Audit Report on the Department of Finance’s Collection of Penalties Imposed in Environmental Control Board Cases

EXECUTIVE SUMMARY

The Department of Finance (DOF) administers and enforces New York City business, property, and excise tax laws; collects these taxes; educates the public about its rights and responsibilities in order to promote voluntary compliance; responds to requests from the public for information and assistance; and protects the confidentiality of tax returns. DOF also collects parking ticket fines, provides a forum for contesting these fines, and handles the final-stage collection efforts on Environmental Control Board cases.

The Environmental Control Board (ECB) of the Department of Environmental Protection makes the initial efforts to collect penalties for Notices of Violations (NOVs) issued by City agencies such as the Departments of Sanitation, Transportation, Police, Health, Buildings, Fire, and Environmental Protection. After providing a forum for contesting these NOVs and mailing at least two request-for-payment notices (called dunning notices) to the respondents, ECB forwards the cases to DOF for final penalty collection efforts. DOF has handled final-stage collection efforts on ECB cases since July 1996.

Upon the receipt of ECB cases on a computer tape, DOF procedures require a computer-system-generated mailing of at least one dunning notice, followed by an effort to contact the respondent by phone, an attempt to identify the respondent’s assets, and a referral, if appropriate, to the DOF legal affairs unit. Depending on the nature of the case, the legal affairs unit then either initiates an execution of the judgment by the Sheriff’s Office or a docketing of the case in court by the City Law Department.

In Fiscal Year 2001, DOF collected about $1.9 million in revenue on ECB cases. The DOF collections unit for ECB cases consists of five full-time employees.

The objectives of the audit were to review the effectiveness of DOF’s collection efforts on ECB cases and to determine whether DOF is referring or selling older ECB cases to private collection agencies as was recommended in an earlier audit.

On January 25, 2000, we issued an audit report (Audit Report on the Case Processing Practices of the Department of Environmental Protection’s Environmental Control Board, MG99-082A) that focused primarily on the case processing and penalty collection efforts of the ECB. Although most of the recommendations in the report were addressed to ECB, it also recommended that the Department of Finance refer or sell older ECB cases to private collection agencies. The report also recommended that ECB and DOF prepare a written agreement delineating each agency’s responsibilities for collecting ECB case penalties and that DOF provide reports to ECB on the results of DOF collection efforts. This audit report follows up on the specific recommendations relating to DOF made in the previous report and reviews the DOF penalty collection efforts on ECB cases collectible during Fiscal Year 2001.

In conducting this audit, we interviewed DOF officials and employees involved with efforts to collect ECB case penalties and reviewed DOF’s written procedures for these efforts and other relevant documentation, including reports, contracts, agreements, case files, and database printouts. We also examined a random sample of 150 ECB cases of the 17,436 cases forwarded by ECB on computer tapes to DOF during Fiscal Year 2001. We reviewed information on these cases in the ECB Adjudication Information Management System (AIMS) and in the DOF Computer-Assisted Collection System (CACS).

This audit was conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS) and included tests of records and other auditing procedures considered necessary. This audit was performed in accordance with the City Comptroller’s audit responsibilities as set forth in Chapter 5, § 93, of the New York City Charter.

The Environmental Control Board has reported that the Department of Finance collected about $8 million on ECB cases from July 1996 (when DOF assumed responsibility for final-stage collection efforts) through Fiscal Year 2001. DOF has also addressed two of the three recommendations made in our previous audit report on ECB that related to DOF. As recommended in the previous audit, DOF and ECB have prepared a written agreement delineating each agency’s penalty collection responsibilities, and DOF has begun to provide reports to ECB on the cases it receives from ECB and on some of the results of its collection efforts.

However, DOF has not seriously addressed the most important recommendation of the previous audit, that it refer or sell its older ECB cases to a private collection agency. This audit has also identified several other significant concerns about DOF’s collection efforts, which are discussed below.

DOF has made minimal collection efforts on a large proportion of its ECB cases. We estimate that an enhanced collection effort could help the City collect $26.2 million in additional revenue.

There are three types of cases that the ECB sends to DOF for final-stage penalty collection efforts. These include AVPS, BARAMIS, and manual cases. The acronyms "AVPS" and "BARAMIS" refer to computer systems that ECB used until July 1999 to track most of its cases. Although these systems were replaced by the AIMS system, the acronyms are still used to distinguish cases that do not require corrective action by the respondent (the AVPS cases) from those that do require such action (the BARAMIS cases). Manual cases are those that are not tracked by AIMS and for which ECB mails documentation to DOF.

