We know of only one study analyzing state-by-state interest practices. In 1998, the Region VIII Office of Child Support Enforcement surveyed states and found that states are as varied in their interest usage as are Colorado counties. As shown in Exhibit 1, about half (47 percent) of the states assess interest. Most (about three quarters) of the assessing states have only recently begun to charge and collect interest, a task made easier by implementation of statewide automated systems. The remaining states have always charged interest.

The Region VIII survey also asked states whether they believed interest charges encouraged payment of current support and whether it was cost effective. The states charging interest were evenly split on the question of whether interest encourages payments of current support. Slightly more than half the states that assess interest said it is cost effective to do so. States did not document the basis for their answers.

For those states that do not charge interest, their reasons for not charging interest included: (1) interest is administratively complex or burdensome, (2) the state's automated system cannot handle interest, and (3) collecting interest is not cost effective. Several states indicated that charging interest is under consideration.

The survey we administered was designed to expand upon the findings of the Region VIII survey. One objective was to provide further insight on why some states thought interest was cost effective whereas others did not. Another objective was to draw from a range of state experiences; whether they recently added interest to their automated system, discontinued charging interest, or developed a relatively trouble-free system of assessment and distribution.

The contractual agreement was to survey 13 states, but because of the diversity of experiences, we interviewed 19 state Child Support Enforcement agencies. Exhibit 2 lists these states. The states selected represented a diversity of approaches and beliefs about interest charges. Preferences were also given to county-administered programs.

Representatives from these states were interviewed by telephone during the summer of 1999. Each interview lasted approximately one hour. It involved a series of forced-choice and open-ended questions covering a range of topics, including policies and procedures; automation; and outcomes, benefits and costs. CSE interviewees were asked if they had knowledge or data regarding the influence of interest on payment behavior, and on the cost of implementing and managing interest. Respondents were also queried about their agency's experience with adding interest to an automated system, or beginning an interest program when starting up a new automated system. CSE representatives who were interviewed were generous in sharing agency notices, training materials, and their own work experiences with the interviewer.

As shown in Exhibit 2, ten of the 19 states interviewed charge and collect interest on arrears statewide on all cases with some minor case exceptions. Interest is not charged statewide in five of the states interviewed, but is charged on an individual case basis if it is ordered, is pursued by the custodial parent, is reduced to judgment or meets some other criteria. Exhibit 2 also shows that we interviewed four states that do not charge interest.

Generally, states reported that their decisions to charge and collect interest, as well as to charge interest statewide, were based on four factors:

Whether the state has provisions mandating interest charges is the most significant factor contributing to a state's decision to charge interest. In turn, this has also resulted in statewide automation of interest. In other states where interest charges are permitted, the capacity to charge interest and the costs of automating interest appear to be primary considerations. Other factors considered by states in the decision to charge interest involve moral issues (i.e., child support arrearages should be subject to interest just as consumer debts are) and the likely effects on payments. These factors are discussed in greater detail below.

Some states' statutes permit interest charges, whereas other states mandate interest charges. As shown in Exhibit 3, every state interviewed for this study has, at a minimum, a statute permitting or mandating that interest be charged on debts reduced to judgments. In addition, many states have statutes authorizing the state CSE agency to assess interest on arrears. New York requires that CSE first reduce arrears to judgment through a court process before assessing interest. Texas, in contrast, has statutes dictating that interest accrue on both pre-judgment and post-judgment arrears. Most states do not distinguish between pre- and post-judgment arrears, and authorize interest to be assessed on past due child support.

The interaction between a state CSE automated system's capacity to assess interest and the state's interest policy is partly reflected by those states that have statutory provisions permitting interest charges but do not assess or calculate interest statewide. For example, the states of New Jersey, Oregon and Indiana have policies whereby entities other than the child support agency have the authority to request or assess interest on arrears. Neither New Jersey nor Oregon has statewide automated capabilities for tracking interest. In the case of Indiana, judges and courts set the interest rate, using a variety of methods of calculation.

