COUNCIL COMMUNICATION

DATE:

 

10/22/2001

 

SUBJECT:   FINAL READING OF ORDINANCE 2001-O- 249

 

Final reading of an ordinance accepting and adopting the City of Laredo’s Write-off Policy for Accounts Receivable as presented to the Audit Committee on September 17, 2001.

 

INITIATED BY:

Larry Dovalina, City Manager

Cynthia Collazo, Assistant City Manager

 

STAFF SOURCE:

Rosario Camarillo-Cabello, Finance Director

 

PREVIOUS COUNCIL ACTION:

Policy was presented to the Audit Committee on September 17, 2001.

 

 

BACKGROUND:              

This policy will formally address the process of writing-off aged accounts receivables.  This policy is based on recommendations made by current and past external auditors to write-off un-collectable accounts on a timely basis.  Aged receivables are revenues that are due to the City of Laredo by clients or customers and have been reflected in our books for over one year or customers that we are not able to locate by any means.  We have compiled a list of aged receivables and have presented them to the Audit Committee and City Manager for their review and approval prior to City Council presentation.  On September 1998 City Council approved a similar list of uncollectible accounts.

 

The policy establishes departmental requirements for the periodic review and identification of accounts receivable deemed to be uncollectible.  The policy established guidelines, procedures, exceptions and alternative action to be taken for write-off recommendations that all City Departments must comply with before recommending an item for write-off.  It also grants the City Manager the authorization to approve write-offs with the following limits:  Individual accounts less than $ 500 and an aggregate amount less than $ 25,000 on a semiannual basis.  Items exceeding the limits of $ 500 and or the aggregate amount of $ 25,000 will be presented to City Council for approval.

 

 

 

FINANCIAL IMPACT:

 

None

 

 

                                                                              

COMMITTEE RECOMMENDATION: 

 

Policy presented to Audit Committee on September 17, 2001.

 

 

 

STAFF RECOMMENDATION: 

 

Approval of adoption of the policy.

 

ORDINANCE 2001-O-249

 

ordinance accepting and adopting the City of Laredo’s Write-off

Policy for Accounts Receivable as presented to the Audit Committee

on September 17, 2001

 

      WHEREAS, the City’s staff has review and created a Write-off Policy for the City of Laredo; and

 

            WHEREAS, the policy was presented and accepted by the Audit Committee of the City of Laredo on September 17, 2001; and

 

            WHEREAS, it is deemed to be in the best interest of the City of Laredo to have a written policy for write-off on accounts receivable

                            deemed to be uncollectible; and

 

            WHEREAS, it is deemed to be in the best interest of the City of Laredo to grant the City Manager the approval to write-off accounts that are

                            deemed to be un-collectible with the following limits of individual accounts less than $500 and a total aggregate on a semi-annual

                            basis amount of $25,000; and

 

            NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF LAREDO THAT:

 

1.      The City of Laredo Write-off Policy attached here to as Exhibit A is hereby adopted as presented.

2.      The ordinance shall become effective immediately upon adoption.

 

      PASSED BY THE CITY COUNCIL AND APPROVED BY THE MAYOR ON THIS THE ______

      DAY OF OCTOBER 2001.

 

 

 

      _____________________

      ELIZABETH G. FLORES,

      MAYOR

 

 

      ATTEST:                                                                                      APPROVED AS TO FORM:

 

 

 

     ______________________                                                      ______________________

     GUSTAVO GUEVARA, JR.,                                                       JAIME L. FLORES.

     CITY SECRETARY                                                                      CITY ATTORNEY

 

 

WRITE-OFF POLICY

              I.      PURPOSE:

This Policy establishes departmental requirements for the periodic review and identification of accounts receivable deemed to be un-collectible and the methodology in handling these accounts.  This activity will also assist in accurately reflecting financial balances.  Such receivables and notes receivables may include: ambulance billing claims, sanitation fees, utility bills, municipal tickets, returned checks, travel advances, delinquent rental leases, and other city related receivables. 

 

            II.      POLICY & GUIDELINES:

1)      Write-off recommendations should be made at the department level upon the determination that the department and/or Revenue Collection Officer, despite its best recovery efforts, cannot recover the asset.  Write-offs occur when the Department removes the corresponding amount of an un-collectible, un-reconciled, or unsubstantiated asset from the Department’s general ledger.