Although ECB could forward computer tapes on AVPS cases, DOF officials have informed us that they do not request such tapes because they do not have enough staff to work on the AVPS cases. DOF’s decision to virtually ignore AVPS cases means that DOF made almost no effort to collect more than $452 million in AVPS case penalties. DOF did not work on $80 million owed in docketed AVPS cases that were received during Fiscal Year 2001; nor did it work on $372 million owed in docketed AVPS cases that were more than one year old and still collectible during Fiscal Year 2001. If we assume conservatively that 10 percent of the current AVPS cases, or $8.0 million (10% of the $80 million owed), could have been collected through a concerted effort by DOF, and that three percent of the older AVPS cases, or over $11.1 million (3% of the $372 million owed), could have been collected, we estimate that at least $19.1 million owed in docketed AVPS cases could have been collected during Fiscal Year 2001.

DOF works primarily on current BARAMIS cases. Cases that are more than one year old are generally placed automatically in an inactive status within CACS. The majority of the 17,436 BARAMIS cases that DOF received from ECB during Fiscal Year 2001, with a total value of about $36 million, had not been worked on by DOF as of January 16, 2002 (the first day we had access to CACS). We randomly selected and reviewed 150 of these cases and found that DOF staff did not work on over 68 percent of them.

The DOF staff that works on ECB case collections informed us that if they worked on a case, there would be a note to that effect in CACS. We reviewed the CACS system for any evidence that the DOF ECB case collections staff had worked on these cases, such as notations in CACS that they had attempted to call or locate a respondent, had received a call from a respondent, or had attempted to locate assets upon which a levy or a lien could be imposed. We found notes in CACS of staff action or an indication in AIMS that the case had been resolved for only 47 (31.33%) of the 150 cases we reviewed. There were no paper files to review for these 150 cases.

Based on our review of these 150 cases, we project that DOF did not work on 11,973 unresolved BARAMIS cases, or 68.67 percent of the 17,436 BARAMIS cases forwarded by ECB to DOF during Fiscal Year 2001. We estimate that the value of the unresolved and unworked Fiscal Year 2001 BARAMIS cases was, therefore, about $24.7 million (68.67% of the $36 million in Fiscal Year 2001 BARAMIS penalties). If we assume conservatively that 10 percent of the unresolved and unworked Fiscal Year 2001 BARAMIS cases could have been collected with a more substantial effort by DOF, then we estimate that over $2.4 million in additional BARAMIS penalties could have been collected during Fiscal Year 2001.

In addition, by not working on the older BARAMIS cases, DOF is ignoring $158 million in penalties ($151 million in docketed cases and $7 million in undocketed cases). If we assume conservatively that three percent of the older BARAMIS cases could have been collected with an enhanced effort by DOF, then we estimate that over $4.7 million in additional BARAMIS case penalties (3% of $158 million) could have been collected on these cases during Fiscal Year 2001.

If we add the additional potential revenue estimates noted above of approximately $8.0 million in current AVPS penalties, $11.1 million in older AVPS penalties, $2.4 million in current BARAMIS penalties, and $4.7 million in older BARAMIS penalties, we derive a conservative estimate of $26.2 million in additional ECB case penalties that could have been collected with a more substantial effort by DOF during Fiscal Year 2001. This estimate is based on DOF expanding its own collection efforts on ECB cases. The following section discusses the potential revenue that could be obtained if DOF referred the older cases to a private collection agency.

In our audit report on ECB issued on January 25, 2000, we recommended that DOF "develop and implement a plan to refer and/or sell these [older ECB] cases to private collection agencies." However, not only has DOF not worked on most of these older cases, but DOF has also not awarded an ECB-case-specific contract on these cases to a private collection agency. DOF has included a provision in contracts being awarded to support its Parking Violations Bureau and tax warrant collection efforts that would permit DOF to also refer "other judgments" to the contractors. However, this provision is clearly peripheral to the main purpose of these contracts and does not specifically refer to ECB cases. A contract that is awarded specifically for the collection of older ECB cases would likely be much more successful in improving the City’s ECB case collection efforts. Alternatively, DOF could sell these older cases to a collection agency for a lump sum.

Since DOF itself takes little or no action on older ECB cases, by not referring these cases to collection agencies, DOF is essentially abandoning all efforts to obtain this revenue for the City. If we assume conservatively that a private agency could have collected three percent of the $372 million in AVPS cases and the $158 million in BARAMIS cases that were more than one year old, then at least $15.9 million (3% of $530 million) could have been collected on these cases during Fiscal Year 2001. Even after providing the contractor a 20 percent commission on this amount, the City still could have realized $12.7 million in additional revenue.

