Friday’s edition of BusinessWeek ran a disjointed but rather damning article about the use of third-party debt collectors by state and local governments.  I was interviewed extensively for the story, along with Nick Bernardo of Net Gain Marketing and several industry experts in municipal receivables. But after reading the resulting article, it seems clear to me that the reporters Jessica Silver-Greenberg and Peter Carbonara had the story already written with their own agenda before they interviewed a single person.

The story is entitled “Are Private Debt Collectors a Bad Bet for Cities?” (BusinessWeek, March 13, 2009). The whole poorly-supported premise of the article: it is better and more cost-effective for municipalities to collect their own debts than if they outsourced to professional debt collectors.

Their claim is inaccurate and misleading for a number of reasons.

Incomplete Reporting

It was not made clear in the article that municipalities and other government agencies tend to send select accounts for collection – generally accounts that are over 180 days past due and/or accounts where internal collection efforts have proven unsuccessful. This is an important distinction, since the kinds of accounts sent to collection agencies are typically more expensive to collect. 

The journalists writing this story lacked this fundamental understanding or they chose to ignore it.  They faithfully published taxpayer advocate Nina Olson’s claim that if the IRS had invested the $7.5 million it paid in collector fees to retraining existing staff instead, it would have collected $250 million dollars vs. the $37 million collected by the two outside contractors.  As many professionals in the industry know, this is a misleading presentation of the facts. If the reporters had read the study, or asked us for clarification, they would know that for in-house collectors, the study includes all overdue taxes, vs. the specific accounts sent out to collection for the contractors. This is an unfair comparison of two different types of debt.  Even if their comparison was reasonable, we would all like to see the IRS’s plan for collecting $250 million. 

For the same reason, a thorough and diligent reporter might have asked for clarification when Montana’s revenue director, Dan Bucks, says he collects $21.08 for every $1 spent on salaries and expenses, vs. $5.01 in money collected for each $1 spent on an outsourced collection agency.  Did his result include all debt collected by his office?  If so, this is not an apples-to-apples comparison either.

Unfair: Lack of Balance

The article contends that accusations of “predatory behavior” in the industry are “proliferating,” but then goes on to describe four cases; two examples from 2005, one from 2007 and one from last year.

However the most egregious example of unfair reporting is how they characterize the overall success or failure of municipal collection contracts.  

The article describes four examples of governments canceling their contracts with collectors: the IRS, the states of Montana and New Jersey, and Mansfield, Texas.

There is one neutral example of a municipal government in the entire article, Bluff City, Tennessee, that is “farming out” its collection work for $50,000 in back taxes and unpaid speeding tickets, but no indication of the program’s success or failure.

There is not one example of a government entity that is benefiting from using outsourced collection services.  

Why?

A fair representation of the facts would not have been able to ignore the numbers.  

As the Wall Street Journal and the Washington Post have recently reported, and as industry professionals know to be a fact, a growing number of governments are utilizing professional collection agencies to collect overdue bills including Anchorage, Austin, Baltimore, Dallas, Denver, Fort Lauderdale, Miami, New York City, Orlando, Philadelphia, Tampa, Portland, San Diego, Washington D.C.

Those in the industry know that the U.S. Department of Education has been successfully outsourcing collections for years and just last week publicly announced the expansion of the program.  It is public record that in addition to the ED contract, the US Department of Agriculture, and Department of Health and Human Services each utilize private collection agencies and have done so effectively for years.  Aside from state and Federal government, mygovwatch.com estimates that roughly a thousand U.S. towns, counties and cities are currently outsourcing to collection agencies.

One of the reporters who co-authored the article, Peter Carbonara, accessed statistics related to growth in public sector debt collection contracts at www.mygovwatch.com made available to him by Nick Bernardo, President of Net Gain Marketing, Inc., the company that owns and licenses the site's content. "After the article was published, I asked the reporter why there was no mention in the article of any of the hundreds of municipalities that are pleased with the professionalism and results of their collection contracts," stated Nick. "The response I got referred to how things can fall in and out during the editing process."

What fell out in the editing was the whole other side of the story that would have made this a balanced piece of journalism instead of a misguided attack against an industry.

I have been around the block enough to know that most media professionals do not write glowing positive articles about debt collectors, and BusinessWeek is certainly not alone in overstating the industry’s isolated problems, but I’m concerned with their blatant lack of balance when covering an important topic.  This does a disservice not only to the industry of professional collectors, but to our credit economy as a whole.  BusinessWeek may have run an eye-grabbing story that played to stereotypes, but it failed to live up to its own stated Code of Ethics and fulfill its charge to serve the public interest. 

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