USAT's Clunker Payment Piece Fails to Note Original 10-Day Govt. Promise To Dealers

Give Sharon Silke Carty of USA Today credit for unearthing important information about the serious back-office problems with Uncle Sam's Car Allowance Rebate System (CARS) program, popularly known as "Cash for Clunkers."

This is the program that ABC, CBS, and NBC have all characterized as "a victim of its own success."

But Carty didn't do nearly as much as she could have with the information she learned. Her most grievous oversights were her failures to compare the government's newly promised payment timetable to the 10 days dealers were told to expect, and to explain to her readers the extra unreimbursed costs dealers will have incurred as a result of the program even if (emphasis if) dealers receive full payment for their Clunker transactions.

Here are relevant paragraphs from Carty's report:

Officials set Sept. 30 as goal to pay dealers on clunkers

The Department of Transportation is kicking up efforts to pay dealers who sold cars under the federal cash-for-clunkers plan and hopes to process all outstanding rebate claims by Sept. 30.

A spokesperson for the National Highway Traffic Safety Administration, who did not want to be identified because the government's data are not yet public, said the government will have 5,000 workers handling claims by the middle of the week, up from the 3,000 now.

So far, the government has paid $500 million to dealers, the spokesperson said, or about 17% of the total claims. By next week, the government hopes to be paying out $100 million a day.

.... Once all the applications are sifted through, there may be money left in the pot, the government spokesperson said, because some percentage of the applications will be rejected. That money will go back to the Treasury Department.

John McEleney, chairman of the National Automobile Dealers Association, says he's happy the government has set the Sept. 30 goal to pay dealers.

"It's taken longer than we would like; a lot of our members are strapped for cash," he said.

McEleney's response seems rather muted, given the grief his dealers are incurring.

The $500 million paid out thus far is only half of the original $1 billion allocated to the program. That amount was used up in clunker deals during the very first week (July 24-30) of the program. Even if the government is able to keep its dubious $100 million a day payment promise starting on Tuesday (more on that in a moment), that means that many dealers have waited over 40 days to get paid. The original payment promise, according to this report, was 10 days.

Congress expanded the program to $3 billion in early August, and clunker deals that used up the additional $2 billion were done from August 7-24. At best, the government will be usually be paying dealers 35 days after their respective deals.

25-30 extra (35 or 40 minus 10) days is a long time to wait for large amounts of money. There are really only three ways a business can deal with this: Dig into cash reserves if they exist, thereby losing interest income; carry more debt while waiting, thus incurring interest expense; or slow down payments to vendors, pushing the pain onto them and potentially damaging those relationships. These problems are more than minor inconveniences. McEleney should have brought them out (is he afraid of offending an administration official?), but even if he didn't, Carty should have known better than to ignore these consequences.

There's plenty of reason to doubt whether DOT can catch up as quickly as promised. You can't increase staff from 3,000 to 5,000 and expect everyone to hit the ground running. Even if we bravely assume that all 2,000 newbies have been screened and are all qualified and ready to work first thing Tuesday morning, you have to have or find the space for them to work, buy or find them work stations, train them, have supervision in place to monitor them and review their work, and have all the necessary controls in place for processing large volumes of cash transactions. Excuse me for being skeptical that DOT can pull this off and get totally done by September 30. I think that's why the agency is expressing that date as a "goal" and not a promise, and why USAT reporter Carty writes of "hope."

The fact that DOT feels it has to ramp up to such a level this far into the program indicates that it had no idea of the scope of what it would have to do to support Cash for Clunkers when it was enacted. Instead of trying to operate the program itself, it seems from here that it should have engaged one or more of any number of outfits accustomed to processing large volumes of financial transactions (banks, loan companies, insurance companies) that would already have had most of the systems capability, and perhaps even much of the staff, in place to handle the workload.

Given the program's myriad problems -- there have been many other issues besides slow payments to dealers, including processing snafus (Carty herself noted that some dealers may not get paid for some of their good-faith transactions), dealer opt-outs, market distortions, and poor disclosure of sales and income tax consequences to buyers -- it would seem more appropriate to talk of Cash for Clunkers not as a "victim of its own success," but as a creator of victims who trusted the government to keep simple promises to run a program efficiently, and to make timely payments.

Cross-posted at BizzyBlog.com.