Oregon is sitting on $3.3 billion in bad debt from unpaid taxes, fines and fees

The Oregon Legislature and Gov. Kate Brown had high hopes on the Department of Revenue to help with the $1.4 billion revenue shortfall only to find that the agency has a long track record of delivering disappointment.

Lawmakers can’t fully trust the numbers they get from the Oregon Department of Revenue — which collects more than $8 billion a year in taxes — because repeated audits uncovered “significant” and “material weakness” in the agency’s accounting system which means there’s no guarantee the numbers are reliable.

Six times state auditors reviewed Revenue Department’s revenue practices for collecting debts over the years and made recommendations — including some dating back to 1997 — that the agency ignored, according to a 2015 auditors’ report entitled “Oregon Needs Stronger Leadership, Sustained Focus to Improve Delinquent Debt Collection.”

Sen. Betsy Johnson, D-Scappoose, said the Legislature must find a way to prod the agency into better performance.

“This cannot drift longer,” she said during a recent meeting of the joint committee that oversees the department’s budget. “What’s systemically wrong here? Something is not right.”

Gov. Kate Brown said she’s counting on Revenue to do “the best possible job” to collect the $3.3 billion in delinquent debt that the state carries on its books.

Legislators, meanwhile, are trying to figure out how to fill a $1.4 billion shortfall for the 2017-2019 budget cycle and could use every $1 million or $2 million it can find to pay for schools, universities and the Oregon Health Plan.

The all-out search for tax dollars naturally leads to the Department of Revenue because, as bankrobber Willie Sutton said, “that’s where the money is.”

“When we’re in the predicament that we’re in,” Nia Ray, director of the Department of Revenue, said in an interview,  “the conversation shifts to revenue generation and collections. That’s just the space that we’re in right now.”

Debt owed to the state is growing. The $3.3 billion in unpaid taxes, fines and fees is double the size it was in 2008, according to state figures. The biggest share is unpaid criminal fines and restitution (49.3 percent),  unpaid taxes (19.1 percent), unpaid child support (12.1 percent) and all other agencies (19.5), according to an annual report by the Department of Administrative Services.

“A lot of that money probably will not be collectable,” said Rep. David Gomberg, D-Central Coast.  “Half of that money is over in Justice where somebody is in jail and was ordered to pay restitution and they’re not going to pay $1 million in restitution while they’re ironing sheets in the state penitentiary.”

Lawmakers are zeroing in on the $600 to $800 million in unpaid state taxes that — if collected — could pump up the state’s general fund. At least $100 million to $200 million is probably doable, said Gomberg, a Lincoln City kite seller and Willamette University MBA, who has made the state’s bad debt his mission since arriving in the Legislature in 2012.

“This is not going to solve our deficit. This is not going to balance the budget. But that’s not the point, is it? The point is that you and I pay our taxes and we think everybody else should pay their fair share as well,” Gomberg said.

More than 2.5 million people owe the state money, he said.

“‘I’m a small business guy. When my company needs money, before we cut positions or raise prices, we call in our accounts receivable. The accounts receivable for the state is $3 billion,” he said.

An investment in employees

In the 2013-2015 budget, lawmakers added $3.8 million to the agency’s budget to add 11 new employees to work on collections and 20 for audits or fraud detection with the promise that the investment would reap $33 million for the general fund.

Lawmakers were surprised recently when they found the additional employees aren’t in place, working collections and filling the state coffers. The agency, in fact, is holding 175 positions open. That amounts to a 16 percent vacancy rate when the norm is 5 to 7 percent.

“The amount of your vacancies is so startling, it’s left even those of us who are seasoned with our jaws on the table,” Johnson said. “We appropriated money based on certain representations that the agency made, and it appears that those promises haven’t been kept. I sort of feel like we got hoodwinked a little bit.”

The agency hasn’t filled vacant positions since last fall, when Ray arrived. Before hiring, Ray took some time to assess the workforce. In December, the governor’s proposed budget for the department was 3 percent less than what the department had to spend for the previous biennium, so the agency canceled interviews and put job offers on hold.

The agency did such a good job, it saved $9 million and promised to send $4.5 million back to the general fund at the end of the biennium.