The Michigan CSE program, which is not fully automated throughout the state at this time, has devised a unique solution to the difficulties associated with interest and automation. In 1996, CSE developed a program to exempt child support cases from judgments rather than deal with the complicated state formula for calculating interest on debt reduced to judgment.^[5] In lieu of assessing interest, the agency imposes a surcharge on past due support. On January 1 and July 1 of each year, a surcharge calculated at an 8% annual rate is added to support payments that are past due as of those dates, less two weeks' support. The surcharge policy states clearly “A support order shall not accrue interest” (M.S.A. 552.603 [7]).

Washington is another state that has elected not to assess interest. According to CSE administrators, the statewide-automated system is old but very effective. However, it was not designed to handle interest. The Washington CSE agency has determined that assessing interest would not be cost effective, in part because adding interest to the automated system could only be done at great expense. The cost rationale of Washington CSE is discussed in more detail later in this chapter.

Utah is the one state participating in this survey that collected interest in the past but stopped the practice. The policy of Utah CSE, as stated in its “Notice of Services” is that the agency only collects interest “if it is listed as a specific dollar amount in a judgment.” The state interest rate on debt reduced to judgment has changed several times, and in 1993 the state adopted the federal post-judgment rate plus 2% as its interest rate. Because the CSE automated system lacks the capability to calculate the rate variations, the agency stopped charging interest on judgments.

Several respondents labeled charging interest as “the right thing to do” because children need whatever support can be collected, and because paying interest on debts is something all Americans understand.

Interest is a fairness issue...the obligee is due a certain amount of money at certain times. If the money is not paid timely, the obligee should be recompensed.

It would be criminal not to collect interest. For one thing, it builds credibility and respect for the agency. For another, an agency is open to lawsuits if it doesn't charge interest.

Although some states hoped to see an increase in collections with the implementation of interest assessment (and the interviewees thought this had happened), this was never the primary reason given for charging interest. Many of the interviewees cited “affecting payment behavior” as the rationale for interest, even while expressing uncertainty that it makes a difference.

We charge interest in order to send a message that if a person does not keep current with payments, he will owe more -- but it probably drives some obligors away, if they really can't pay the arrears.

Only about a quarter of the states mentioned that the effects of interest on payments were factored into their decision to charge interest. Most of these states hoped that interest would improve payment behavior, but few had collected any empirical evidence. Only one state (Oregon) had put the decision to charge interest in the context of a cost-benefit study.

Nonetheless, most of the interviewees held two perspectives on how interest affects payment behavior:

Many participants had anecdotes relating to both perspectives. For example, one respondent said that while he has observed obligors who try to pay off arrears quickly to avoid paying interest, he has seen even more obligors who lose hope of ever paying off the arrears when interest begins to accrue. Yet another respondent said, “We expected and hoped that charging interest would improve payment behavior, but we don't have any indication that it does. Sometimes it incites the obligor to more anger, and makes the relationship of the CP and NCP even more difficult.” In contrast, several respondents said that in their states the introduction of assessing interest had not created any kind of hostile response, and that “people just accept it.” An advocate for interest argued, “It is well known that people always pay the most demanding bills (meaning the ones with the highest interest rates) first, and ignore the less harsh ones.” Therefore, this person believes that interest does make a difference, and CSE agencies should not be afraid to assess interest at a hefty rate.