Such circumstances occur when:

a)      Assets are legally without merit;

b)      Assets cannot be substantiated by evidence;

c)      Costs of asset recovery actions will exceed anticipated recovery amounts;

d)      The debtor cannot be located;

e)      It is not possible to collect any substantial amount;

f)        Bankruptcy cases that are less than $100.00;

g)      Statutory requirement(s) exists to terminate asset recovery actions;

h)      The City Manager or external auditors have identified the need to adjust the records and management has agreed with the auditors.

 

Detailed explanations of these categories can be located in the procedures section.

 

2)      On semi-annual basis:

a)      All City Departments will report to the Revenue Collections Officer the recommended accounts deemed as un-collectable. 

b)     The Revenue Collections Officer will analyze such accounts and verify supporting documentation for appropriateness.

c)      All accounts deemed as un-collectable will undergo an approval process that begins with the Department Director, followed by the Finance Director, City Manager and if necessary, City Council.

 

3)      Authorizations levels for writing off accounts are as follows:

a)     Individual accounts less than $500 and aggregate amounts less than $25,000 semi-annually

 - City Manager Approval is required.

b)    Individual accounts exceeding $500 and aggregate amounts exceed $25,000 semi-annually

 - City Council approval is required.

 

4)      A summary memorandum or other format detailing the rationale for proposing a write-off, should be included as part of the Department's file documentation.  The original support documentation will be kept at the department level and records will be maintained in accordance with the city’s record retention requirements  (See attached sample report).

 

5)     Once appropriate approvals have been obtained, the Revenue Collection Officer will ensure that the accounts are written-off in the general ledger.

 

 

          III.      EXCEPTIONS TO WRITE-OFF POLICY

·         The department, with supporting documentation, may retain and age account receivable due to grant related or legal circumstances, i.e., property taxes, federal or state laws.

 

·         Restitution cases will not be written-off unless the Judicial System disposes off the case.

 

          IV.      RELATIONSHIP BETWEEN WRITE-OFF AND COMPROMISE

When the City compromises (accepts less than the full amount) a debt, the difference between the amount accepted for repayment and the amount of the debt that existed before compromise must be written off at the time that the Department makes the compromise.  A decision about whether the compromised receivable should be written off at any time during its repayment history must be made under the standards in this Policy and approved by the City Manager.

 

           V.      PROCEDURES

1)      CRITERIA FOR WRITE-OFF ACTIONS

a)      Assets legally without merit

A receivable which was never owed to the Department and should not have been classified as a receivable, or is determined to be without legal merit because of other situations affecting the enforceability of the Debt. It should be noted that the write-off of many unsubstantiated assets will be treated by reversing the original entries and will not reflect as a loss to the Department. 

 

b)      Assets that cannot be substantiated by evidence

The department does not have or is unable to produce the evidence of outstanding receivables due the City (e.g., accounting records, witnesses necessary to confirm the existence of the asset). A confirmation of an asset's existence and/or value may include documents such as, inspections, appraisals, deeds, contracts, or other objective written evidence.

 

Other situations may occur in which accounting ledgers are incorrect and/or there is insufficient documentation to support routine adjustments. Write-offs (or, in certain cases, reclassifications) may be appropriate to correct accounting records in the following situations:

 

c)      Costs of asset recovery actions will exceed estimated recovery amounts

When making this determination, factors to be considered include:

·         Fees associated with the asset recovery tools that an organization is considering using;

·         Costs to the City associated with resources needed to pursue recovery, including internal agency costs, and additional recovery services (e.g., collection agencies);

·         Ability to compromise the amount of debt and to report the unrecovered portion of the debt to the Internal Revenue Service (IRS) as income; and

·         Need to pursue collection, regardless of costs, in those cases where it is in the best interest of the City.

 

d)      Inability to locate debtor

An asset may be deemed unrecoverable when the debtor cannot be located.  Before establishing that it cannot locate a debtor, an organization should contact or utilize available and appropriate sources of information such as: credit reporting bureaus, city and county tax records, business references, utility companies, telephone directories, or places of employment.

 

e)      It is not possible to collect any substantial amount;

The determination of what constitutes a substantial amount of the asset is a matter of judgment made by the City Manager based on historical recovery rates for particular type of assets. Justification for what amounts are considered to be substantial should be included in the documentation for write-off.

 

f)        Bankruptcy

Bankruptcy cases must be reported to the Legal Department for appropriate action and filed in Court. Once the bankruptcy is disposed or settled, the account will be addressed based on court action.  For those accounts with less than $100 in claims, amounts will be recommended for write-off by the department as long as supporting documentation is attached and approval is obtained by the City Manager.

