Faced with huge budget deficits and several hundred million dollars in uncollected bills, Los Angeles city officials are cracking down on businesses that owe fees or back taxes.
Perhaps paradoxically, the push comes at the behest of a local business group. The logic: If the city collects back taxes, it may be less inclined to raise taxes on businesses or cut services.
What’s more, local collection agencies could score big, as the city plans to contract out the extra work to L.A.-area firms. The city’s Office of Finance already is adding companies to its roster of outside collection contractors and is proposing several more as part of a pilot program that could win City Council approval this fall.
All this to handle what the Office of Finance last month estimated was $280 million worth of delinquent accounts, 320,000 in all.
Not all are businesses, of course. Deadbeats include drivers who haven’t paid parking tickets, residents who haven’t paid ambulance fees for Los Angeles Fire Department paramedic services and even golfers who skipped out on city golf course green fees.
But according to Finance Director Antoinette Christovale, taxes paid by businesses – gross receipts, utility taxes, hotel bed taxes and the like – make up the single largest category of delinquent or unpaid accounts.
“We’re glad the mayor and the City Council have finally decided to listen to us,” said Stuart Waldman, chief executive of the Valley Industry and Commerce Association. “By collecting more of our debt, it means we won’t have to raise taxes and fees as much or cut services as much. This is really the low-hanging fruit.”
Of course, any stepped-up collection effort will mean that businesses that the city deems owe it money will be hounded more frequently, even those businesses that may have a legitimate dispute over what they owe. (See related article.)
But Waldman said that disputed fees are the exception,
“Most of these are people who think they can get away without paying,” he said.
Three dozen recommendations
VICA’s push began two years ago when then-City Controller Laura Chick issued an audit showing even more delinquencies: $500 million in fees, taxes and other bills were outstanding. Her audit stretched back 20 years and included some delinquent accounts that hadn’t yet been turned over to the Office of Finance.
“How can the city … that has so many unmet needs and demands for services, not care about collecting all the money legitimately owed it?” Chick asked in the letter accompanying the audit.
Chick made three dozen recommendations, including centralizing all bill collection functions under the Office of Finance, making penalties for late payment or nonpayment consistent across all city departments and using more outside collection agencies.
Last fall, in response to the audit, Mayor Antonio Villaraigosa issued a directive to most city departments that laid out how to collect unpaid bills, including referring all accounts delinquent more than 45 days either to the Office of Finance or to outside collection agencies.
If the current proposal to add collection agencies passes, it could open up what has until now been a very exclusive club. Currently, only four outside collection agencies conduct the vast majority of outsourced debt collection for the city: NCO Financial Systems Inc. of Horsham, Pa.; Alliance One, a subsidiary of Salt Lake City-based Teleperformance USA Group; Caine & Weiner Inc. of Woodland Hills; and Municipal Service Bureau of Austin, Texas.
Under the proposal, the city will try to collect any debts in-house, then will send them out for two rounds of collection attempts by contracting companies that are paid on commission. After that, any outstanding debt goes to a review board either to be written off or sold at a discount to a collection agency.
‘Immediate infusion’
Recently, other companies have bid to collect court judgments that went in favor of the city. Union Adjustment Co. of Burbank won a bid for several million dollars in delinquent business taxes, and is negotiating final terms of the contract, which could involve sale of the debt for pennies on the dollar.
“One of the advantages of selling the accounts rather than putting them on contingency is that the city gets an immediate infusion of cash,” said Lloyd Dix, vice president and general counsel at Union Adjustment. Dix is also legislative chairman of the California Association of Collectors.
The city has developed a mailing list of 55 local collection companies and law firms with collection services that could bid on city accounts. At least initially, these would be secondary agencies, taking on accounts that the current four companies couldn’t collect on within a year. They would have six months to collect before the accounts were referred to the city’s Board of Review for write-off or sale. They would collect standard industry commissions, which range anywhere from 10 percent to 35 percent.
One collection agency on that list and eager for the additional business is Robinson & Associates, a 54-year-old company with a staff of about 10, just west of downtown.
“I had my marketing director contact the city a few months back,” said President Michael Alex, who has co-owned the company since 1964. “But it seems to be a pretty closed book; they only go with a handful of agencies that they preselect. If they really intend to find more locally based companies, that would be a healthy thing. It would be a nice steady income.”
A couple of other local collection companies that have until now stayed away from government agencies said they, too, would bid on accounts held by the city.
“We don’t have any government contracts,” said Elaine Goldstein, owner of Collection Connection, a family-owned company in Chatsworth with five employees that’s been around more than 40 years. “This would be a nice opportunity for us.”
Mark Bender, owner of Allied Collection Services in Van Nuys, also said he would bid on city contracts if the opportunity came up.
Los Angeles isn’t the first city looking to boost collections in these tough budget times.
“It’s becoming more and more common as cities look to collect whatever they are owed,” said Jan Steiger, executive directors of the California Association of Collectors. “It’s certainly preferable to finding new revenue streams.”
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