Historically, interest has not received much attention at the federal level.

For example, we have found nothing in writing from OCSE on how interest should be calculated. We have, however, found some guidance on how it should be distributed. Federal rules state that if accrued interest attaches to the support debt, it becomes “child support” and subject to the same distribution, federal incentive payments and collection remedies. Interest must follow the same complex distribution rules as arrearages that require separate tracking of six categories of assigned and unassigned arrears. Yet, it is up to the State to determine whether to apply collections to interest or principal first within a mandated arrearage category.^[1]

Since all states have adopted the Uniform Interstate Family Support Act (UIFSA), state differences in arrearage and interest calculation have recently become an issue. UIFSA requires the responding state to enforce the order of the initiating state.

The law of the issuing state governs the nature, extent, amount, and duration of current payments and other obligations of support and the payment of arrearages under the order. [§604(a)]

This has been interpreted that the responding state, regardless of whether the responding state assesses interest on its orders, must collect and enforce interest if the issuing state assesses interest.^[2]

The Interstate Reform Workgroup is reviewing whether a uniform policy of arrears and interest calculations is necessary for UIFSA. Appointed by the federal OCSE in 1999, the Interstate Reform Workgroup will recommend what uniform standards for collection, disbursement, distribution and case processing, and improved accounting would ease UIFSA/IV-D case processing across states. Interest is just one of the many issues they are considering. To our knowledge, a release of their recommendations has not yet been scheduled.

Another current policy issue that may affect interest is child support passthrough. Representative Benjamin Cardin (D-Maryland) has introduced legislation that would pass all child support paid on to TANF recipients and eliminate the complex distribution scheme. This could indirectly affect interest by requiring that all interest payments go to the family, rather than some of it being assigned to the State through the current distribution rules.

The CSE system in Colorado is state-supervised, county administered. Counties have the discretion to assess, or decline to assess, interest on arrears. Colorado law currently provides that “Interest per annum at four percent greater than the statutory rate set forth in §5-12-101, C.R.S., on any arrearages and child support debt due and owing may be compounded monthly and may be collected by the judgment creditor” (§14-14-106 C.R.S.).^[3] Effectively, the interest rate is 12%. Yet, the interest rate has changed several times since 1963 —from 6% to 8% to 12%— as has the method used to calculate interest—from simple per annum to compounded annually to compounded monthly. This statute and CSE policies pertaining to interest are provided in Appendix I.

The Colorado Department of Human Services Child Support Enforcement Staff Manual Volume VI [9CCR 2504-1 §6.805.4] further specify that interest should be considered support and collections on it should be used to reduce unpaid public assistance or paid to the family for non-IV-A cases.

A 1999 performance audit of the Child Support Enforcement Program by the Colorado Office of the State Auditor included a limited assessment of interest usage and recommendations about how to improve that use.^[4] When the Auditor's report was released, this study was just beginning. Thus, the auditors did not have the benefit of this study's findings in developing their recommendations. Nevertheless, one of the recommendations was to review this study's findings to determine how best to use interest in the State.

The interest functions on ACSES, the statewide child support enforcement automated system, are limited. ACSES does not automatically calculate interest and does not track interest arrears and principal arrears separately. However, technicians can add interest charges to the ACSES ledger on a current delinquency or on judgment and non-judgment arrears. The county technician is responsible for the interest calculation. Some counties use a software package to calculate interest (either their own or off-the-shelf, commercial software); others calculate it manually.

ACSES contains reason codes that can be used for interest adjustments. State administrators believed these codes were used infrequently so they developed a memorandum in May 1999 clarifying the procedure for entering interest on ACSES. In a survey we administered in October 1999, all counties assessing interest reported that they follow state procedure on this issue.

Somewhat less than half of Colorado counties currently assess interest. Among these counties, most do not calculate interest monthly on all arrears cases. Instead, they typically assess interest at the time of a child support action (e.g., entering a judgment, negotiating a lump-sum payment, or conducting other actions requiring a calculation of arrears or unpaid public assistance). Several of the counties that assess interest are frustrated that the calculation is not part of the statewide-automated system.

County perceptions about assessing interest vary widely. Some believe it to be effective, while others do not. To further complicate the issue, some believe it could be effective or could be more effective with automation and notification. Even with these improvements, however, there is still a faction that does not believe interest could ever be effective.

The remainder of this report is divided into four chapters. In Chapter II, we examine other states's experiences with interest. Chapter III examines how interest affects payment behavior. The costs of implementing statewide interest, statewide automation and notification are estimated in Chapter IV. Conclusions and recommendations are provided in Chapter V.