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Weekly UpdatesFor local governments, saving money has become much more than a platitude the last few years. Still reeling from the 2001 recession, local governments are pinching pennies wherever they can in order to balance their budgets. Perhaps one area in which governments could help their budgets is that of payment processing. Many governments pay banks or other providers of lockbox services to receive, open, and process payments on their behalf. But is this always the most efficient strategy?
Clark County, Washington, has found an innovative way to save thousands of dollars on payment processing. Instead of paying a third-party provider to open envelopes and record tax payments (34,000 on a peak day), the county formed a partnership with a local utility company to buy the necessary remittance processing and mail-opening equipment needed to do the job in-house. The key to the success of this venture was the decision to market the system's excess capacity to public sector customers in the two-state region. So far, the Joint Remittance Processing Center has eight customers and has made a profit of more than $500,000 for the county.
This article describes why two governments in Washington state decided to join forces in setting up a payment processing center and how they resolved the major issues involved in this type of operation. Hopefully, our story will be helpful to other jurisdictions looking to economize on their transaction processing costs.
BACKGROUND
GFOA recommends that local governments evaluate the costs and benefits of using lockbox services. According to a recently updated recommended practice, "lockbox services should increase payment and posting accuracy; improve cash flow by reducing processing time between delivery of the mail and depositing of payments; and increase staff productivity by freeing personnel from the labor intensive process of manually handling mail and payments." (1) The practice goes on to encourage governments to evaluate the use of regional lockbox processors.
In an effort to save money and become more efficient, Clark County began using modern equipment for processing tax and assessment payments in the late 1980s. Hardware-driven, this equipment used Microfilm document-capturing technology to process roughly 2,000 items per hour. The first tax season it was used, the Treasurer's Office reduced its temporary help budget by $35,000, cut banking services by nearly $8,000, and increased interest earnings by approximately $100,000.
In 1995, the county began using excess capacity to process water and sewer utility remittances for the City of Vancouver. As a result, Vancouver was able to stabilize its staff size, lower its banking fees, and earn, on average, an additional two days of interest per transaction. Then in 1997, the county was notified that its automated processing equipment would not be supported after the year 2000, either from a hardware or a software perspective. While this opportunity presented a challenge for the county, it also offered an opportunity to evaluate technological advances in the field of automated remittance processing.
QUESTIONS AND ANSWERS
As we began to explore our options, we identified a list of questions the county would have to answer before settling on a course of action for future lockbox processing. Do we want to outsource this project to a vendor? Can we find a way to finance the necessary equipment if we continue to process payments in-house? Can we attract other customers? How can we customize services for customers? How much should we charge? How do we limit liability? Can local government really compete with the private sector in providing lockbox services? This section describes how Clark County answered each of these questions.
Do we want to outsource payment processing to a vendor? The most fundamental decision to be made was whether the county would continue to perform payment processing in-house or outsource it to a third party. The question really boiled down to which of three potential management structures was the most cost-effective for the county--an independent payment processing center like the one we had been operating for years, joint acquisition and operation with one or more public sector partners, or commercial lockbox services used by many other jurisdictions.
Revenues collected by the Treasurer's Office for the county and other local taxing districts must be processed promptly. We were well aware of the benefits of processing payments in-house, having done so for many years. In addition to the cost savings, we liked the added security and control of running our own system. No commercial vendor could guarantee the one-day turnaround on payments that we desired--and had achieved on our own. Given the cost savings and the many other intangible benefits of our existing operation, the county decided to continue processing payments in-house if a cost-effective method of financing the necessary equipment could be found.
Can we find a way to finance the necessary equipment if we continue to process payments in-house? While we were looking into possible solutions, Clark Public Utilities, a local publicly owned electric/water utility serving the same customer base as the county, was weighing the same options. The utility had essentially the same type of aging equipment and Y2K issues as the county.
After analyzing the costs and benefits of the three options outlined above, the two entities decided to purchase and operate the expensive equipment jointly (the payment processing hardware and software cost a total of $560,000). Clark County and Clark Public Utilities crafted a joint interlocal agreement to define the intent of the partnership and to resolve such issues as the distribution of labor, the location of the enterprise, and the allocation of costs.
The partners decided to jointly staff the center, which was to be located in a secure area in the basement of Clark Public Utilities. The county and the utility each contribute one full-time employee and two part-time employees for a total of three full-time equivalents. (Additional staff from the Treasurer's Office is used during peak collection periods.)
What equipment do we need? The next step was to research equipment and software that would fit the needs of each organization. When the interlocal agreement was signed, Clark County was processing 430,000 items per year and Clark Public Utilities 1,056,000 (the City of Vancouver was processing 575,000). The two partners identified several areas in which new technology might enhance efficiency, including mail opening, remittance processing, document handling, processing of nonstandard items, and customer service.
Our research led us to the conclusion that fully integrated image-based technology, including a two-pass system for remittance processing, could help us achieve the efficiencies we desired. The new remittance processor operates at a speed of 250 items per minute or 15,000 items per hour. Unfortunately, neither the county nor the utility possessed mail-opening equipment that could keep up with the faster processor (a skilled operator using the older equipment could open and sort only 700 to 900 items per hour). To achieve the efficiency we sought with the new processor, we purchased a piece of automated mail-opening equipment capable of opening envelopes containing a single statement and single check at the rate of 4,000 per hour.
Using the new remittance processing and mail-opening equipment, Clark County and Clark Public Utilities can easily process all of their daily payments in two to six hours, depending on the day of the week, the billing cycle, and the status of property tax payments.
Can we attract other customers? The additional capacity of the new equipment led the Treasurer's Office and Clark Public Utilities to consider marketing remittance processing services to other public sector customers besides the City of Vancouver. Our marketing strategy included direct marketing to potential customers, as well as a presentation on the joint processing center at the annual conference of the Washington Finance Officers Association.
We started by creating a list of public sector agencies in the vicinity that processed payments using a standard remittance statement. We then prioritized the agencies on the list based on how well their work matched the kind of payments we were processing at the remittance center. In addition, our marketing team was aware of which agencies were looking to outsource payment processing. Through telephone calls and site visits we were able to secure four additional customers. A fifth was added through word of mouth.
According to the GFOA recommended practice, there are two basic types of lockbox services: wholesale, which is used for high-dollar, low-volume payments, and retail, which is used for high-volume, low-dollar payments accompanied by standardized remittance statements. Based on the resources the county and the utility were willing to contribute to this venture, we decided the retail lockbox/utility model was better suited to our business processes. This type of work is more predictable and it is much the same industry wide. As a result, we have been able to minimize the training time for our operators when we take on new customers.
How can we customize services for our customers? One important component of processing tax payments is mail float. Mail float refers to the length of time it takes a piece of mail to leave the customer's hand, reach a post office, and arrive at the processing center. The local postmaster recommended that we purchase a "caller box" for each customer so that the post office could sort payments by customer. The postmaster also created a uniform pickup time to allow employees at the processing center to retrieve payments for all customers at the same time each day (6 a.m.) based on the caller box routing.
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