150 billion in 2017.
The remaining major segment, nontax and non-DOE delinquencies, which is comprised of other federal agencies (e.g., U.S. Department of Agriculture or U.S. Department of Defense) presents a tremendous opportunity for collection agencies and other ARM firms. Not only is there significant diversity within this segment—a contract from USDA may deal with different debt than that of DOD—but it is also sizable, amounting to just shy of $35 billion in 2017.
Additionally, different agencies have varying levels of collection efficiencies, with some needing large business processing efforts while others simply necessitating—and restricted to contracting with—small mom-and-pop firms.
Regardless of the agency and portfolio, the government generally has three broad options to recover receivables and delinquencies:
1. Engage in internal government-initiated collection efforts;
2. Outsource efforts to private collection agencies (PCAs); or
3. Do nothing and wait for debts to “roll off the books” due to federal statutes of limitation.
Due to congressional mandates and to mitigate lost revenue, the government awarded a variety of lucrative debt collection contracts—most notably DOE, IRS, Treasury, and the Department of Health and Human Services, to name a few—to PCAs. However, federal data indicate massive amounts of additional federal debt are not currently under collection, representing a large and worthwhile opportunity for PCAs now and in the future.
With several hundred different debt types beyond student loans and income taxes, the federal debt collection marketplace also presents an attractive opportunity for PCAs that are not currently federal contractors or subcontractors. Federal-sector collection opportunities constitute the largest prospective expansion opportunity for the ARM industry since the credit card market boom in 1990s, offering PCAs a substantial revenue stream as other mature creditor markets become overly saturated.
To capture these opportunities, PCAs must begin to position themselves to proactively create relationships with federal agencies. The industry must shift from a passive, wait-and-see RFP procurement approach to a more active relationship-based sales model.”
To learn more, listen to Mike Ginsberg and Randy Kamm, founder and principal of Collection Quotient Consulting, discuss working with the federal government to secure debt collection contracts on an episode of ACA Cast: Winning Federal Government Contracts.
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