Without empirical data regarding the impact of interest on payment behavior, it is difficult to reconcile these perspectives—or at least determine which outweighs the other. However, a recent report analyzing the $214 billion in unpaid assessments of the IRS as of 1997 contributes to the discussion.^[6] The GAO reviewed 1997 unpaid assessments to determine whether the classification and balances of the unpaid assessments were accurate, and to estimate the amount of taxes receivable that the IRS could anticipate collecting. More than one third (36 percent) of the unpaid assessments were considered to be uncollectible. In 22 percent of the unpaid assessments neither the taxpayers nor a court agreed with the IRS that these taxes were owed to the government. Researchers found that among these cases, there was little or no payment activity. This led researchers to conclude that, “Based on our sample, we found that taxpayers who do not agree that they owe the IRS usually do not make payments” (GAO 1998:12). Cases which were more likely to be collected were defined by (a) evidence of regular payment, (b) the ability or willingness of the taxpayer to pay, and (c) the newness of the debt. If it had accrued within the past four years, the debt was more likely to be paid.

This distinction between people who are willing to pay and those who will not pay because they disagree that they owe something was also made by state CSE respondents during the survey interviews. “For some obligors, interest doesn't matter, because they are not going to pay (voluntarily) anyway.” But for other obligors, the threat of interventions such as interest does act as a deterrent to non-compliance. These obligors would be the equivalent of the taxpayers who have paid in the past, who have the ability or willingness to pay, and who have a fairly new debt.

As shown in Exhibit 4, few states could provide empirical or quantitative evidence corroborating their beliefs concerning the theoretical impact of interest or on the collections and costs relating to interest. The most detailed information comes from Virginia. In one year, Virginia was able to collect about $0.5 million of their $80 million interest debt or about 0.6%. Virginia's collection rate on all past due child support is about 11%. Principal is satisfied first then interest for each disbursement category.

Although Minnesota does not have collection information, its information provides some insight on whether interest inflates arrears. Interest comprises about 7% of all arrears. The majority (70%) is owed to public assistance.

Several interviewees described considerable staff investment in preparing for an interest program. In New York, for example, three people devoted six months full-time to developing and testing the interest component for the automated system. Another state created an interest work group to develop business rules at the time of conversion. Massachusetts policy staff spent months working out the details before announcing the program.

When Virginia CSE began assessing interest in 1995, the agency mailed a notice to all noncustodial parents, informing them that interest would be charged on past due child support obligations, and describing other enforcement remedies which could be applied, such as driver's license suspension. According to the survey respondent, this notice generated payment activity by approximately 27,000 obligors who had not paid child support in the three previous months. Likewise, when Massachusetts announced its new interest program this year, more than 2,000 obligors responded by sending in payments, averaging $400. In summary, based on the experiences of Virginia and Massachusetts, notification has a positive effect on payment behavior.

Respondents from states that recently experienced system conversions described extensive loss of staff time and loss of income, but they could not separate out the cost of interest from the cost of other problems, except to say that programming for interest complicates the conversion process.

When asked if they believed interest had a positive impact on collections, most interviewees were cautious. Although a few people thought interest had increased the state's collections, they explained they had no evidence to support their theory. The general response was that it is impossible to sort out the impact of interest from other remedies. Thus, the surveyed states that are assessing interest have not analyzed the economic impact of the program. However, three states—Iowa, Washington and Oregon—have conducted studies to estimate the costs and benefits of implementing interest.

Iowa. In 1992, Iowa CSE considered the cost of assessing interest or penalty charges on arrears as a way to increase compliance with child support obligations. Iowa statutes allow an interest charge of up to 10 percent per year on judgments. The agency's estimate of the costs to develop the policy and procedures and to reprogram the automated system for interest was $77,000. For a late penalty program, the estimated cost was $87,500. These estimates did not include the costs of system maintenance, increased case activity, or a public awareness campaign. An estimate of the return on the investment was not made.