 

2)      CONSIDERATIONS

When evaluating the ability to recover a receivable, the City will consider the present and future financial condition of the debtor.  Some examples include:

·         Assets and liabilities;

·         Potential for future earnings;

·         Receipt of public assistance payments;

·         Bankruptcy;

·         Age and health of the debtor;

·        Availability of the debtor's assets for liquidation.

 

3)      ROLES AND RESPONSIBILITIES

a)      Departments:

1.      Review aging trail balance.

2.      Evaluate the delinquent accounts receivables to determine that adequate actions have been taken before considered for bad debt write-off. (Dual role)

3.      Write a memo to the Finance Director, to request the write-off.  At the very minimum, the memo should contain the following information:

·         Account Description such as name, service date, amount, invoice number (where applicable), and so on.

·         Justification for the write-off request and evidence of collection efforts.

·         Origination of the debt or type of service rendered.

4.      Attach supporting documentation as applicable.

 

b)      Finance:

The Finance Department is responsible for the oversight of this policy's implementation.  The Finance Department is also responsible for the review of assumptions used in developing write-off estimates proposed by departments for consistency with the Policy and monitoring actual write-offs.

1.      Prepare and review, aging trail balance.

2.      Evaluate the delinquent accounts receivables to determine that adequate actions have been taken before considered for bad debt write-off. (Dual role)

3.      Maintain records of accounts written-off in accordance with the city’s record retention requirements.

4.      Once approved by City Manager or City Council the Finance Department will prepare the journal entries to record write-off, and will inform the department   so that the appropriate subsidiary ledger could be adjusted.

5.      Journalizing all entries authorized for write-offs.

 

 

4)      REQUIRED DOCUMENTATION

Prior to writing off a receivable, documentation is required citing what efforts have been taken to recover the asset. "Due diligence" must been performed to recover assets prior to recommending them for write-off, detail documentation for the due diligence should include, as applicable, those items as listed in Appendix B to this Policy.

 

         VI.      ALTERNATIVE ACTION TO BE TAKEN AFTER WRITE-OFF PROCEDURE:

·         COLLECTION AGENCY--A recommendation that is used by many or all agencies is collection agencies.  In order to collect a past due account, the debt may be referred to a collection agency or attorney for further follow up.  The Finance Department is to set the criteria for referrals.  The Finance Director or designee is to review approve the referral and use reasonable precautions to insure that any collection agency or attorney to which accounts may be referred is reputable, honest, accurate, and credible.

 Or

·         LITIGATION--Litigation is another process that City of Laredo can use in order to recover their funds.  A collection agency may recommend litigation for an account if the debtor refuses to cooperate in paying the debt and assets to repay the debt.  The Finance Director will review the case and the recommendation to litigate, and if the decision is made to proceed with litigation an Affidavit of Claim is prepared.

Or

·         IRS 1099-G --Reporting all write-offs of $600 or more to the IRS on Form 1099-G, including debts discharged in bankruptcy and without regard to solvency; Reporting to IRS any amounts compromised due to a debtor's inability to pay or the possibility that collecting the full debt would cost more than the debt is worth.

 

        VII.      CLOSEOUT OF RECEIVABLES / 1099-G FORM

1.      At the time to “closeout” of a receivable, Finance shall report the amount of the unrecoverable receivables to the IRS as income to the debtor on IRS Form 1099-G. Once the receivable has been referred to the IRS, the City needs take no further recovery action. The City may, however, accept voluntary repayments of the receivable, without notifying the IRS of repayment. At this point, any further notification to the IRS becomes the taxpayer's (debtor's) responsibility.

 

2.      Finance Department, where appropriate, shall follow IRS procedures on completing Form1099-G for closing out of accounts receivables. The procedures for referral shall include the following requirements to the IRS by February 28th of the same year:

·         Including administrative costs (to the extent assessed by the organization and as subject to an organization's rules and/or regulations),

·         Penalties where appropriate

·        Accrued interest and loan principal wherever applicable.

 

 

 

 

 

 

APPENDIX A GLOSSARY

·         Administrative Costs - are additional costs incurred in processing and handling a debt because it became delinquent. Costs should be based on actual costs incurred or on cost analyses, which estimate the average of actual additional costs incurred for particular types of debt at similar stages of delinquency. Administrative costs should be accrued and assessed from the date of delinquency.

 

·         Allowance for Un-collectible Accounts - is a contra asset account established for the purpose of reducing receivables for estimates of un-collectible amounts to reflect assets at their net realizable value.

 

·         Asset - is any item of economic value, either physical in nature (such as land) or a right to ownership as expressed in cost or some other value, which an individual or entity owns.

 

·         Asset Recovery - represents those activities dealing with the collection of amounts owed to or owned by the Government after routine follow-up activities fail.

