B-204733 L/M, JUL 30, 1982, OFFICE OF GENERAL COUNSEL

B-204733 L/M, JUL 30, 1982, OFFICE OF GENERAL COUNSEL

PRECIS-UNAVAILABLE

MR. DAVID J. GRIBBLE, OFFICE OF MANAGEMENT AND BUDGET:

THIS REFERS TO YOUR INVITATION FOR COMMENTS ON THE PROPOSED OMB CIRCULAR, "TIMELY PAYMENTS," WHICH IS INTENDED TO PROVIDE FEDERAL AGENCIES WITH POLICY GUIDANCE ON IMPLEMENTATION OF THE PROMPT PAYMENT ACT, PUB.L. NO. 97-177, 96 STAT. 85, MAY 21, 1982. ALTHOUGH THE GENERAL ACCOUNTING OFFICE, AS A LEGISLATIVE AGENCY, IS NOT SUBJECT TO THE REQUIREMENTS OF THE ACT, OUR CONTINUING CONCERNS WITH IMPROVING FISCAL RESPONSIBILITY AND ACCOUNTABILITY IN THE GOVERNMENT LED TO STUDIES ON GOVERNMENT BILL-PAYING PERFORMANCE WHICH WERE INSTRUMENTAL IN ENACTMENT OF THE PROMPT PAYMENT ACT. (SEE, E.G., "THE FEDERAL GOVERNMENT'S BILL PAYMENT PERFORMANCE IS GOOD BUT SHOULD BE BETTER" (FGMSD-78-16) (1978)); B-204733, MARCH 17, 1982.) WE ARE GRATEFUL THAT MEMBERS OF OUR STAFF WERE INVITED TO SERVE ON THE INTERAGENCY TASK FORCE WHICH WAS LARGELY RESPONSIBLE FOR DRAFTING THIS PROPOSED CIRCULAR. MANY OF THEIR SUGGESTIONS WERE INCORPORATED IN THE CIRCULAR. MOST OF THE COMMENTS THAT FOLLOW WERE ALSO MADE AT TASK FORCE MEETINGS.

WE ARE GENERALLY PLEASED WITH THE PROPOSED CIRCULAR BUT ARE CONCERNED THAT TWO PARTS OF PARAGRAPH 8(D), PRESCRIBING SEVERAL INSTANCES IN WHICH INTEREST PENALTIES NEED NOT BE PAID, EXCEED THE AUTHORITY OR INTENT OF THE ACT.

FIRST, THE EXCLUSION OF PAYMENTS MADE OUTSIDE THE UNITED STATES FROM INTEREST PENALTIES IS NOT SPECIFICALLY AUTHORIZED BY THE PROMPT PAYMENT ACT. IN FACT, NO DISTINCTION IS MADE BY THE ACT BETWEEN FOREIGN AND DOMESTIC BUSINESSES OR BETWEEN BUSINESSES LOCATED WITHIN OR OUTSIDE THE UNITED STATES. THE PURPOSE OF THE ACT, TO PROVIDE AN INCENTIVE FOR THE GOVERNMENT TO PAY ITS BILLS ON TIME, IS NOT SERVED BY SUCH A DISTINCTION. SINCE THE POLICY WOULD AFFECT OVERSEAS OPERATIONS OF U. S. CORPORATIONS AND MULTI-NATIONAL COMPANIES CONTROLLED BY U. S. CORPORATIONS, IT WOULD NOT EVEN FAVOR DOMESTIC INTERESTS. FURTHERMORE, ANY PRACTICAL PROBLEMS WHICH MIGHT OTHERWISE BE MET IN TRYING TO COMPLY WITH FOREIGN PAYMENT DATES APPEAR TO BE READILY RESOLVABLE SINCE THE REQUIRED PAYMENT DATE CAN BE ESTABLISHED BY THE CONTRACT AND SINCE, UNDER SECTION 6(5) OF THE ACT, PAYMENT IS CONSIDERED TO HAVE BEEN MADE ON THE DATE ON WHICH A CHECK FOR SUCH PAYMENT IS DATED AND NOT THE DATE IT IS RECEIVED BY THE BUSINESS. ACCORDINGLY, WE SUGGEST THAT THIS EXCLUSION BE DELETED.

