Category: state revenue

Is “True Escheat” The Future of Unclaimed Property Laws?


Nevada is considering a bill “providing that all property rights and legal title to, and ownership of” of U.S. savings bonds would “vest in this State” after three years. After that three year period, the state could choose to pay the proceeds to the rightful owner of the bond, but the decision to do so would be left to the state’s discretion. West Virginia is considering similar legislation, A law proposed in Hawaii goes even further providing that all unclaimed property with a value of $100 or less shall immediately “escheat to the State and be transferred to the general fund.” These are just a few examples of a new (and for unclaimed property owners, troubling) trend in unclaimed property legislation — a shift from “custodial” escheat laws to “true” escheat laws.

Currently, most state unclaimed property laws are “custodial” in nature — meaning that the state takes possession of the unclaimed property on the rightful owner’s behalf, but the state never actually takes “title” (i.e., ownership). Instead, the state holds the property in trust, and the rightful owner can always claim the property from the state when he or she becomes aware of it. To be sure, the state may use those monies for schools, roads, or other budgetary purposes in the interim, but the rightful owner retains the right to get his or her money or property back.

The rationale for such “custodial” escheat laws is reasonably straightforward: given that the rightful owner is not in possession, someone is going to have the “free” use of the money. Better that it be the state for the use of all citizens than a private company. In the custodial paradigm, the owner theoretically is no worse off by the state, rather than a company, holding his or her property (at least if the property is cash, and not securities)

In a “true” escheat system, the state ultimately acquires not only custody of the property, but ownership. As a result, the rights of the original owner are deemed “cut off.” As explained by 18th Century English jurist William Blackstone in his Commentaries on the Laws of England, the rationale for “true” escheat laws is that all property rights were ultimately derived from the sovereign: “The grand and fundamental maxim of all feudal tenure is this; that all lands were originally granted out by the sovereign, and are therefore holden, either mediately or immediately, of the crown.” Accordingly, where something happens to the current owner, the property reverts back to the sovereign.

While this rule may still make sense for “real property” (i.e., land) with the sovereign being the state, it is not for most “intangible” property. A share of stock you purchase from an issuer, a CD you deposit at a bank, a payroll check — none of these items “originated” with the state. The potential for true escheat laws, along with the ever expanding scope of unclaimed property laws, and the apparently inexorable process of making dormancy periods shorter and shorter, could very well have a significant and negative impact on the owners of unclaimed property.

While the current proposals appear to be modest (just a single property type here, a $100 limit there) it is not hard to imagine such laws being expanded. Owners should be wary.

Unclaimed Property Provides Boost to South Carolina Budget

The Charleston Post & Courier has an article about the boost provided to South Carolina’s budget as a result of unclaimed property collections.  Just as lawmakers were putting the finishing touches on the state budget, State Treasurer Curtis M. Loftis, Jr. announced that unclaimed property estimates for the year would rise by nearly $50 million.  The article notes that some of the excess resulting from unclaimed property and other increases was used to reduce cuts to educational and hospital programs.

South Dakota Finds Out That Unclaimed Property Changes Bring Only Temporary Revenue Relief

At the beginning of this year, South Dakota’s legislature and Governor were trying to figure out how to spend an “extra” $33 million in unclaimed property revenue, collected as a result of shortening dormancy periods, additional holders moving into the state, and reduced outreach efforts.  As we’ve warned repeatedly, however, such measures are only a temporary fix for state budgets — shortening a dormancy period from 5 years to 3 years, for example, means that three years’ worth of property gets collected in the first year after the legislation passes.  After that bump in year one, unclaimed property collections return back to normal.

According to a story in the Argus Leader, South Dakota is finding that out this year.  After record collections last year, unclaimed property revenues are down significantly this year and 80% under the amounts projected by the state.  While South Dakota has apparently been able to adjust other revenues and spending to account for the shortfall, this serves as a reminder to other states that unclaimed property revenue — especially when that revenue is artificially increased by legislative activity — can’t be relied upon to take the place of prudent planning.

Say “Aloha” to Your Unclaimed Property

Modern day unclaimed property laws are “custodial” in nature, meaning that the state takes possession of, but not legal title to, property that is reported and remitted to the state.  As a consequence, it is the rule in most states that although unclaimed money and assets may be remitted to the state’s general fund and used for state spending, the owner never loses the right to reclaim his or her property.  This is in contrast the the historical practice of bona vacantia in England and prior Roman civil law, where “ownerless goods” would be owned by the crown.