Washington . In 1993, the Washington CSE Division weighed the costs of implementing an interest program. The state statute allows CSE to assess interest at 12 percent per annum, simple (RCW 26.23.030). Staff personnel estimated the costs to reprogram the information system to be more than $2 million, much of which represented “lost collections” staff believed would occur during the time they were involved with training or developing, testing and implementing the program. Staff estimated it would take approximately 18 months, from the study phase to implementation, to complete the program. Additionally, Washington CSE projected it would cost more than $24 million to retroactively calculate interest on all cases with arrears.^[7] From this information, CSE administrators determined that charging interest would not be cost effective. According to the CSE survey respondent, “We could define the costs fairly easily. But the benefits were indeterminate.” We should note that Washington CSE only considered the approach to implementing interest which involved calculating each case retroactively. Alternative approaches to implementing interest are discussed in Chapter IV.

Oregon. Policy Studies Inc. (PSI) staff conducted research for the Oregon Department of Justice, Support Enforcement Division in 1994 to estimate how much the State would likely collect from interest on arrears accrued between 1975 and 1995. Oregon had plans to implement a new statewide automated system in 1996, with the capability to calculate and track interest. It wanted to know how much could be collected if they retroactively entered interest for all cases back to 1975, the year when statutes allowing interest charges were passed. The study estimated that the amount of interest on arrears that had accumulated over the 20-year period was $400 million. While the study found that collections deriving from interest over the next five years could be between $0.8 million and $3.5 million, most of that would come from non-AFDC arrearages rather than AFDC arrearages. Oregon did not believe their share of the collections would offset the costs of back-entering interest. They based their cost estimates of back-entering on the Washington study.

None of the three states discussed above are currently assessing interest on arrears. Of those states that do assess interest, some programs appear to be more successful than others. What is of particular importance for this study is that the respondents who expressed satisfaction with their state's interest program described a fully automated system and set of procedures that, once implemented, requires very little from workers. In the next section, we take up what CSE interviewees listed as the elements of effective interest programs.

Some of the CSE respondents expressed satisfaction with their state's automation system and interest program; others were less positive and described problems with the program or system they are struggling to overcome. Here we concentrate on what CSE staff have learned from their experiences, and what they suggested an agency should do to create a successful program. We have divided the factors of success into the following topics:

Respondents noted that because of the many ramifications of adding interest to a child support program, planning is a key element to having a successful program. According to the respondent from West Virginia, if a state wants to add interest to its automated system, investing in a thorough planning stage to develop business rules is crucial:

Before making the change of adding interest, think of everything you can that will be impacted. Tighten your laws and procedures; work out ahead of time ALL details. For example, think of how you will handle dates: what will be the rule regarding interest if the order is established on a certain day, but the agency does not receive the order until three months later? Try to simplify the law; try to keep the application of interest uniform. Avoid rules that will require workers to constantly make adjustments.

This planning advice was echoed by the respondent from New York, who talked about programming:

Think it through from start to finish. Anticipate how it will affect everything, at the county and the state level, from creating judgments to entering the data for the first time. Test it (on a small system) until you are sure of it. Even then, there will be glitches.

Another respondent discussed the experience of her state this way:

Going forward is easy; the hard part is dealing with the past. Calculating interest in the past was not uniform (in this state), so we had to set up a number of rules. Are arrears owed to the state or the CP? We had to decide on the rules to distribute interest paid when recalculating, and then figure out how to program it.

Other respondents described preparing workers or customer service departments for an onslaught of calls when interest was initiated.

Exhibit 5 lists the states interviewed that currently assess and track interest on their statewide-automated system. Somewhat more than half (60%) of these states did not charge interest before they developed their new systems, which were developed to meet federal requirements. The remaining 40 percent of the states also assessed and tracked interest on their old systems.

In addition, Exhibit 5 summarizes the level of manual effort required on the automated system. With the exceptions of New Mexico and Arizona, which are discussed in greater detail later, the level of manual effort is limited to adjustments made by caseworkers or staff with the proper security level. Finally, Exhibit 5 summarizes some of the merits and limitations of automated systems as identified by interviewees. Merits are generally reduced labor costs and increased accuracy. The limitations mostly involve automation and conversion issues.

