It has come to our attention from several District 10 constituents that City Sales Tax is being sent out of state, more specifically, to a Texas Post Office Box. Why is this? The answer is rather long and complicated so please see my website for more information (LINK)
According to the Treasury Department, the short answer is that for over 5 years, certain tax payments have been processed in Texas, but were first being collected at a post office box in Denver. The City paid to have a courier drive to the local post office to collect the boxes and drive them to Denver International Airport each morning to be flown to Texas for processing at the lockbox processing site of the City’s bank JP Morgan. The collection of the mail at the Denver post office, the compiling of the returns into various transportation boxes, and the driving them to the airport had some processing inefficiencies. From time to time a box would be overlooked, or if the receipt in the local post office was around a 3-day holiday, processing could be delayed up to 4 or 5 days from receipt at the Denver location. By having the U. S Postal service deliver the returns directly to the processing site, the City’s fees for driving the returns back and forth from the airport, both in Denver and in Dallas are reduced. Further, payments processed by the bank are collected balances the day they are processed by the bank in Dallas due to the Federal Reserve Bank clearing all checks for the Rocky Mountain region in Dallas.
The long answer is that the collection and processing of mass payments such as the sales, use and occupational privilege taxes are more efficiently done through high volume processing sites, normally administered by a bank. It would be cost prohibitive for the City to acquire and maintain these high speed remittance processors for its own volumes. Because the payments are sent to a post office box, they are then picked up and processed by these banks sites by personnel who follow very detailed processing instructions from the City. This processing is commonly referred to as lockbox services. Lockbox services are but one portion of the entire banking services the City contracts with its banks. JP Morgan was selected through a competitive bidding process to provide such services. The bank had a local lockbox processing site when it was selected. However, the Federal Reserve Bank announced that it would no longer clear paper checks in Denver (at the Denver offices of the Kansas City Federal Reserve Bank). Specifically the entire Rocky Mountain Region would be processed in the Dallas, Texas Federal Reserve Bank. What this means is when a paper check is presented to the City drawn on a bank other than JP Morgan, the paper check needs to be presented to the originating bank prior to the money being “collected balances” in the City’s bank account and therefore available to the City for investment or expenditure purposes. This is commonly referred to as processing or clearing float. By having the processing done in Texas, the checks clear the same day they are processed by JP Morgan. If the checks were processed locally, they would have to be transported to Dallas, prior to the funds being available to the City. The City has experienced an acceleration of available funds of 1 to 2 days by having the processing in Texas.
It is important to recognize that banking services are a multi-faceted relationship. Because the City has a number of services provided by JP Morgan, the bank has offered attractive fees for its services and provided support to the City through Community Reinvestment Act programs such as educational support in the La Alma/Lincoln Park area of Denver, workforce development programs such as Denver’s Road Home and Work Options for Women. The bank has also supported City debt transactions by providing credit support during the difficult financing markets of 2008 and 2009, when other banks were unable or unwilling to apply their capital. JP Morgan provides approximately 480 Denver jobs.
It is important to correct the perception that tax returns are maintained in Texas. The processing of opening the envelop, depositing the check, and returning the tax returns for processing by Treasury employees is the majority of the work done in the lockbox services in Texas. This processing is consistent with Xcel and major retailers processing of Colorado residents’ mass payments through lockbox services. To our knowledge there is only one bank that still provides local lockbox services, although there may be other lockbox service providers.
The City will be issuing a Request for Proposals for banking services in the fourth quarter of this year including lockbox services. As in the past, the support of local businesses and the local economy will be a significant – but not necessarily the only - evaluation factor in awarding business to banks. In summary, the direct mailing to the processing location provides a lower cost and more efficient processing of payments. By being processed in Texas, the City benefits by having available funds 1 to 2 days sooner than if processed locally and the paper checks sent to the Dallas Federal Reserve Bank. The relationship with JP Morgan Bank reduces costs for services through economies of scale. The mailing of payments directly to the Texas address is no change from how payments have been processed for over 5 years, since JP Morgan moved their lockbox operations in response to the Federal Reserve Bank’s changes. The continued evolution of the banking system to image processing from physical item presentment may offer further opportunities for the City to process locally without experiencing higher costs or inefficiencies at some point in the future.
We hope that this information clears up any confusion around this issue. If you do have additional questions, please contact Lauren Hobbs, Finance Administrator for the Treasury Division- Department of Finance at 720-913-9361 or lauren.hobbs@denvergov.org.