In fact, it is the custodial nature of these laws and the unlimited opportunity for the owner to reclaim his or her money that serve as the states’ most prominent response to frequent holder complaints that state unclaimed property laws are increasingly unfair, complex or burdensome.  Some states, however, are quietly limiting owners’ rights to make claims for property held by the state.

For example, pursuant to Hawaii Senate Bill 2321, effective July 1 of this year, an owner has 10 years to file a claim for property valued at $100 or less.  After that time, according to the new law, the property “shall escheat to the state” permanently.  According to testimony by the Director of the Department of Budget and Finance (who, to his credit, testified against this legislation) the new law means that there are 275,000 items (in an aggregate value in excess of $20 million) that are now subject to escheating permanently to the state.

Similarly, in Idaho, the amendment to Section 14-518 of the Act means that items valued at less than $100 need not be listed on the state’s website database of unclaimed property held by the state.  While this represents a small fraction of unclaimed property held by the states as a whole, as states become more addicted to unclaimed property as a revenue raising measure, such initiatives will probably increase (to the detriment of owners).

Nice Problem to Have: South Dakota Governor and Legislature Discussing How to Spend “Extra” $35 Million in Unclaimed Property

The Rapid City (SD) Journal recently published a story concerning a tug of war between the South Dakota Governor and State Legislature concerning how to use an “unexpectedly large” collection of unclaimed property.  According to the article, the state collected almost $70 million in unclaimed property during the past year – more than $33 million more than expected.  The windfall is apparently due to the state’s recent decision to shorten the dormancy period for most property types from 5 years to 3 years and the movement into South Dakota of certain companies and financial institutions.  As we previously noted, that same legislation also reduced the number of published notices to owners from two to one, and increased the dollar threshold for publishing such items from $50 to $250.  The shortening of dormancy periods and increase in notice threshold are becoming regular tricks for states to (temporarily and artificially) increase state revenue.

According to the Journal article by Bob Mercer, the legislature wants to use the extra cash for economic development, while the governor wants to use the money to pay off some existing state debt.  As is often the case, neither side is suggesting that the funds be used to increase outreach efforts to get the money back to its rightful owners.

Unclaimed Federal Tax Refunds & What Happens When Sovereigns Collide

 According to The Asbury Park Press, the federal government is holding more than $917 million in unclaimed tax refunds from 2009 and the deadline for requesting a refund — April 15 — is fast approaching.  According to the article the number of taxpayers affected is significant:  more than 30,000 in New Jersey, over 86,000 people in Texas, and more than 100,000 in California. 

This begs the question:  what happens to these tax refunds if they remain unclaimed, do they get turned over to the states as unclaimed property?  Consider the following:

Unclaimed property practitioners are familiar with the seemingly continued and unrelenting expansion of state unclaimed property laws.  Where, historically, those laws were used to provided rules for the disposition of the estates of those who died without heirs, they now touch upon nearly every party of modern economic life:  bank accounts, brokerage accounts, checks, gift cards, benefits, rebates, insurance proceeds . . . . the list is nearly endless.  However, as state governments become increasingly reliant upon using unclaimed funds to balance state budgets and provide a source for state revenue, pressure increases on state legislatures and/or unclaimed property administrators to expand the laws even further, or to audit even more aggressively, to continue to be able to feed the beast.  As states recognize that they can only squeeze so much revenue from corporations and financial institutions, they will start to look elsewhere.  One such place that they may look is to federal government programs.  

After all (the argument would go), one of the rationales for state unclaimed property laws is that the state “steps into the shoes” of the rightful owner and takes custody of the property in that owner’s name.  See Great Iowa Treasure Hunt FAQs (explaining that “The courts have long maintained the states’ rights are derivative of the missing owner. In other words, the state stands in the shoes of the missing owner.”)  Under this theory, there would seem to be no reason why property held by the federal government is any different.

The “steps into the shoes” theory, however, is not the only policy supporting unclaimed property laws.  Another is the “common benefit” theory, which generally provides that when property is abandoned or unclaimed, the property is better used for the benefit of all citizens (i.e., by escheating the money to the state) rather than having the holder (who, in most cases, has no entitlement to the funds) receive a windfall because of the owner’s failure to take the property.  Under this theory, the property arguably should remain with the federal government, where it can be used for the common benefit of all citizens.  Similarly (the argument would go) there is no reason why the state should be deemed a better custodian of unclaimed funds than the federal government.  Indeed, the federal government has its own site providing links to searchable databases of unclaimed funds relating to government programs.