A number of respondents stressed that if a state is going to charge interest, the program must be fully automated, and applied uniformly to obligors with arrears. Of course, exceptions to being assessed interest can be programmed into the system. For example, Minnesota's automated system PRISM contains nine categories of criteria for interest exemptions (see Exhibit 6.)

Alabama illustrates some of the issues with automating interest, particularly how it interfaces with manual functions. Alabama converted to the new system ALECS (Alabama Locate and Enforcement Collection System) in 1995 and was certified by OCSE in 1997. CSE created a special “interest unit” to address the problems of converting from the old to the new system. Programmers and systems staff do not recall any problems in getting the new system up and running. With the new system,

It seems logical that the less complicated a state's statutory history has been with regard to interest rates, the easier it would be to create a satisfactory computer program to handle interest calculations and collections. Yet this is not always the case. Alabama, with a number of rate changes over the years, and Minnesota, with a variable interest rate tied to the general judgment rate, both have automated systems that handle interest without problems, according to the survey respondents. Arizona, with one statutory change in the past 20 years, has experienced extensive problems in adding interest to the automated system during conversion. The Arizona respondent explained that interest calculations were not done uniformly prior to the system conversion in 1995, so cases must be recalculated as they are entered into the new system. Additionally, the state has numerous cases that do not fit programming operations, such as employers withholding wages every other week rather than monthly.

Sometimes the automation system itself is the problem. New Mexico, for example, reported that its new automated system continues to be unpredictable, requiring that all cases involving interest be recalculated before going to court. Another state experienced so many errors made during conversion that the agency had to conduct a reconversion. The interest-related automation problems listed by the Texas respondent included the state law, the changing laws, and the state distribution scheme: “Because (by law) each child support arrearage must be tracked to determine when it is 30-days past-due, and thus eligible for interest accrual, the programming task was formidable.” Further, Texas law regarding interest on child support arrears has changed four times in the past ten years. Finally, Texas has a complex state distribution scheme that caused significant problems in coding it correctly.

Does the obligor understand that interest may be assessed on arrears? Does the obligor know when s/he is being assessed interest? It makes sense that if the reason for assessing interest is to affect payment behavior, the obligor must be informed of the penalties for nonpayment. Yet several of the states explained it is not the responsibility of CSE to inform the obligor. According to one respondent, “Charging interest is statutory, so CSE isn't required to provide notification.”

Exhibit 7 shows whether and how states notify obligors about interest charges. (Examples of notifications are provided in Appendix II). Notification of the use of interest and other remedies appears to be a practice some state CSE agencies used to their advantage when launching an interest program. New York, Virginia and Minnesota sent letters to obligors with arrears just prior to implementing interest, warning the obligors what would happen if outstanding balances were not paid.

Virginia is a state that has continued the practice of sending one-time notices. When interest was implemented in 1995, every NCP was sent a one-time “Important Notice”, which listed all possible enforcement actions for arrears, including interest. Now, when a new case opens, the obligor receives a similar notice. The system does not send out monthly bills or statements. But if a CP or an NCP requests a statement, the agency sends a case account summary. It breaks out interest separately from arrears and current monthly support, and public assistance arrears are differentiated from non-public assistance arrears. As noted previously in this report, approximately 27,000 noncustodial parents who had not paid in the three months prior to July 1, 1995 started paying after receiving the notice.

Massachusetts is unusual because it charges both a 12 percent interest rate and a penalty of 6 percent on all arrears. Notification is critical to Massachusetts' interest program, which was initiated this year. The Massachusetts policy is to send out an Annual Notice which explains liens, interest, remedies and enforcements, and lists what is owed. This notice is also sent as soon as $50 is owed by an obligor. In addition to the Annual Notice, CSE staff sent a notice to obligors with arrears in May of this year, explaining that the fiscal year would be ending in June. At that time, the system would tally the arrears for an obligor, and would assess interest at 12 percent and penalties at 6 percent. The letter explained the conditions under which an obligor with arrears could avoid interest and penalties, and it included a work sheet. This approach is discussed in more detail in the section on Incentive Structures.