Table I (in the report) presents our estimates on the potential revenue that DOF could collect either by enhancing its own collection efforts or by awarding an ECB-case-specific contract to a private collection agency.

DOF Computer-Assisted Collection System data are not consistently updated to include BARAMIS case status changes noted in the ECB AIMS system. DOF officials informed us that they regularly receive computer tapes from ECB that contain updates on the status of ECB cases previously forwarded to DOF. The updates provide information on case status changes, such as the respondent having paid the penalty on a case, the violation having been dismissed, or a case having been docketed.

In our review of 150 randomly-selected BARAMIS cases, there were 17 instances in which ECB’s AIMS showed that the respondent had paid the penalty or that the violation had been dismissed subsequent to the case having been referred to DOF, but for those 17 cases, DOF’s CACS still stated that the penalty was outstanding. The range of time from the dates indicated in AIMS that the respondents paid these penalties or that these violations were dismissed, to the dates on which we checked the corresponding information for these cases in CACS was from three to 16 months. Therefore, there was ample time for this information to have been updated in CACS. Outdated information in CACS can confuse respondents if they receive dunning notices from DOF after they paid the penalty or after the violation was dismissed. Such information can also create inefficiencies in DOF to the extent that its staff works on cases that have already been resolved.

There were also 67 instances in which ECB’s AIMS showed that the case had been docketed subsequent to the case being referred to DOF, but for which DOF’s CACS still indicated that the case was undocketed. The range of time, from the dates shown in AIMS that the cases were docketed to the dates on which we checked the corresponding information in CACS for these cases, was from five to 27 months. Therefore, there was ample time for this information to have been updated in CACS. The failure to update CACS to show that cases have been docketed subsequent to referral to DOF is particularly significant because the DOF ECB case collections unit staff informed us that they are much more likely to work on a docketed case than on an undocketed one.

DOF officials informed us that after the agency receives a BARAMIS case from ECB, the respondent is mailed two dunning notices for a docketed case and one dunning notice for an undocketed case (in addition to the dunning notices already sent by ECB). DOF’s contractor handles this responsibility. The only evidence that the notices have been sent are case entries in CACS showing the dates the notices were sent. Of the 150 randomly-selected BARAMIS cases we reviewed, there was no evidence in CACS that the required notices had been sent for 107 (71%) of the 150 cases. Therefore, there is no evidence that an important procedure in the DOF ECB case collection efforts is being followed or that the contractor is meeting its responsibility for mailing dunning notices.

The audit resulted in eight recommendations, including the following six:

The Department of Finance should:

• Request, obtain, and review computer tapes from ECB containing AVPS cases.
• Initiate a substantial effort to collect payments on AVPS cases.
• Significantly enhance its efforts to review and collect payments on BARAMIS cases.
• Award a contract that specifically involves the referral of older ECB cases for further collection efforts. Alternatively, DOF could sell these older cases to a collection agency for a lump-sum.
• Periodically review a sample of ECB cases in ECB’s AIMS and DOF’s CACS to determine whether it is receiving updated case information from ECB in a timely manner and whether DOF’s contractor is properly downloading this information into CACS.
• Periodically review a sample of ECB cases in CACS to determine whether the contractor is mailing dunning notices as required.

The matters covered in this report were discussed with DOF officials during and at the conclusion of this audit. A preliminary draft report was sent to DOF officials on April 25, 2002 and discussed at an exit conference held on May 8, 2002. On May 23, 2002, we submitted a draft report to DOF officials with a request for comments. We received a written response from DOF on June 7, 2002.

In its response, DOF stated that it "agree[s] with the draft audit’s main conclusion that the collection rate on ECB debt has been unacceptably low." DOF also stated that "the draft contains useful observations and recommendations that will help Finance improve its efforts to collect delinquent ECB debt" and that it "agree[s] with most of the draft audit’s specific recommendations." However, citing "the poor quality of ECB debt," DOF questioned our estimate that $26.2 million could be collected through an enhanced DOF collection effort on these cases. Nonetheless, DOF stated that it is "optimistic that Finance, working closely with ECB, can boost the collection rate and significantly increase ECB revenue." DOF stated that it will "work with ECB to improve the enforceability of its fines, in part by applying some of the strategies that Finance has used to improve the enforceability of parking fines. For example, we will provide more feedback to issuing agencies in cases where the information necessary to enforce summonses has not been properly recorded."