But that’s not what the Legislature had in mind.

Each employee in tax collections can bring in 12 times their salary in taxes, Gomberg said. Revenue leadership replied that the 12 times doesn’t persist as agents work through the backlog to the cases that are harder to collect.

“I said: ‘I’m a small business guy. I would be happy with five times my return, or three times,'” Gomberg said.

“We were very unhappy that we had funded positions and those positions were not filled. Those are critical positions that exist to help Oregonians to make payment plans or to answer questions as well as go after people who are avoiding us,” Gomberg said.

Tracking down debtors

Finding the debtors, verifying the sum and getting them to pay up is more difficult than people understand, Revenue officials say. Some people who appear to be tax scofflaws, for example, may have moved to another state and paid taxes there.

“The collections formula is more complex than most would acknowledge,” Ray said. “That being said, there’s always room for improvement. My goal is to find those avenues for improvement and then implement those. If there’s a way to improve, it’s my goal; to get there.”

But Ray, who came to the directorship last October from the same job in Missouri, leads a 1,087-member department that’s best known for missteps, mistakes, public apologies and a chronic resistance to change.

A 2016 audit found errors caused by incomplete data, data from the wrong time period, applying incorrect percentages in certain calculations — all not detected by employees charged with reviewing the work.

As a result, the general fund was $212 million shy of what the Department of Revenue figured, according to the audit. In addition, the agency was slow to reconcile the cash on hand with certain figures in the ledger, the auditors found.

The department blamed the mistakes on high turnover among agency accountants and a lack of training. The training lack can’t be remedied by simply sending someone to a single class, a Revenue official said. It will take time. More training is scheduled for the fall.

The answers didn’t sit well with Johnson.

“You are our big deal fiscal agency,” she said. “You’ve got bad audits and you say they’re consistent over the years. … Where is the management plan to fix that? The agency has HUGE problems. …If I had one bad audit finding, I would have been on it immediately to fix it.”

Past mistakes

The Revenue Department’s lack of controls has lead to some spectacular lapses, such as in 2012 when a 25-year-old Salem caregiver reported $3.5 million in false income and got a $2.1 million undeserved tax return — undetected until the woman called to say she’d lost the Visa card that held the cash refund.

The woman, Krystle Marie Reyes, is serving  5 1/2 years for felony theft and tax evasion. Four Revenue employees were disciplined for not catching the fraud but none were fired.

More recently, as the result of crossed wires with the Justice Department, Revenue agents erroneously seized the income tax refunds of 438 Oregonians, who had paid their back child support and were no longer in arrears with the Division of Child Support. The state has since refunded the refunds.

What makes lawmakers “absolutely barking crazy” is when Revenue drags its heels on productive collections tools that auditors and others have recommended for decades, Gomberg said.

In 1997, for example, the state auditor recommended comparing the state debtor roles with the list of vendors providing goods and services to the state — once identified, the vendors would likely pay what they owed voluntarily or the state could garnish the payments until the debt was satisfied. In 1996, other states collected as much as $2.7 million with that strategy, according to the audit.

A 2015 audit found 9,000 vendors that owed the state money and 40 other states had vendor offset programs to intercept the outgoing payments.

The 2015 auditors provided these examples:

*One vendor for the Department of Human Services and the Oregon Health Authority received $1.4 million in regular payments from 2008 to 2014. During that period, he accumulated $224,000 in state debt. The state could have collected $166,695 by intercepting payments made after the debt was incurred.

*Another vendor incurred debt of $86,000 with Oregon Parks and Recreation, which sent the debt to (the Department of Revenue)  in 2013. In 2014, Oregon State Police paid the business $19,894, which could have been intercepted.

*A vendor hired by the Oregon Department of Fish & Wildlife in 2012 had $60,200 in child support debt and roughly $500 in court debt. His $21,000 payment could have been intercepted.

Gary Blackmer, then director of the audits division, estimated that a vendor offset program could bring in $1 million a year.

Two decades later, Revenue officials say they’re now getting vendor data from sister agencies and preparing to enter vendors into payment plans or garnishing vendor payments.

“We’re really close to being able to put something out,” said Deanna Mack, Revenue legislative liaison.

This summer, she said.