|Budget Issue:||Initiative to increase holder compliance with unclaimed property program|
|Program:||State Controller's Office|
|Finding or Recommendation:||Approve proposal on a two-year limited term—rather than permanent—basis.|
Unclaimed Property Program. Since 1959, banks and other institutions (“holders”) have been required by law to remit unclaimed property to the state. The most common types of unclaimed property are bank accounts, safe deposit box contents, stocks, and the proceeds of insurance policies. Most property is deemed unclaimed when an account has remained dormant for three years and holder efforts to locate the owner have been unsuccessful. The unclaimed property is then transmitted to the State Controller's Office (SCO), which maintains records of all such property and attempts to identify the owners. Owners can then file a claim with SCO to get their property back, which SCO approves once the owner's identity is confirmed.
Minor Source of General Fund Revenue. When properties with cash value are remitted to SCO—or when other properties, such as securities, are converted to cash—they are deposited in the Unclaimed Property Fund (UPF). In 2012-13, $205 million in claims were paid to owners from the UPF. Because amounts remitted to SCO regularly exceed amounts paid to owners, however, the ending balance in the UPF would grow each year. To prevent this, amounts in the UPF exceeding $50,000 are swept to the General Fund each month and are counted as General Fund revenues. In 2012-13, these revenues totaled $473 million—less than one percent of overall General Fund revenues.
Liability Grows Indefinitely. Under current practice, an owner could claim a property decades after the property is remitted to SCO. As discussed above, because amounts remitted to SCO are greater than amounts returned to owners each year, the state’s potential liability for returning unclaimed property to owners grows indefinitely.
Holder Compliance Initiative. In 2011-12, the Legislature approved a $2.4 million annual appropriation from the UPF and 22.6 positions (growing to 23.6 positions in 2012-13) for a three-year limited term to enhance holder compliance with the state’s unclaimed property law. In addition, the program seeks to increase the rate at which holders return properties directly to owners before they are remitted to SCO. (Because the initiative also increases the amount of property remitted to SCO, it also results in SCO directly returning properties to owners). Specifically, the program: (1) conducts outreach to holders that are not submitting reports to SCO to improve awareness of and compliance with the program, and (2) audits holders to ensure compliance with unclaimed property laws.
Proposal to Make Initiative Permanent. The administration’s budget plan proposes to make the holder compliance initiative permanent. Specifically, under the proposal, the initiative would be funded with $2.5 million from the UPF and 23 positions would be authorized beginning in 2014-15.
Holder Outreach Outcomes Differed From Projections. In the 2011-12 proposal, SCO projected that in 2011-12 and 2012-13 holder outreach and compliance would result in an average of $5.5 million of property per year returned to owners—both from holders and SCO—and $4.1 million of property per year remitted from holders to SCO. It appears that the outreach efforts have resulted in less property being returned to owners and more property being remitted to SCO than was projected in the 2011-12 proposal. Specifically, over the same two-year period, the program resulted in an average of $5.3 million per year returned to owners—close to the 2011-12 projection—and $9.4 million per year remitted to SCO.
Audit Outcomes Differed From Projections. The 2011-12 proposal projected that the audit component would result in $7.6 million per year returned to owners and $16.9 million in property remitted to SCO. It appears that through 2012-13, the audits have resulted in less by both measures. Specifically, over the three years since the initiative has been in effect, the audits have resulted in about $2.3 million of property per year being returned to owners and about $4.1 million of property per year being remitted to SCO. The preliminary estimates for 2013-14 show an improvement in both metrics—according to SCO, many of the audits have taken longer than a year to complete, explaining the lower amounts reported in 2011-12 and 2012-13. Nevertheless, this year’s proposal reflects lower projections going forward. Specifically, for 2014-15 and 2015-16 SCO now projects fewer amounts being returned to holders and remitted to SCO than was originally projected in the 2011-12 proposal.
Approve Request for Limited Term. The initiative appears to be improving holder compliance, resulting in far more property being remitted to SCO than was projected in the 2011-12 proposal. Based on the information presented in the proposal, however, we conclude that the initiative has produced outcomes that differ from projections. For this reason, we recommend approving the proposal only for a two-year limited term. In addition, we recommend that the Legislature continue the reporting requirement to monitor the progress of the program.
Additional Questions for Legislative Consideration. The unclaimed property proposals submitted to the Legislature this year provide an opportunity to consider the overall goals of the program. While the holder compliance initiative appears to be increasing the rate at which holders return property directly to owners, the Legislature may want to ask SCO what the state can do to increase the amount of property returned to owners once it has been remitted to SCO. (We note recent efforts by SCO allow owners to claim property through SCO’s website, reducing the amount of time needed to pay claims compared with the traditional paper process.) In addition, recent program changes appear to have increased General Fund revenues. The Legislature may want to consider if program resources should be shifted—or if additional resources should be provided—to increase the amount of property that is returned to owners. If so, the Legislature may also want to consider setting overall goals for the unclaimed property program based on measurable outcomes and require SCO to report on its progress in meeting those goals. For example, the Legislature could establish a goal to increase the ratio of (1) property returned to owners once it has been remitted to SCO to (2) property swept to the General Fund. (As noted earlier, in 2012-13 $205 million in such property was returned to owners and $473 million was swept to the General Fund, producing a ratio of 0.4:1.)
Lastly, because the amount swept to the General Fund regularly exceeds the amount of property returned to owners, the state’s liability for unclaimed property grows each year. In our view, it is problematic for the state’s liability to grow indefinitely in this manner. The Legislature may want to consider whether there should be a limit to the amount of time that the liability for a particular unclaimed property item is kept on the state’s books.
This analysis was updated April 10, 2014 to include revised data from SCO concerning properties returned to owners under the holder outreach component of the program in 2011-12 and 2012-13.