So, what happens when sovereigns collide?  A relatively recent case out of New Jersey suggests one possible answer.  Last year, the states of New Jersey, Montana, Oklahoma, Missouri, Pennsylvania, Kentucky and North Carolina filed an action in federal court seeking to require the federal treasury to turn over unclaimed savings bonds that the states alleged had become abandoned pursuant to their state unclaimed property laws.  The amounts at issue were significant.  The states sought turnover of some $1.6 billion in matured bonds and some estimate that the amount of matured but unredeemed bonds held by the Treasury Department is about $16 billion. 

Ultimately, the federal district court dismissed the case, raising the doctrines of federal preemption (i.e., that federal law is superior to, and cannot be trumped by, a conflicting state law) and intergovernmental immunity (i.e., that one government cannot threaten civil or criminal penalties to another government for acts carried out in an official capacity).  This decision was affirmed by the United States Court of Appeals  in Philadelphia, which held that “federal statutes and regulations pertaining to United States savings bonds preempt the States’ unclaimed property acts insofar as the State seek to apply their acts to take custody of the proceeds of the matured but unredeemed savings bonds.”  The Court also agreed with the district court that the states’ claim was barred by the doctrine of intergovermental immunity, reasoning that allowing application of state unclaimed property laws to the federal government “would result in a direct regulation of the Federal Government [by a state] in contravention of the Supremacy Clause.”

Apparently reluctant to give up on this pot of funds, the objecting states filed a Petition for Certiorari with the Supreme Court of the United States, asking the high court to review and reverse the appellate court’s decision.  That petition is currently under review.

Unless and until the Supreme Court reverses the decision of the Court of Appeals in the savings bond case, it is unlikely that the states will see be able to take custody of property held by the federal government under state unclaimed property laws.  However, with both the state and federal governments scrambling to raise revenue, cut expenses, and balance budgets, these inter-government fights over other people’s money are sure to continue.

Aggregate Reporting Under the Microscope in California

Under most state unclaimed property laws, there exists a mechanism called “aggregate reporting” whereby the holder of the funds is permitted (or in some states, required) to report and remit items under a specific dollar amount (usually $50) in one lump sum, without providing owner name and address information.  As we’ve discussed previously in this space, while aggregate reporting reduces administrative burden on the holder and on the state, that process is arguably inconsistent with the primary purpose of the unclaimed property laws — to try and reunite owners with their missing funds.  Obviously, to the extent that the state does not have identification information for the owner of the funds, the state cannot search for that owner or take any action to return the funds.

A recent situation in California demonstrates this problem.  According to a report by CBS 13 Sacramento, a fifteen year old California resident learned that his $30 savings account was turned over to the state by his bank because of a lack of activity.  When he and his family went to search for the funds, however, they state was unable to locate the account.  They eventually contacted CBS 13 consumer investigation reporter Kurtis Ming, who learned that since 2007 California brought in more than $68 million in funds without owner name and address.  Ultimately, the bank – not the state – gave the money back to its customer, but the story isn’t over yet.

California Assemblymember Bonnie Lowenthal has authored a bill to close this unclaimed property “loophole” and would require holders to report owner-identification information for all amounts, regardless of size.  Assembly Bill 212 would remove the provisions of California unclaimed property law that permit balances of less than $50 to be reported in the aggregate, and would also require holders to send notice to all owners of unclaimed property — regardless of the balance.  The bill is currently before the Assembly Judiciary Committee.
 

States Continue to Use One-Time Tricks to Increase Revenue

Earlier, we looked at a Washington State proposal to increase revenue by selling unclaimed securities upon receipt (instead of waiting at least three years, as under prior law).  As we mentioned at the time, this procedure could wind up being detrimental to the owners of unclaimed property — given the flux in the financial markets at any given time, it is quite possible that the securities will be worth more in 3 years.  Of course, the state is not following this procedure to protect holders, it is doing so to raise revenue.  On that score, it has been successful.  According to PubliCola.com, this measure has increased revenue by some $51 million.  The News Tribune posted a “Twitter Version” of the Washington State Legislature’s revenue forecast meeting which notes that, during the meeting it was noted that “[m]ost of $96 m increase in [state] revenue is non-economic, due to December law regarding when unclaimed property can be sold (HB 2169).”