SECOND, WE DO NOT BELIEVE THAT THE LIMITATION ON PAYMENT OF PENALTIES OF LESS THAN $10 UNLESS THE BUSINESS CONCERNED SUBMITS A WRITTEN STATEMENT FOR THE LESSER AMOUNT IS AUTHORIZED BY THE ACT. IN FACT, THERE ARE INDICATIONS THAT CONGRESS INTENDED INTEREST BE PAID REGARDLESS OF THE COST EFFECTIVENESS TO THE GOVERNMENT SINCE CONGRESSIONAL HEARINGS LEADING TO ENACTMENT OF THIS LEGISLATION EMPHASIZED THE IMPACT OF LATE PAYMENTS ON SMALL BUSINESSES. OUR 1978 STUDY SHOWED THAT OVER 60 PERCENT OF ALL INVOICES RECEIVED BY THE GOVERNMENT WERE FOR AMOUNTS OF $300 OR LESS WITH ALMOST 50 PERCENT FOR AMOUNTS LESS THAN $150. IF NO PENALTIES OF UNDER $10 WERE TO BE PAID, THE ACT'S REMEDIES COULD BE ELIMINATED FOR A BUSINESS HAVING MANY SMALL TRANSACTIONS WITH THE GOVERNMENT AND THE PURPOSE OF THE ACT WOULD BE FRUSTRATED. FOR EXAMPLE, ON A $250 INVOICE, THE GOVERNMENT COULD BE 4 MONTHS LATE IN MAKING PAYMENT BEFORE INTEREST WOULD BE PAYABLE UNDER THE PROPOSED CIRCULAR IF A 12 PERCENT INTEREST RATE WAS APPLIED. WOULD BE BURDENSOME TO REQUIRE SMALL BUSINESSES, WHICH COULD LEAST AFFORD IT, TO BILL THE GOVERNMENT IN THESE CIRCUMSTANCES, PARTICULARLY SINCE THE ACT STIPULATES THAT INTEREST WILL BE PAID AUTOMATICALLY. WE SUGGEST THAT IF A MIMINUM AMOUNT IS CONSIDERED DESIRABLE, $1, AS USED BY THE INTERNAL REVENUE SERVICE, MIGHT BE MORE REASONABLE.

WHILE CORRECTLY EMPHASIZING THE NEED FOR THE GOVERNMENT TO PAY ITS BILLS ON TIME, WE ARE CONCERNED THAT THE POLICY STATEMENT IN PARAGRAPH 3, BY REQUIRING AGENCIES TO "MAKE PAYMENTS AS CLOSE AS POSSIBLE TO, BUT NOT LATER THAN, THE DUE DATE," COULD ENCOURAGE EARLY PAYMENTS. ALTHOUGH WE ARE MOST SYMPATHETIC TO CONCERNS OF CONTRACTORS WHO HAVE NOT RECEIVED TIMELY PAYMENTS, EARLY PAYMENTS HAVE ALSO BEEN A SERIOUS PROBLEM TO THE GOVERNMENT. CONTRACTORS HAVE BENEFITTED FROM EARLY PAYMENTS. THE FINDINGS ON EARLY PAYMENTS IN OUR 1978 REPORT WERE CONFIRMED IN AN AUGUST 1980 REPORT PREPARED BY YOUR OFFICE, "STRENGTHENING COST MANAGEMENT IN THE FEDERAL GOVERNMENT." THE PRACTICE OF PAYING BILLS BEFORE THEY ARE DUE PROJECTS A FAVORABLE IMAGE OF THE GOVERNMENT AS A BILL PAYER, BUT IS CONTRARY TO SOUND CASH MANAGEMENT PRINCIPLES. SINCE CONSIDERATION OF THE COST OF BORROWING ALONG WITH CONTRACTOR GOOD WILL AND THE ADVANTAGE OF TAKING DISCOUNTS SHOULD BE CONSIDERED IN FORMULATING FEDERAL PAYMENT POLICIES, WE RECOMMEND THAT THE FIRST SENTENCE OF PARAGRAPH 3 BE AMENDED TO READ AS FOLLOWS:

"AGENCIES WILL MAKE PAYMENTS WHEN DUE UNLESS DISCOUNTS PROVIDED FOR EARLY PAYMENT ARE ADVANTAGEOUS TO THE GOVERNMENT."

WE APPRECIATE THE OPPORTUNITY TO COMMENT ON THIS CIRCULAR.