Report 2003-131 Summary - May 2004
Franchise Tax Board:
Significant Program Changes Are Needed to Improve Collections of Delinquent Labor Claims
Our review of the Franchise Tax Board's (board) collection activities in connection with delinquent fees, wages, penalties, costs, and interest (claims) referred by the Department of Industrial Relations (Industrial Relations) found the following:
- The board's success in generating collections for these claims is limited—our analysis of 310 claims filed in fiscal years 2001-02 and 2002-03 shows that Industrial Relations received payments on only 20 percent of them.
- Further, our review of 60 claims shows that, as of February 2004, the board has taken an average of almost 18 months to process these claims, and it still has not completed processing many of them.
- The board conducted two studies to improve its collection activities by automating its system, however, the board abandoned the project after realizing it would not receive the additional funding to implement the changes.
- Although state law requires Industrial Relations to adopt rules and regulations to charge the employer a fee to cover the board's collection costs, it currently does not do so.
RESULTS IN BRIEF
The Franchise Tax Board (board) is one of the State's two major collection agencies. In addition to administering the personal income tax, corporation tax, and homeowner and renter assistance programs, the board assumes the collection responsibilities of other state entities. Chapter 1117, Statutes of 1994, Senate Bill 1490 (SB 1490), authorized the board to collect the delinquent fees, wages, penalties, costs, and interest (claims) owed to the Department of Industrial Relations (Industrial Relations) under the Labor Code. Many of the claims that Industrial Relations refers to the board involve an employer owing a wage earner unpaid wages; if Industrial Relations collects those wages, it passes them on to the wage earner. According to Industrial Relations, the claims that the board processes involve money owed to individuals from all walks of life including minimum-wage earners, commissioned salespeople, data engineers, and others. Clearly, these individuals would benefit by receiving the funds that their former employers owe them. Furthermore, Industrial Relations also refers claims to the board that involve penalties related to certain labor law violations that, when collected, are deposited in the State's General Fund or two other special funds. In light of California's current fiscal problems, the State would benefit from any additional revenues the board can generate.
We analyzed 310 Industrial Relations claims filed in fiscal years 2001-02 and 2002-03 and found that the board collected only 20 percent of them. The board often takes a significant amount of time to process these claims, and we believe it could be more successful if it responded more promptly to the cases Industrial Relations refers. The board took an average of over a year to process these 310 claims and longer than two years to complete six of them. Furthermore, our review of a sample of claims selected to determine where the delays occur in processing suggests that the board's process takes even longer, with the processing of 60 claims averaging almost 18 months by the end of February 2004, and many are still not completed.
Although the board's general fund and the Department of Motor Vehicles provided funds to automate two other collection programs, its collection of delinquent child support payments and vehicle registration fees, the board still manually inputs the claims that Industrial Relations refers to it into the Non-Tax Debt Consolidated Debt Collections system. Automated systems both speed up the process and use fewer staff to generate more dollars collected. Between 2001 and 2002 the board conducted two studies—a program proposal and a feasibility study—to improve its collection activities, decrease the substantial backlog in SB 1490 claims, and possibly increase resulting revenues. However, after realizing that it would not receive additional funding to implement the changes these would require, the board abandoned the project.
Three other states we reviewed operate collection programs similar to the SB 1490 Program and currently have or are working on implementing some level of system automation. One of these states retains a percentage of the amount collected on behalf of the wage earners to cover its own collection costs and the costs of sending the claims to a collection agency. We believe that charging employers a fee for the board's collection services is consistent with the language of SB 1490 and would clearly benefit California's wage earners, as well as the State.
To monitor the amount of time the board takes to process claims and discuss any concerns when the delays seem excessive, Industrial Relations should require the board to periodically provide it with a status report on individual claims.
If the administration is unwilling to provide the additional resources needed to ensure that the board processes claims from Industrial Relations more promptly, Industrial Relations should consider taking the following actions:
- Adopt rules and regulations to charge a fee, as state law requires, to employers that delay paying their claims; the board and Industrial Relations could use such funds to automate the current system and increase staffing levels as needed.
- Prepare a cost analysis to determine the appropriate fee to charge employers that delay paying their claims.
The board indicates that it agrees with our recommendations. However, Industrial Relations does not agree that it retains responsibility for monitoring claims after it has referred them to the board.