 

·         Bad Debt Expense - is the estimated cost of losses, which may be realized as a result of the failure to collect on receivables. The loss is recorded when information is available that an asset (in this case, receivables) has probably been impaired or a liability incurred and the amount can be reasonably estimated. For accounting purposes, the bad debt expense estimate is recorded as the allowance account is periodically adjusted.

 

·         Close Out - occurs concurrently with or subsequent to a Department decision to write off a debt. At close out, the  amount of an inactive debt as income to the debtor on IRS Form 1099-G, at which point no additional collection action may be taken by the Department.

 

·         Compromise - is to accept less than the full amount of the debt owed from the debtor in satisfaction of the debt.

 

·         Debt Collection - represents that portion of the credit cycle dealing with recovery of amounts due after routine follow-up fails. This activity includes the assessment of the debtor's ability to pay, the exploration of possible alternative arrangements to increase the debtor's ability to repay, and other efforts to secure payment.

 

·         Deficiency Balance - represents that portion of a loan that remains outstanding after pledged property has been liquidated (converted to cash) and applied to the outstanding balance.

 

·         Inactive debt - describes a debt that has been written off, and thereby removed as an active asset (e.g., a receivable).

 

·         Non-recoverable Assets - refers to an asset for which it has been determined that there is no future potential of any further collection.

 

·         Principal - is the sum of money owed as debt, exclusive of interest, penalties, administrative costs, loan fees, and prepayment charges.

 

·         Receivable - is an amount of money or property that an appropriate program official determines is owed to the Government.

 

·         Retention - takes place when an organization retains a written-off asset for further possible collection action prior to close out.

 

·         Terminate Collection Action or Terminate Recovery Activities - is to cease active collection of an asset. The act of removing the asset from accounting records is to write it off (see below).

 

·         Write off- occurs when a Department official determines, after all appropriate recovery actions have been used, that an asset is non-recoverable and recovery activities are terminated. Write-offs represent the financial statement recognition of non-recoverable assets. After write-off, the asset can either be dosed-out or retained (as an inactive debt).

APPENDIX B GUIDELINES FOR DUE DILIGENCE DOCUMENTATION

 

1.       The number, nature (personal and/or letter), date, and content of contacts made with the debtor, as well as a record of any follow-up action required by the contact, including copies of correspondence.

 

2.       Date and means (letter and/or personal contact) of notifying debtor of Departmental policy regarding accrual of late interest, penalties, and administrative costs, the debtor's rights, the amount and basis of the receivable, and collection actions available to the City.

 

3.       Basis of accrual/assessment of late charges. Date and amount/rate assessed. Reasons for not accruing/assessing late charges.

 

4.       Date receivable compromised, voluntarily repaid, or repayment agreement established. Copies of signed, revised repayment agreements. Amount repaid and/or terms of repayment agreement. Application of payment. Reasons for not accepting compromise/repayment proposal.

 

5.       Documentation for other forms of administrative offset. Date debtor notified, type of offset, actions taken. Reasons for not offsetting administrative actions identified.

 

6.       If applicable, determine the existence of licenses, contracts, etc. that can be suspended, revoked. Document actions, including dates taken against such licenses, contracts, etc. Reasons for not taking actions identified. Provide documentation that no licenses, etc. exist to be suspended, revoked.

 

7.       If applicable, date of referral and amount referred to collection agency. Name of collection agency, amounts collected, and dates of collections. Actions taken by collection agency, including recommendations for further action. Date agency acted on recommendations of collection agency. Reasons for non-referral.

 

8.       If applicable, availability of security/collateral for liquidation. Date actions initiated to liquidate and actions taken. Amount recovered and date of recovery. Reasons for non-liquidation.

 

9.       if applicable, date of referral and amount referred for litigation. Actions taken to follow-up on litigation status. Result of litigation. Amount recovered and date of recovery. Reasons for non-referral for litigation.

 

10.   If applicable, copy of notification letter for IRS tax refund offset. Date of referral and amount referred. Amount recovered through voluntary repayment. Amount recovered and date of recovery through offset. Reasons for non-referral.

 

11.   If applicable, date of suspension of collection action and amount suspended. Reason for suspension. Length of suspension. Date of resumption of collection action or predetermination of status and decision made.

 

·         Basis for and date of decision to pursue/not pursue collection after write-off. Length of time debt to be retained. Actions and date of actions taken on retained asset;

·         Copy of letter notifying debtor of referral to IRS on 1099-G. Date IRS notified and amount referred. Date and amount of subsequent voluntary repayments;