Is Town Council ready to take action on bad debts?

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At the June 3rd work session the Town Council continued the discussion from the March 4, 2019 work session were Town Council had discussed additional options for collection of bad debt on utility accounts. The items Town Council requested to pursue were:

1. Judgments for bad debt on utility accounts
2. Raising the minimum deposit amount from $125.00 to $150.00
3. Personal guaranty on business utility accounts
4. Proof of Income

Town Staff is currently processing the first round of utility accounts to obtain judgments and continues to work to streamline the process. Town Staff will report back to Town Council with an update once judgments have been put in place or additional information is obtained.

Town Staff has recommended several options to include:

• Requiring a personal guaranty and/or furnishing proof of income should help reduce the Town’s bad debt expense, but will make the utility application process more cumbersome for applicants.There are approximately 2,000 new utility accounts opened each year and approximately 240 are subject to bad debt expense after 5 years. The amount written off during FY2018 was roughly 1% of the dollar value billed.
• Staff recommends raising the minimum amount of deposit on utility accounts, allowing staff to continue pursuing judgments, and possibly review additional collection options such as the personal guaranty & proof of income after one year.

As you can see in these related stories, the Town Council has been discussing this bad debt issue for some time. Is it now time for action? The proposed code (with changes) is below.

Town of Front Royal to write off more bad debt & update policy

$53,364.65 written off; new policy needed to handle bad debt on utility accounts

Town writes off bad debts

Town Council approved a revision to the Bad Debt Policy in March 2019 and requested to review/approve write-off of bad debt quarterly. Town Council is requested to approve the removal of 5 years or older of outstanding accounts receivable (bad debts) on the Town’s ledger for the second quarter of 2019 totaling $27,755.98 which is comprised of 59 utility accounts. All possible recourse of attempting to collect these amounts has been completed and the accounts have no activity for at least 5 years.

HISTORY: The Town of Front Royal had a large dollar value of uncollectible “bad debt” recorded yearly on the Town’s ledger, due to non-payment of utility bills which had not been addressed for over 30 years until 2012. The Town’s auditing firm, Mitchell & Company, requested that Town Council approve a policy that would allow the Department of Finance to review outstanding uncollectable debt annually, and abate the bad debt from ledgers after all avenues for collection had been exhausted. Town Council adopted a bad debt policy on November 13, 2012 that deemed an uncollectible account as having no activity for a period of 7 years. Town Council adopted a revision to the bad debt policy on March 11, 2019 that deemed an uncollectible account as having no activity for a period of 5 years to coincide with the Code of Virginia.

Code of Virginia § 8.01-246 allows action to be taken to collect on written contracts for a period of 5 (five) years. Written agreements are used for Town of Front Royal Utility Accounts. Based on the Code of Virginia, a Town of Front Royal Utility Account would be deemed uncollectible after there has been no activity from the account holder for a period of 5 (five) consecutive years.

Based on the utilities billed & bad debt written off during FY2018, the Town of Front Royal Department of Finance collected approximately 99% of the amounts billed annually before accounts were deemed uncollectible and written off.

Town Staff has determined that the accounts presented meet the criteria for uncollectible as determined by the Town’s bad debt write off policy:

1. No activity on closed account for at least 5 years
2. All other methods of collection have been exhausted

The amount of bad debt approved to be removed by Council is as follows:

• Dec 2013 – $848,191 – approved for removal
• Dec 2014 – $144,049 – approved for removal
• Feb 2016 – $225,318 – approved for removal
• Feb 2017 – $203,808 – approved for removal
• Nov 2017 – $175,999 – approved for removal
• Oct 2018 – $166,191- approved for removal
• Mar 2019 – $277,974.34 – approved for removal along with revision to policy
• June 2019 – $27,755.98

The FY19 budgeted revenue for the sales of electric, water, sewer, & refuse totals approximately $30.8 million. The amount of $27,755.98 represents approximately 0.09% of the budgeted sales.

