Chapter 5. Conclusions and Recommendations

In this chapter

5.1 Lessons Learned from Other States
5.2 The Effect of Interest on Child Support Collections
5.3 Costs of Statewide Interest Assessment
5.4 Other Issues
5.5 Recommendations

Colorado counties have the discretion to assess, or decline to assess, interest on arrears. Currently, 26 Colorado counties assess interest, 37 Colorado counties do not. In the counties that assess interest, most calculate it as part of the arrears calculation when they are preparing a case for an enforcement action, rather than reviewing all arrears cases monthly and posting interest then. Nonetheless, all counties report they calculate interest according to statute.

The statewide-automated system (ACSES) does not compute interest; however, a PC-based program that calculates interest has recently become available to the counties. Once interest is calculated, county technicians are expected to enter the interest amount onto ACSES. Noncustodial parents are not routinely notified of interest assessments, although the support order includes a statement that interest may be charged.

A 1999 State audit of the Colorado Child Support Enforcement program criticized the program's interest policy. In the auditor's review of 9 cases with interest calculations, reviewers found that interest was not always calculated correctly. The State auditors also took issue with interest not being automated statewide and with the lack of notification about interest charges.

This chapter discusses the lessons we have learned from other states' experiences with interest. It also summarizes our estimates about interest's effect on child support collections and offers estimates of how much it would cost to assess interest statewide, including automating its calculation on ACSES.

5.1. Lessons Learned from Other States

Most states' decisions to assess interest are based on moral grounds rather than on evidence that the policy would be cost effective. Most states assessing interest believe that assessing interest on child support is important because it puts support on a par with other debts. In states where the decision was based on economics (i.e., Oregon and Washington), they concluded interest assessment would not be cost effective and hence do not assess interest statewide.
Automation is essential to assessing interest statewide. All of the states that assess interest statewide include interest calculations and tracking on their statewide automated system. Most of these states automated interest at the same time they were bringing up their statewide system.
Plan and keep the business rules simple . A recurrent theme among the states when asked for advice on how to best implement interest was to (1) plan well, (2) plan for the unexpected, and (3) keep the business rules simple. In particular, avoid rules that require several manual adjustments.
Notification. Only about half of the states assessing interest reported interest separately on the billing statement. The more common notification practice was to include it on the order or send an annual notification, which typically discussed interest as one of several enforcement remedies.
Alternatives to Interest. Michigan and Massachusetts have alternatives to interest. Michigan assesses fees because their automated system did not initially have the capacity to track interest. Yet, fees are treated as program income and not subject to the same Federal incentives as child support collections. Massachusetts uses an interest amnesty program. If an obligor pays 75% of his/her current support and makes at least $1 payment toward arrears, interest will not be assessed on his/her arrears. This parallels Federal performance indicators, which provide incentives based on the percentage of current support paid and the proportion of arrears cases with a payment.
Distribution can be difficult. Interest adds additional complexity to an already complex distribution scheme. This is most evident in Texas where state statutes further specify interest distribution. As a result, Texas has 24 sub-categories of arrears it must track. At a minimum, Federal requirements double the number of classifications.

5.2. The Effect of Interest on Child Support Collections

In Chapter III we posed several research questions. The responses are summarized below.

Will interest inflate accounts receivable? Yes, assessing interest will inflate accounts receivable, particularly if it is assessed on all arrears. We estimate that that option would add about $130 million to arrears balances within the first year of statewide implementation. An alternative option would be to assess interest on past-due current support only after a specified date and not assess it on existing arrears. We estimate that policy would add about $1 million in interest arrears to the arrears balances within the first year of statewide implementation.
What proportion of interest is likely to be collected? The percent of interest that is likely to be collected is 0.6% to 6.4%. The minimum is based on Virginia's experience. The maximum is the amount that Colorado currently collects on its arrears.
Does interest encourage timely payment of current support? If interest does encourage timely payment and better payment compliance, it is not evidenced by a higher percentage of current support paid in counties and states that assess interest than in counties and states that do not assess interest. Nonetheless, some of the case examples provided in the interest negotiation survey suggested that interest on debt is sometimes used to effectively negotiate regular payments.
Is interest an effective negotiation tool? Yes. Although not used frequently, interest is used to negotiate lump sum payments, keep payments on current support regular and encourage unemployed and underemployed obligors to enroll in a six-month employment program. For a one-month study period in which six counties tracked their negotiations, there were 26 successful negotiations involving interest. The average lump-sum payment was $6,297. One county also reported receiving a lump sum payment of $40,000 shortly prior to the month of study.
Does interest motivate some obligors to pay, while creating a disincentive for others? For example, do some low-income obligors stop paying when they are faced with even higher arrears due to interest? The proportion of low-income obligors that could be affected by interest assessments could be large. Although the precise number in Colorado is unknown, national statistics and statistics from other states suggest that low-income obligors carry a large share of arrears debt. Nationally, about 16-32% of young noncustodial fathers not paying support have incomes below the poverty level. Minnesota found that 20% of its obligors with arrears have gross monthly incomes of $500 or less.
Does notification increase collections? Yes, based on the experience of other states. Massachusetts reports that its annual notification, which was implemented for the first time this year, resulted in payments from 2,000 obligors averaging $400 each. Virginia's notification (1995) resulted in payment from 27,000 obligors who were not previously paying. After receipt of the notice, $12 million dollars in arrears was collected from these obligors ($444 each on average).