How does assessing interest impact the workload of CSE personnel? Respondents stressed that a good interest program that is folded into the automated system should have very little impact on the average worker. Three states reported that no training involving interest is given to workers, since the system does all the work. Four states give workers a little information and training (“only a couple of hours”), so that they can explain interest to obligors and obligees when they review cases. Minnesota, for example, includes a small segment on interest in a class on collections and disbursement. Two states reported that specialized workers receive substantial training (1-3 weeks) on interest-related issues. Finally, two respondents explained that when interest was first implemented, workers received extensive memos regarding the new program.

If errors were made in data entry during conversion, workers may be required to constantly recheck their work. Several states talked about the time involved in recalculating interest because of errors that were rolled over during conversion. If a new interest program is complex, the agency must have personnel ready to explain interest to its customers and court personnel.

The impact on programmers can be significant when a state is converting to a new system or adding interest. Although no state had actual figures to share with us, several respondents talked about the sizeable amounts of time that programmers invested in implementing interest. Many states expressed concern about the new PRWORA distribution requirements, and suggested that their programmers will have difficulty meshing the existing program with these new mandates.

The policies and procedures for assessing interest of each state are naturally different. In this section, we will discuss briefly some of the similarities and variations of states' policies, looking at the rate and method of calculation, amnesty programs and waivers of interest, the use of interest in negotiation, and incentive structures.

There are many elements that contribute to an agency's decision regarding implementation of an interest program. In addition to the economic, technical and personnel aspects of implementation, there are political considerations. In this section, we briefly discuss three challenges which Colorado CSE may encounter: lawsuits, PRWORA distribution requirements, and adding interest to an automated system.

Since 1997, a lawsuit has been pending against the Office of the Attorney General in Texas over the collection of interest on past due child support payments. Attorneys for custodial parents filed a class action lawsuit, claiming that interest on arrearages can be collected back to the date of delinquency. The Attorney General's Office argues that Texas law prohibits them from assessing interest on arrears which occurred prior to 1991. Similarly, the Washington CSE study on the cost of adding interest to their system was generated by a lawsuit brought against the agency by the Northwest Women's Law Center, pressing for interest to be charged. One respondent for the state survey suggested that any agency not collecting interest is vulnerable to lawsuits.

The question of distributing arrears and interest came up several times during state interviews. Most respondents said their agency follows PRWORA rules regarding the hierarchy of distribution (revised Section 457 of the Social Security Act). According to one respondent, interest is the last item to be paid in his state, but with the new federal distribution schemes, there are some questions regarding which arrears and which interest gets paid first. Several respondents noted that the federal requirements are now so complicated that agencies will be unable to explain them to courts and obligors. At least one state, Texas, has its own mandated sub-categories for distribution of payments. When PRWORA's distribution schemes are added, Texas CSE is faced with 24 sub-categories of arrears that must be tracked. For states that have already had problems programming the automated system to handle interest, the PRWORA regulations for arrears and interest represent another round of computer-driven headaches.

A challenge Colorado faces if a statewide interest program is implemented is developing a process to handle cases with arrears that is fair. In some counties, cases with arrears will have no interest calculated; in those counties that have been charging interest, the methods of calculation have varied. With this in mind, states that recently implemented interest, or that moved from calculating interest manually to automatically, were asked to describe the method they used. Was interest calculated from the beginning of each order and entered into the ledger, or was interest charged only from the time that the program began operating? In some cases, the answers were quite detailed. We have included the details to show the range of approaches used.

This survey was designed to hear from states that have implemented interest programs. Although respondents certainly expressed a range of opinions and experiences on most topics, several themes emerged from the interviews:

Respondents were quite willing to make recommendations, and their advice was direct and concrete. Some of their advice appears in Exhibit 8.