Feature Articles and Resources

• What You Need to Know Before Using a Lockbox Service
  
• What are Lockbox Services?
  
• Sequence of Activities in a Lockbox
  
• Analysis of Lockbox Costs and Benefits
  
• GFOA Cash Management Committee Updates Recommended Practice on Lockboxes
  
• Example: Lockbox Services Section in an RFP for Banking Services

• Panel of Economists: Effect of Housing Downturn on Economy
  
• Interest Rate Outlook
  
• Snapshot of Economy and Interest Rates

• Performance Benchmarks
  • 10-Bill Index
  • Money Market Fund Index
  • LGIP Index
  • Key Rates: Cash Markets
  • Relative Value Yield Chart

What You Need to Know Before Using a Lockbox Service

One way for a government to streamline the collection of water, sewer, utility, or other types of recurring remittances is to outsource the processing to a lockbox provider. Lockbox processing involves a third party service provider (typically a bank) handling all of the activities involved with remittances, including collecting, depositing, and reporting. By using lockbox services, a government reduces mail float, processing float, and check clearing float, allowing funds to be collected more quickly than through normal in-house processing. Consider the following before using a lockbox service:

Volume. Lockbox processing is very volume driven. There are two primary types of lockbox services based on volume: (1) wholesale lockboxes, which process a low volume of high ticket items (e.g., property taxes) and (2) retail lockboxes, which process a high volume of low ticket items (e.g., water payments). Some providers also offer a hybrid service for medium range volumes that require hands-on attention such as keying in data. For example, one bank calls its hybrid service, “Wholetail Lockbox.” When considering whether your agency qualifies for a retail lockbox service, the key question concerns the volume threshold, which can range from a minimum of 5,000 to 20,000 items a month.

What Lockbox Can Do for You. Lockbox processors will perform the following basic functions for a government: collect remittances from the Post Office, open the mail, scan or key in the coupon information, scan or key in the check information, encode and endorse all of the checks received, deposit the checks to make check clearing deadlines, and create and send an electronic file and/or a hard copy report with information on the items processed each day. Any number of exception-type activities can be arranged for, such as creating customized reports, mailing any correspondence received, making photocopies of the checks received, reconciling mismatched items, etc. A new service that some of the major banks are offering is Accounts Receivable Conversion (ARC), whereby the checks received by the lockbox are converted to ACH debits.

Costs of Lockbox Processing. The primary cost component of lockbox processing is the per item fee. For wholesale lockboxes, the per item fee might range from $.50 to $1.00. For retail lockboxes, the per item fee might range from $.15 to $.30 for matched items (i.e., one coupon and one check with matching dollar amounts). In addition, both wholesale and retail lockboxes may have other charges, such as monthly maintenance charges, P.O. Box rental, photocopies, and special handling requirements. Retail lockboxes may also have additional charges, including charges for data transmissions, ARC, and MICR rejects. The per item fee for retail lockbox items is increased for:

• Multiples (i.e., one coupon with more than one check or the reverse),
• Mismatched items (i.e., coupon and check amounts do not match),
• Check only (i.e., no coupon), and
• Reject items (e.g., coupon only with no check).

The higher the volume, the lower the price per item because lockbox processing, especially retail lockboxes, benefits from significant economies of scale.

Prerequisites for Lockboxes. In order to be able to benefit from retail lockbox processing, a government needs to have the following items in place in addition to the volume requirements:

1. The agency needs a scanable remittance document or coupon. The lockbox service provider will give the agency document specifications for both the envelopes and coupons if scanable documents are not currently being used.
   
2. The agency has to feel comfortable with the fact that its customers will mail remittances to a P.O. Box that is probably located in a different city. Lockbox processing sites are typically located in the downtown areas of major cities, such as Los Angeles, San Francisco, Dallas, etc.
   
3. The agency needs to have the applicable technology in place, such as the ability to receive a lockbox file and have that information uploaded to the agency's accounts receivable system. If the computer connection is not in place, then the agency would receive only a hard copy file and have to manually input the data.
   
4. The agency needs to have fairly clean processing with a low percentage (10 percent or less) of mismatched or exception items.

Lockbox Selection Criteria. When selecting a lockbox service provider, a government should consider and rank the following criteria:

1. Protection of public funds (collateralization of deposits);
2. Financial strength of provider (capitalization, bank ratings, profitability);
3. Ability to provide basic remittance processing services;
4. Ability to provide enhanced services, such as ARC and exception handling;
5. Experience providing lockbox services to other with governments;
6. Quality of references (governments with similar volumes and requirements); and
7. Costs to the government (overall pricing, costs of programming, and staff time).

Summary. If a government is looking at outsourcing possibilities, then lockbox could be an effective option for remittance processing. Consider lockbox before investing in new remittance processing equipment, renewing an equipment-servicing contract, or hiring additional staff. In addition, perform a thorough cost-benefit analysis before signing on the dotted line with a potential lockbox provider. The universe of lockbox providers continues to grow with many choices available among bank and non-bank providers, making the market very competitive right now.