In the same vein, a few months ago Michigan overhauled its unclaimed property act by reducing the dormancy period for most property types from 5 years to 3 years.  According to a report concerning the legislation from the Michigan House Fiscal Agency,  the shortening of the dormancy periods was intended to increase state revenue by more than $160 million in the year of enactment.  New York used a similar gambit in an attempt to pass a balanced budget.

The problem with these methods is that they are one-time fixes that are neither “real” nor sustainable.  For example, the shortening of dormancy periods (for example, from 5 years to 3) does not really result in the state bringing in more money over the long haul — it simply brings in 3 years’ worth of property in the first year after enactment.  In years 2 and 3 after the proposal, when the state is again only bringing in a single year worth of property, collections revert to normal.  Similarly, by immediately liquidating securities and putting the resulting funds in the state treasury, Washington is not actually collecting more money, it is simply liquidating it faster — potentially at the expense of the rightful owners who may ultimately want to collect their securities from the state.  Thus, these legislative changes are not improvements in any way, they are simply a way to delay the problem for a year or two.

States have often shortened dormancy periods in an effort to pad budgets and increase revenue.  Of course, decades ago, when dormancy periods for many items were 15 years, the unclaimed property laws only applied to a narrow set of property types, and unclaimed property audits were rare, states had a number of weapons at their disposal to use unclaimed property laws to (temporarily) increase revenue.  Today, with dormancy periods shortening to only a few years, states trying to apply unclaimed property laws to ever more contingent and ephemeral “property” types, and unclaimed property audits increasing in frequency and scope, the states’ quiver of revenue tricks is emptying.

Delaware Keeps AAA Credit Rating With Other People’s Money

While the broader U.S. economy continues to ebb and flow, some are warning of another possible downgrade of the national credit rating.  Some other governments, however, are not having credit rating problems during these difficult times.

According to a press release on Marketwatch.com, Fitch Ratings assigned a AAA rating to Delaware’s latest $275 million bond offering.  Among the factors that Fitch relied upon in making its determination to provide its highest rating was Delaware’s revenue profile (that is, the sources of revenue brought in by the state, and the likelihood that those revenue streams would remain sufficient to discharge the state’s bond obligations).  Given Delaware’s status as a popular state of incorporation for domestic companies, its no surprise that unclaimed property revenue makes up an important slice of the First State’s revenue mix.  As Fitch noted:

Delaware’s revenue mix reflects its position as legal home of most U.S. corporations, with various fees and taxes as well as abandoned property revenue all linked to companies being legally domiciled in the state. Abandoned property typically accounts for 10% to 12% of general fund revenues though collections were a high 15% in fiscal 2010; this variable revenue stream has been negatively affected by the downturn in financial markets but the state’s decision to shorten the dormancy period on held securities has resulted in an increase in these collections.

Other People’s Money: States Use Unclaimed Property and Accounting "Tricks" To Balance Budgets

The San Antonio Express had a relatively run of the mill article concerning the Lone Star State’s approval of next year’s budget.  Many states are struggling to balance (or cutback) their state budgets, and Texas is no exception.  Generally, to balance the budget, state have to either cut services (which is politically unpopular) and/or raise taxes and fees (which is even less popular).  Texas is taking other short-term approaches to address the immediate problems that may cause even more budget difficulty in the long term.

For example, one of the ways that Texas seeks to increase revenue is by “allowing unclaimed property to revert more quickly to the state.”  In other words, Texas intends to shorten unclaimed property dormancy periods to take custody of more property more quickly.  In particular, the proposed legislation would shorten the dormancy period for utility deposits from three years to 18 months; money orders from seven years to three years; and bank deposits, savings accounts, and matured certificates of deposits from five years to three years.  The legislation will supposedly raise some $277 million in revenue for FY 2013. 

We saw a similar strategy used earlier this year by New York and last year by Michigan.  Of course, this unclaimed property legislation does nothing to actually increase revenue.  It increases the amount of money brought in this year, but necessarily decreases the amounts brought in for the few years after that.  For example, assuming the legislation passes, four years’ worth of money orders will be escheatable at the next reporting deadline.  The year after that, of course, only one year’s worth will be due.  Thus, this strategy is a short term fix at best.  Moreover, states can only rely upon shortening the dormancy period a few times.  Soon, there will be nothing left to cut, unless states decide simply to require all property be paid directly to the state.

On the other hand, perhaps these states believe that the Mayans were right, and that they won’t have to worry about next year’s budget.