Here is a list of the Utility Account Bad Debt
Balance – Service Address – Final Bill Due Date
680.88 84  – E STRASBURG RD #4 –  3/31/2014
205.63  – 604 EARL CT – 3/13/2014
415.08 – 112 W 16TH ST – 5/31/2014
312.82 – 1318 DIXIE AVE – 5/30/2014
171.26 – 1122 N SHENANDOAH AVE #6 – 5/23/2014
400.34 – 111 W 12TH ST #1 – 3/20/2014
216.37 – 706 W 14TH ST – 4/2/2014
422.72 – 842 W 11TH ST – 4/17/2014
207.44 – 708 W 11TH ST #3 – 3/31/2014
246.19 – 708 W 11TH ST #4 – 3/7/2014
318.61 – 650 E W 11TH ST – 3/21/2014
509.49 – 343 KENDRICK LN #20 – 5/31/2014
214.27 – 1400 MASSANUTTEN AVE #2 – 5/23/2014
301.63 – 122-B N ROYAL AVE – 4/17/2014
240.14 – 21-D W 6TH ST  – 3/7/2014
763.28 – 717 VILLA AVE – 4/22/2014
180.38 – 15 MASSIE ST – 3/7/2014
551.07 – 144 CHESTER ST #1 – 4/17/2014
44.71 – 8-A CHESTER ST – 4/17/2014
670.05 – 190 COMMERCE AVE – 5/23/2014
249.70 – 110 E 4TH ST – 4/17/2014
374.21 – 718 WARREN AVE #3 – 3/21/2014
1504.30 216-B E MAIN ST 4/24/2014
219.18 – 615-A VISCOSE AVE – 7/31/2013
418.60 – 518 W MAIN ST #3 – 4/24/2014
52.77 – 117 E MAIN ST #3 – 8/5/2013
403.30 – 413-A E MAIN ST – 3/7/2014
422.50 – 23 S ROYAL AVE – 3RD FLOOR – 4/30/2014
50.87 – 215 S ROYAL AVE #3 – 9/10/2013
120.72 – 124 W JACKSON ST #6 – 3/24/2014
63.61 – 405 E CRISER RD #204 – 3/20/2014
346.70 – 1084 FOX DR – 5/7/2014
326.83 – 19 SHENANDOAH COMMONS WAY #103 – 4/24/2014
139.26 – 17 SHENANDOAH COMMONS WAY #201 – 9/27/2013
224.74 – 13 SHENANDOAH COMMONS WAY #103 – 3/31/2014
586.40 – 634 BEL AIR AVE – 5/23/2014
492.39 – 425 BEL AIR AVE – 4/30/2014
1173.34 – 519 BEL AIR AVE – 5/23/2014
604.67 – 1433 HAPPY CREEK RD – 3/31/2014
84.19 – 541 S ROYAL AVE POOL/OFFICE – 11/28/2013
529.27 – 227 CHURCH ST #3 – 4/30/2014
247.06 – 315 PINE ST – 5/1/2013
4466.22 – 226 CHURCH ST – 2/13/2014
755.37 – 219 CLOUD ST #2 – 3/31/2014
1054.78 – 219 CLOUD ST #4 – 4/24/2014
72.49  – 320 CLOUD ST #3 – 4/14/2014
1024.16 – 320 CLOUD ST #5 – 3/17/2014
202.07 – 10 HIGH ST #1 – 4/14/2014
423.26 – 212 FLETCHER ST – 5/28/2014
152.05 – 322 RITENOUR ST – 3/7/2014
531.84 – 337 RITENOUR ST – 4/22/2014
854.11 – 101 PINECREST ST – 5/10/2013
178.54 – 27 ROYAL LN #3 – 4/2/2014
86.69 – 61 ROYAL LN #1 – 5/16/2014
338.63 – 125 BIGGS DR #8 – 5/23/2014
511.77 – 1443 JOHN MARSHALL HWY #5 – 4/2/2014
863.22 – 2 LAKE AVE – 4/30/2014
82.24 – 205 POLK AVE – 3/13/2014
451.57 – 209 POLK AVE – 3/13/2014
TOTAL $27755.98

This is the proposed code to Town of Front Royal Municipal Code 134-71 related to the remaining four items listed above.

134-71 UTILITY ACCOUNTS-PAYMENTS/TERMINATION OF SERVICE

A. DEPOSIT:
1. Amount: For an existing residential service location, the deposit required for Town utility services shall be an amount equal to the highest monthly bill for that location during the preceding twelve months or one hundred and  fifty dollars ($150.00), whichever is greater.

For an existing commercial service location, the deposit required for Town utility services shall be an amount equal to the highest monthly bill for that location during the preceding twelve months or two hundred dollars ($200.00), whichever is greater.

To calculate the amount of the deposit for newly established residential or commercial service locations, the Front Royal Department of Finance shall establish the deposit at an amount equal to the customer’s anticipated monthly usage of water and electric service, as may be the case.

If, at any time, the customer’s deposit is waived or returned, as set forth below, but the customer’s service subsequently is terminated for nonpayment or the customer has made four late payments during any twelve month period, a deposit, in an amount as set forth above, shall be required.

2. Deposit Waiver: Notwithstanding the foregoing, no deposit shall be required hen an acceptable credit history is furnished by the customer from a previous utility provider. Acceptable credit history is defined as a customer who can demonstrate that during the previous twelve months his bills were paid with no more than four (4) late payments on a monthly billing system or no more than two (2) late payments on a bimonthly system.