In sum, if Colorado assessed interest on all arrears and collected 0.6-6.4% as suggested above, total collections from interest are estimated at $0.8-$8.6 million in the first year. We are not optimistic that the high-end of this estimate could be reached because as discussed above, we anticipate that a large amount of the arrears is owed by low-income obligors that do not have the ability to pay. Assessing interest on those arrears will not make them any more likely to pay. We believe the low-end is more realistic. Thus, if Colorado began assessing interest on all-past due current support beginning January 1, 2000 (i.e., do not apply interest on existing arrears retroactively) we estimate that $7,000 to $70,000 would be collected in the first year. Again, we believe the low-end of this estimate is more realistic.

5.3. Costs of Statewide Interest Assessment

The estimated cost of implementing interest assessment statewide is $347,662. This includes developing business rules, automating the interest function statewide, and training staff.
The estimated cost of notifying noncustodial parents is $141,849 if notices are sent once per year, $267,246 per year if notices are sent quarterly, and $601,636 per year if notices are sent monthly. This includes the cost of producing, printing and mailing the notices and a conservative amount of customer service response. The estimate could be higher if the notices generate a greater need for customer service than staff now anticipate.

5.4. Other Issues

Prior to making recommendations, there are two other issues that should be considered in developing a statewide interest policy.

Interstate Cases . According to the Census Bureau, about a third of noncustodial parents live in a different state than the custodial parent. Recently, all states adopted the Uniform Interstate Family Support Act (UIFSA) which provides state-to-state consistency in the treatment of interstate cases. The Federal OCSE appointed an Interstate Reform Workgroup to review what uniform standards for collection, disbursement, distribution and case processing, and improved accounting would ease UIFSA/IV-D case processing. The need for uniform arrears and interest calculations is one of the specific issues they are assessing. The release of their recommendations has not yet been scheduled.
National concern about arrears . The amount of past due support is $39.6 billion dollars nationally. Recent research showing that a high proportion of obligors are poor or near poor makes it unlikely that all of this debt can be paid. As a result, the Federal government and several states have become interested in child support guidelines amounts for low-income obligors and arrears accumulation and debt compromise policies that include setting a cap on the maximum amount of arrears that can be accumulated and compromising interest.

5.5. Recommendations

The two most extreme options are:

Assess interest statewide on all child support arrears; and
Eliminate interest.

The most compelling reason for assessing interest, as perceived from interviews from other states, is that it is fair; that is, it puts child support debt on a par with other debts. The most compelling reason not to assess interest statewide is that it will inflate Colorado's arrears balance, which is already high relative to other states.

Interest cannot be discussed separately from arrears. If obligors are not paying arrears, there is no reason to believe they will pay interest. Yet, we do not believe this justifies eliminating interest charges statewide. Interest is an effective negotiation tool that has been used to obtain large lump sum settlements and in some cases help move delinquent, unemployed obligors into employment programs.

We do not recommend either of the two most extreme positions. Instead, we recommend a third option.

Develop a statewide policy that will not inflate arrears, but that allows interest to be used when it can be used effectively (e.g., during negotiation).

We are intrigued by the Massachusetts interest amnesty program because its structure relates to the Federal performance indicators. Yet, it is not clear whether Massachusetts assesses interest on obligors who do not meet the criteria and are enrolled in an employment or fatherhood program. We recommend that if Colorado adopts a similar amnesty program they exclude noncustodial parents enrolled in an employment or fatherhood program from interest charges over a specified time period.

Specific recommendations for a statewide interest policy follow.

Automate Interest. Without exception, the states that assess interest statewide automate the interest calculation and tracking of interest payments. Manual calculation is prone to human error.
Do not assess interest on all arrears, assess it only on past-due current support after a specified date (say the first of the year). We are concerned that assessing interest on all arrears will inflate Colorado arrears to unreasonably high amounts. The State Auditors are already concerned that arrears in Colorado are high relative to other states. As a result, we recommend following the interest implementation plan drafted when automation of interest was considered in the early 1990s. In this plan, interest would only be assessed on past-due current support after a specified date. In addition to not burdening accounts receivable, this approach would reduce customer service needs (i.e., in cases where the principal to which interest is applied is disputed, it would only require calculating past-due current support after a specified date rather than calculating total arrears on the order). However, there are at least two counter arguments to this approach. First, the collections that are likely to be realized will be small initially. Second, some may argue that the policy is not fair to those who have already been assessed interest.
Notify obligors that interest will be assessed . According to some of the interviews with other states and the Colorado State Auditor's reports, notification is a fair way to inform noncustodial parents about interest. In addition, some states have experienced increased payments following notification.
Do not assess interest retroactively . It appears to be extremely difficult, if not impossible to automate the calculation of interest retroactively. The only alternative is to compute interest manually, which is expensive (about $0.8 million) and prone to error
Develop sound business rules . Business rules should be developed to minimize situations where interest would have to be calculated manually by a technician at the county level. This requires extremely clear rules on how interest will interact with other enforcement remedies. For example, if an obligor only owes interest arrears, could his or her professional license be suspended? Will interest accrue on medical support? In initiating orders, how will Colorado apprise the responding state on updated interest charges?
Plan for customer service needs. Undoubtedly, interest charges and notification will generate increased telephone calls to the VRU and counties. We have considered these customer service needs in the cost estimates. Counties should be advised prior to mailing the interest notification to obligors so staff have adequate time to plan for increased customer service needs. Also, as part of the statewide training, counties should be advised on some of the likely questions and answers pertaining to interest.
Consider adopting simple interest rather than compounded . Texas and West Virginia moved from using a compounded interest policy to a simple interest approach. The problem with compounded interest is not automating it, but with those situations when interest needs to be calculated manually and quickly (e.g., in court). In these situations, simple interest is easier to calculate than compounded interest. Both Texas and West Virginia administrators acknowledged this.