Unclaimed Property - States Turn to Robbery to Fix Budgets

As the economic crisis continues to spread, we are seeing more and more signs of states being in serious economic trouble. Last week, California’s Governor Arnold Schwarzenegger, declared a fiscal emergency, and the governor of New York has also warned of a coming budget crisis. Job losses are increasing, and the unemployment rate may very well go above 10% in the beginning of next year, which, by some definitions, would mean that we would be in a depression. One of the more instantly visible results of job losses in the American economy is state budget shortfalls, because tax revenue decreases dramatically when job losses occur. This also has a more direct effect on the daily lives of people, as they see services cut and libraries closed. In addition, states rely on loans and other types of financing for day-to-day operations, which is obviously highly questionable, but that source of liquidity has dried up. The states must, then, try to turn to other sources of revenue, and out of desperation, they have turned to something that most Americans have never heard of: unclaimed property.


Unclaimed property, sometimes called abandoned property, is governed by an old type of English law known as escheat. The King of England at some point in the middle ages declared that any property that does not have an owner belongs to him. For example, if someone died without heirs, the dead man’s house would become the property of the King. Fast forward a few hundred years and across the Atlantic, and we have the same laws still in place. Back in the 1970s, some people realized that the states actually had vast powers to seize all types of valuable property, and started promoting this idea. The idea was very attractive to politicians, because it could provide money for the state without them having to collect taxes. Sounds great, but where does the money come from?


Here’s a fact that should have a lot of people running to the bank: in every state, the state treasurer has the right to take your money right out of your savings account and put it in its own general fund, if you don’t touch your money in 5 years. Again, if there is no activity on the bank account for 5 years, meaning no withdrawals or deposits, the state can take your money. The same goes for stocks and contents of safe deposit boxes. The state is then usually required, by law, to publish your name somewhere in a local newspaper before they go ahead and use your money in the state budget. This is so that you can claim it back, but the states usually try to make it so that people never find out about this money.


This source of unclaimed property is nothing, though, compared to what the states get from uncashed checks. If an employer writes a check to an employee, and the employee forgets to cash it, the employer is supposed to give the money to the state after 5 years. If the employer does not do this, it becomes subject to stiff penalties, and must pay the original amount as well. The state gets the most money from starting audits of corporations. Most companies, like most Americans, have never heard of unclaimed property, so they are usually unprepared, which is what the states want. What happens in such an audit is that the corporation is contacted by the state, and is asked to provide information on voided checks going back 20 years. A check can be voided for a number of reasons, but the states usually consider any amount on any voided check as rightfully belonging to that state.


So, what happens then is that the state looks at how many voided checks the company has for a given year, and the assumes that the situation has been the same going back 20-30 years. Then it adds penalties and interest. This might be a little hard to grasp, but in essence what happens is that if a company, for example: writes 10 checks for $50, and the ten employees for whom the checks were for forget to cash them, then the company could have to pay several hundred thousand dollars to the state only five years afterwards!! This is no joke, this is legalized robbery, and I’ll provide some statistics below.


In light of the economic crisis, many states have stepped up their efforts to seize unclaimed property, and many of them have publicly stated this. Here are a few very recent examples from around the country:


Nevada - The state treasurer will “increase aggressive unclaimed property collection”. This year, Nevada was so aggressive in collecting that it more than doubled the amount it projected that it would be able to collect. So far, it has collected over $44M.


Washington State - “Increase collection to over $100M”. The state changed it’s laws specifically to be able to collect more money in recent years.


California - This state was so aggressive in seizing money from people’s bank accounts and safe deposit boxes, that it was ordered by an injunction to stop all collection efforts. Among many other things, the state seized stock certificates that a man living in England had put in a safe deposit box in California. The man was going to use the money when he retired, and never thought that the state of California would steal it. He sued the state, and the case Taylor v. Chiang, consequently changed a lot of California’s law on the subject.


California currently holds $5 Billion (!) of these funds, and collects an average of $400M per year.


Delaware - This state is the worst offender. Because almost half of U.S. corporations are incorporated in Delaware, this state can perform audits on companies all over the country. Delaware seizes unclaimed checks, gift certificates, unused airplane tickets and much more, from people all over the country. 10% of Delaware’s income comes from unclaimed property! At one time, Delaware was trying to define tips for maids in hotel rooms as unclaimed property between the time that the guest left them there to when the maid picked it up. Before the maid picked the money up, the state treasurer of Delaware could have gone in and pinched it first, according to the state. Interesting policies.


This type of behavior is yet another piece of evidence of how twisted both local and federal economic policies have become. Should grandma’s pearls in the safe deposit box or some poor teenager’s forgotten check after a summer job be what provides us with roads, buses and libraries? What may be even worse is that this type of revenue collection leads to a situation where politicians don’t need to make as many tough choices, and are hence able to abdicate from responsibility for a sustainable economic situation. Relying on private charities for poverty relief and other related issues has the same effect.