PROBLEM/SITUATION: Paying vendors and reimbursing expenses is time consuming and prone to lost checks.
SOLUTION: Electronic deposits by state.
JURISDICTION: Virginia Accounts Department.
VENDORS: Sterling Software Inc.
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Virginia postal carriers have lighter loads. Vendors and state employees get quick reimbursement. Local governments get more interest revenue. And not even heavy flooding can stop payments.
The system paid off big time last June when floods covered much of Western Virginia, closing roads and preventing Postal Service trucks from moving the mail. Businesses expecting a check in the mail had to wait for the water to subside. But those using the electronic transfer got their money without delay. "Rain and snow don't stop the payments," said Richard Davis, assistant fiscal manager for the Accounts Department.
Davis and Jeff Smith worked together to develop the electronic data interchange (EDI) for the department several years ago. Department management stood behind the pair's work and urged them to find ways to streamline procedures and cut costs.
The development was pretty painless. "We read up on it, and came to financial EDI," Davis said. "We drew up a design, bought EDI software, put in some security, and made our first payment in January 1994."
Starting with 300 trading partners at that early stage, the system has grown to nearly 1,700 active accounts, including state agencies, vendors and local governments.
There are also about 600 state employees participating in a program for reimbursing travel and other expenses. The reimbursement program is especially helpful for employees working far from Richmond who often must wait some time before reimbursement comes in the mail, especially if the person is on the road a lot and not home to pick up a check. Mine inspectors in the far corner of the state sometimes don't get a check in the mail for up to two weeks.
But electronic deposits arrive in a much more timely manner. It's "one reason we got people on EDI," Smith said.
The system the pair put together consists of software packages from Sterling Software Inc., of Columbus, Ohio. When a disbursement is made, the system routes data either for cutting a check or to EDI based on stored data on program participants. If an electronic transfer is made, funds are routed from the bank holding state money to a Federal Reserve Bank, which in turn routes it to the appropriate recipient's bank.
The system takes advantage of networks already created by the banking industry for moving funds around. Direct payroll deposits are one example of how this network is used. Transactions are encrypted, and message verification is used to ensure messages are unchanged in transit.
SAVING COSTS
The department used to send out some 8 million checks per year, which was a major expense, Davis said. Not only is there postage cost, but it cost the state money to reissue lost checks and pay for offsite storage of blank checks, among other expenses.
Last fiscal year, the state avoided writing nearly 100,000 checks by making about 30,000 payments with EDI. The number of checks avoided is larger than the number of payments because EDI enables the department to make a single payment, rather than the frequent multiple payments required under the old system. This is simply because the department can fit only seven lines on the check stub describing the reimbursement. If there are eight items for reimbursement, two checks have to be cut. "We're saving forests," Davis said, adding that they are also saving money since the postal rates rose in 1994.
When a transfer is done, instead of mailing an invoice with a check, information on the transaction, including labeling what it is for, is faxed to the recipient.
CUSTOMER SATISFACTION
The Virginia EDI system has helped both private and public state clients. In New Kent County, EDI has helped cut costs significantly. The county, with about 11,000 people, gets lump sum payments from the state rather than separate checks. The state used to send separate checks to each of the five constitutional offices, but now all the money is deposited in the bank at once, saving processing time and effort. While this example seems like a minuscule point, every little bit makes a difference in a small jurisdiction, said Betty Burrell, New Kent treasurer. "With a small staff, whatever we do is significant savings."
The county didn't have to make any adjustments or buy software or hardware to become a part of the EDI program when it began two years ago. A form was filled out, which included a fax number for the state to submit remittance information.
Besides saving administrative costs, the automatic deposit allows the county to begin collecting interest on the bank accounts during those days when the checks used to be in the mail. "I call that an enhancement," Burrell said.
The same concept applies to larger jurisdictions, but they get a larger enhancement. Virginia Beach, for example, can typically get an extra day's interest of $1,250 for bimonthly $12 million payments made by the state, based on the 5.4 percent prime interest rate at the time this was written. This is money which wouldn't be earned by the city if it was sent as a check and had to go through a process by both the city and bank before starting to earn interest.
The direct deposit also means the money can begin to earn interest before accountants even know precisely what the money is for, said Troy Tripamer, chief accountant for the Virginia Beach treasurer. "The money is in my hands faster than with a check," he said. When mailed from Richmond to the city, a check may take a few days before it arrives and can be deposited. But because the deposit happens immediately after the state releases the funds, the city can start collecting interest which the state used to collect.
Private-sector participants also win. Owens & Minor Inc., a large health care product supplier, is connected with the EDI and was instrumental in getting the system going with Davis and Smith. The state used to send Owens & Minor about 8,000 checks annually for a variety of products, and the company had to manually credit the transactions. With electronic transfers, there is time savings and less human error in the records.
"It really takes a lot of the cost out of the system for both of us," said Richard Bozard, vice president and treasurer of Owens & Minor. "Hopefully we'll go forward and come up with additions."
The program will likely grow in the future, said Davis, starting with recruiting more participants. He estimates that between 10,000 and 15,000 state employees could potentially use the electronic deposit system, as well as about 100,000 vendors who do business with the state. "If we get 80 percent of the volume that way, we'd save a lot of money," Davis said.
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