Susan M. Cotton is a Certified Treasury Professional and manages the firm Money Matters Consulting. She can be reached at 949/279-1855 or s_cotton@hotmail.com.

What are Lockbox Services?

Lockbox services are designed to expedite the collection of paper-based payments and provide timely payment information to update accounts receivable records. Lockbox services are usually provided by a third-party processor (usually a bank) that receives, opens, and processes payments for a government entity or business. For most entities, lockbox services should: increase payment and posting accuracy; improve cash flow by reducing processing time between delivery of mail and depositing of payments; and increase staff productivity by freeing personnel from the labor intensive process of manually handling mail, making daily deposits, and posting manual payments.

There are two basic types of lockbox services: wholesale (used for high-dollar, low-volume payments) and retail (used for high-volume, low-dollar payments such as taxes, utilities, licenses, and fees, and accompanied by standardized remittance documents). Retail lockbox services generally are of primary interest to government entities.

Most lockbox services function in the following manner:

1. The bank contracted to provide lockbox service maintains a separate post office box in the government's name.
2. Customers' remittances (that is, the document indicating amount due) and enclosed check are mailed to the specific post office box, rather than to the post office box for the government's regular mail (often facilitated by using pre-addressed, bar-coded envelopes).
3. The bank collects the remittances periodically during the day. Depending on volume, the bank may collect remittances perhaps as often as once every two hours or as infrequently as once a day.
4. Bank staff opens the remittances and sorts the check payments and accompanying data.
5. Checks that match the particular bill, invoice, or other data are processed for deposit that day.
6. Exceptions (non-matching items) may or may not be processed according to the special customized computer program. Any checks that are not processed are turned over to the government for action.
7. Copies of all normal, accepted remittances and accompanying data are forwarded daily to the government (on CD-ROM and/or via the bank's online reporting) for its internal posting process. The posting process is automated among some governments. That is, the responsible government financial manager can capture data from the bank's online reporting tool and automatically post it to the internal financial management system.

Sequence of Activities in a Lockbox

Source: Banking Services: A Guide for Governments, Government Finance Officers Association, 2004.

Analysis of Lockbox Costs and Benefits

Note: Data adapted from mid-sized Illinois municipality.

GFOA Cash Management Committee Updates Recommended Practice on Lockboxes

The GFOA Cash Management committee recently updated its recommended practice on the use of lockbox services. The new practice recommends that government entities evaluate the benefits and costs of utilizing lockbox services to determine if advantages can be gained in the areas of accuracy, cash flow, internal controls, and efficiency. The evaluation should consider:

1. Availability of lockbox services
2. An analysis of the existing workflow from receiving mail to depositing payments and posting receivables
3. Volume of transactions
4. Staffing requirements
5. Time necessary to complete
6. Expected float savings from using a lockbox
7. Security of the process
8. Employee accuracy
9. Enhanced customer service
10. Capital requirements
11. Lockbox service charges
12. Technical requirements
13. Other considerations

Example: Lockbox Services Section in an RFP for Banking Services

1. What is your deadline for data transmissions?
2. Please describe the locations of your processing center.
3. Please describe how processing errors are resolved and expected timeframes for resolution.

Below is a list of lockbox options next to which we have placed an “XX” for those items we require, and an “X” for those items in which we have an interest, but may not require. Please specify whether these options are available at your bank.

____ Remittance with photocopy

____ Remittance without photocopy

____ Attach photocopy to documents

____ Attach photocopy to documents and envelopes

____ Return envelopes

____ Invoice balances to check

____ Return Items included in mailed work

____ Weekend processing and deposit

____ Remittance document includes change of address

Reporting/Communications

____ Data keying

____ Full check MICR capture

____ Data transmission formats

___ BAI ___ 823 ___ 820 ___ Other (please explain)

____ CD/ROM

____ Email/fax

____ Internet

____ Imaging of checks

____ Third party reporting

Effect of Housing Downturn on Economy

This month, Treasury Management asked its panel of economists what effect the downturn in the housing market is having on other sectors of the economy. We also asked the economists to provide their forecast of the economy over the next six months.

Carl Tannenbaum of LaSalle Bank/ABN-Amro says that there has been remarkably little spillover from the housing downturn to other sectors of the economy. However, he expects that the weakness in real estate will affect consumer spending during the year. Tannenbaum predicts that strong corporate profits should support business spending for the rest of this year, which he expects to post below-potential growth rates around 2.5 percent. He anticipates persistent inflation due to price pressures from energy, food, and monetary policy.

Lacy Hunt of Hoisington Investment Management states that growth in the first quarter of this year was the slowest in four years. He notes that four critical “big ticket” sectors – housing, household goods, automobiles, and capital spending – have all fallen into recessionary conditions. In fact, according to Hunt, the main problems in the housing sector still lie ahead. For example, housing completions have not been brought down into alignment with the slump in housing starts. The decline in U.S. home prices will reduce the amount of cash that households can extract from their homes and use to purchase consumer goods and services. He notes that the risk continues to rise for a recession late in 2007 or 2008.