3. Payment of Deposit: Payment of the deposit is due upon execution of the service work order. In lieu of the foregoing, when the required deposit for a residential customer exceeds one hundred dollars ($100.00) but is less than two hundred dollars ($200.00), the customer may elect to pay one hundred dollars ($100.00) at the time the work order is executed and pay the balance of the deposit along with payment for the first month’s service. When the required deposit exceeds two hundred dollars ($200.00), the deposit may be paid in two equal installments with one half due when the work order is signed and pay the remaining half along with the payment for the first month’s service.

4. Interest and Refunds: Deposits shall be held in an interest-bearing account. Deposit plus interest shall be refunded either: (1) upon termination of the service account in an amount equal to the deposit and accrued interest minus any amount deducted to satisfy customer arrearages or other debts owing to the Town; or (2) upon the customer’s request after a period of twelve months of service during which there were no more than four delinquent payments. Upon request of a refund, the Director of Finance shall first ensure that customer does not have any debts owing to the Town. If the customer is indebted to the Town, the Director of Finance will apply any refund toward satisfaction of these debts prior to the refund of any money to the customer.

B. PAYMENTS:
1. Due Date – Fines and Charges: All payments for water, sewer, electric, and garbage collection services shall be due within 20 days of the date of billing. Accounts, for which full payment is  not received within 20 days, are delinquent. A late charge of 2% of the delinquent bill immediately shall be charged to the delinquent account. If the account remains delinquent for 10 days after  the original notice, an additional service charge of $10.00 shall be charged. Finally, a service charge will be required to reconnect service that has been discontinued due to non-payment. If the reconnection occurs during normal business hours, the reconnection fee shall be $20.00-first reconnection fee; $30.00-second reconnection fee; $40.00-third reconnection fee; $50.00- reconnection fee for all other times.

2. Allocation of Payments: During a delinquency in the payment for any service (electric, water, sewerage, or garbage collection) any subsequent payment received for services will be applied first against the most delinquent account which is not subject to a defense of any applicable statute of limitations.

3. Budget Billing: Notwithstanding the foregoing, the Director of Finance, in his discretion, may enter into agreements with customers for alternative billing and payment schedules with persons on fixed or limited incomes.

C. TERMINATION OF SERVICES:
1. Notice: The Director of Finance shall notify the customer in writing of all 20 day delinquencies, imminent service termination, and right to contest as set forth below. Notice also shall be posted on the door of the premise with the delinquent account.

2. Protest: The customer may contest the bill by contacting the Director of Finance for the Town of Front Royal who will immediately schedule a hearing on the customer’s claim that his account is not delinquent.

3. Disconnection of Service: If the matter is not successfully contested by the customer and arrearages remain 10 days after the date of the aforementioned notices, water service shall be disconnected. If the account remains delinquent after another 2 days, electric service shall be disconnected. If, however, the customer has not secured water service, electric service (rather than water) will be disconnected after 10 days. Notwithstanding the foregoing, no services shall be disconnected prior to a requested hearing.

4. Persons in Poor Health: Customer may seek an additional 30 days before water and electric services are disconnected if the Director of the Warren County Health Department certifies in writing to the Town of Front Royal Director of Finance that the customer has a serious medical condition or the customer resides with a family member with a serious medical condition. Upon providing certification the service termination may be delayed twice within a 12-month period, but may not be consecutive, certification shall be valid for period of 365 days.

5. Conditions for Reconnection of Service: Once disconnected, services shall not be restored to that customer until the outstanding balance (service fee(s), penalty, and reconnection fee(s))  for that service location is paid in full, unless the Director of Finance has approved other arrangements for payment in full.

D. RETURNED CHECK POLICY: If a check is returned to the Town for any reason, the Director of Finance shall notify, in the same manner as provided above, the Customer. If payment, in full, plus a $35.00 service charge is not received by the close of business three days after the date on the notice, all utility services to the customer’s service location shall be disconnected. If the customer presents the Town with more than two bad checks during any twelve month payment, payment by check will no longer be accepted.

E. BUSINESS ACCOUNTS. The Town shall require any entity not a natural person requesting a utility account to either: (1) provide the written personal guaranty of payment from a natural
person holding an ownership interest in the entity or, (2) pay an additional deposit amount equal to the greater of: (a) twice the average monthly utility bill during the preceding twelve (12) month period for utilities provided at the service location or, (b) $375.00. Any additional deposit paid pursuant to (2), above, after applying same to any past due balances, shall be refunded to the entity within a reasonable time after the utility account is closed.

F. PROOF OF INCOME. Customer shall furnish Town with documentation necessary to verify source of income to prove ability to pay average monthly utility bill for that location for the preceding 12 month period; such proof may include, pay stub, bank statement, copy of last year’s federal tax return, wages and tax statement (W-2 and/or 1099’s), pension payment, social security payment, child/spousal support agreement, and/or other documentation deemed acceptable.