One indisputable result of the current global economic crisis is that state budgets, along with those of everyone else, have plummeted. Revenues have imploded. Collections of tax receipts have dramatically dropped, and states are scrambling to find ways to stem the tide. A recent article in the Wall Street Journal indicated that thirty-five states experienced a reduction in revenue in the fourth quarter of last year, eight of them by over ten percent. Fifteen states are expected to face a current mid-year budget gap amounting to billions of dollars each.1 Unlike the federal government, which can simply run the printing presses and borrow, most states are compelled to spend no more than what their revenues can support. State officials and legislators consequently are searching frantically for sources of revenue to keep state governments operating.
This unprecedented state budget crisis appears to have pushed some states further along the conflicted path of focusing on unclaimed property laws not as a method to reunite property with its rightful owner but rather primarily as a source of additional government revenue. It has been estimated that states collectively hold nearly thirty-three billion dollars of unclaimed or “deemed abandoned” property2 – an easy target during a desperate budget session. This recent activity is part of an alarming twenty-year trend. The mismatch between rhetoric and reality undermines faith in the system and the legitimacy of the law.
The primary purpose of unclaimed property laws in every state is to collect “deemed abandoned” property that presumably has been abandoned, hold the property on behalf of the owner until that owner may be found, and ultimately return the property to that rightful owner. A by-product of that purpose, which arises only in the event that the owner cannot be found, is that a State may use the property to benefit the public at large rather than allowing the holder of such property to retain a windfall. The authors certainly do not disagree, in theory, with the public benefit policy preference. However, such a policy must be carried out in accordance with the primary intent and purpose of the state statutes and must remain aligned with the underlying principals in unclaimed property law.
From a state’s perspective, it may seem rational – and in fact an act of self-preservation – that if property is truly abandoned, what is the harm in using it to balance the budget? The reality, however, is that if states change unclaimed property laws with the purpose of obtaining more property or obtaining the property faster, the raison d'être of those laws also becomes abandoned. The cost of abandoning the purpose is not only the financial cost to owners who are never reunited with their property but also to holders that have an increased compliance burden (which ultimately increases costs for all). A greater cost is the erosion of public confidence and respect for governing bodies once the perception arises that states are more interested in appropriating property to satisfy a revenue need than in returning the property to its rightful owners.
Recently, States that increase reliance on unclaimed funds to meet current year budget problems have followed several trends – expanding the definition of unclaimed property; shortening dormancy periods; expanding the definition of holder; and limiting certain recovery options for owners.
States consistently seek to expand their control over a vast pool of property that presumably no one claims, either by expanding the definition of property subject to escheat, expanding the definition of “property”, or by removing or limiting exemptions. One seemingly easy target in this regard are gift certificates/gift cards exemption provisions. A proposal to add gift cards and gift certificates as property subject to the unclaimed property act was recently introduced3 in Maryland.4 While such legislation may succeed in its purpose to raise funds, the fundamental reason why such property should be exempt remains.5 Further, since many gift certificates and cards never have an owner name and address, such property will become the de facto property of the State.
Another trend among states is to accelerate the collection of, and thus increase the time during which they have control over, unclaimed property.6 The result not only hastens the addition of revenue to state budgets from property ultimately unclaimed by its true owner, but actually increases the amount of revenue by the not insubstantial amount of interest states can earn (and often refuse to pass on, even when the owner is identified) once they have control of the property. Utah recently reduced the time after which unclaimed property generally is considered to be abandoned from five years to three years.7 Delaware reduced the dormancy period for intangible property from five years to three years and established a dormancy period of one year following the last day of the meet for outstanding pari-mutual tickets.8 Kentucky9 has reduced the dormancy period for bank deposits from seven to three years and for traveler’s checks from fifteen to seven years. Shortened dormancy periods could, for some types of property – stocks with automatic reinvestment plans or savings accounts, for example – actually frustrate owners by removing funds that the owners never lost track of, but merely were letting sit and grow.
A third trend is evidenced by those states that limit owners’ ability to receive interest on abandoned funds once claimed or aggressively fighting back owner challenges to such laws. Texas, for example, refused to allow an individual to claim the interest earned by the state on property returned to that individual, a decision left standing by no less an authority than the United States Supreme Court.10 Statutorily, California is entitled to retain any interest it may earn on unclaimed property and is not required to pay that interest to the owner, a provision recently upheld by the California Court of Appeal.11 Recent case law in this regard may indicate that courts are more willing to find such statutes unconstitutional, even amongst stern state opposition. Specifically, the Illinois Supreme Court, although finding that the owner was not entitled to the interest earned by the state on unclaimed funds, did concede that in certain circumstances, such a recovery may be constitutionally required.12 Perhaps even more significant, the Ohio Supreme Court recently held that an Ohio unclaimed property statute which prohibited owners from collecting interest on unclaimed fund was unconstitutional.13
In light of these trends, it is relevant and important to ask the question whether states have forgotten the purposes of their own unclaimed property laws. Moving away from the laws stated purpose could have a drastic impact on individuals, holders, and the direction of the law. With the budget crisis confounding states, this concern should be more real now, than ever. The temptation to regard unclaimed property as an additional source of revenue may always be lurking. State officials, like the rest of us, know that we should all be eating vegetables, but oh, those doughnuts taste so good!