States Going After Billions In Unclaimed Property To Fill Coffers

SAN FRANCISCO (CBS/AP) -- When Americans lose track of money -- in old, neglected bank accounts, paychecks they forgot to cash, unredeemed life insurance policies and the like -- state governments are increasingly aggressive in taking control of the cash.

Now, with those efforts swelling state coffers by more than $40 billion and lawmakers using some of it to patch budget holes, new skirmishes are breaking out between states and companies with their own interest in holding on to the unclaimed property.

California alone has more than $8 billion in unclaimed property belonging to 32.5 million individuals and organizations, according to the State Controller's office.

Find Out If You Have Unclaimed Property In California

Companies accuse states of overreaching, imposing what amounts to a "stealth tax." State officials counter the businesses are more concerned with keeping the assets themselves. Both sides acknowledge it's not their money, while pointing out that many owners are unlikely ever to come forward.

Critics say those rightful owners too often get short shrift.

"The analogy is to finding somebody's lost wallet. In Minnesota, anyway, we give people their wallets back. It's just what we do here. But it's not what the state is doing," said Joe Atkins, a state representative from outside St. Paul who last year introduced a bill calling for increased funding to track down property owners and publicize the state's program to return unclaimed assets.

While other states, too, have increased efforts to reunite owners with their property -- some even setting up state fair booths to alert claimants -- others are faulted for doing too little. And many states have changed laws to let them take control of more unclaimed property more quickly.

"The real motivation is for the state to get money for the state to use when they're in financial difficulty," said Joseph M. Belth, an emeritus professor of insurance at Indiana University who has followed states' pursuit of unclaimed life insurance payouts. "They want to get their hands on the money."

The assets in state lost-and-found programs have been growing rapidly for more than a decade. Every state keeps a list of those whose property it has claimed. California alone has 28.5 million on its list.

States stepped up pursuit of unclaimed property in the late 1990s, after restructuring by insurance companies exposed those firms' inability to locate many policy holders. Many states have hired auditing firms to scrutinize the books of insurers, retailers and others, paying them multimillion-dollar fees for unclaimed property they have brought in.

The experience of two medical researchers who recently sued Delaware officials highlights the stakes.

Gilles Gosselin and Jean Louis Imbach, French chemists who developed a drug for treating hepatitis B, became major shareholders of a company incorporated in Delaware to develop it. In 2009, without contacting them, Delaware took control of their stock, deeming it abandoned. Next, the state sold the shares for $1.7 million.

As Gosselin and Imbach worked to track down their shares, the drug company was acquired by pharmaceutical giant Merck & Co., in a 2014 deal that valued the researchers' stock at $13.7 million. Delaware turned over proceeds of its earlier stock sale, but they took a $12 million hit.

"All of this could've been easily avoided if someone just sent a letter," said Ethan Millar, a Los Angeles lawyer representing the researchers, who is convinced other overseas owners of U.S. stock are in for a similar shock. "These people are eventually going to discover one day that all these shares they thought they had, they don't anymore."

Most people named on unclaimed property lists don't even realize they're entitled to missing money. It could be an inheritance they weren't aware of, property left in safe deposit boxes or mutual funds entrusted to a broker with a mistaken address, even unspent gift cards from retailers. Most are owed less than $100, though some amounts are far higher.

Many are genuinely difficult for states to find. But others are household names: NBA star Kobe Bryant and House Minority Leader Nancy Pelosi on California's list, and Red Sox slugger David Ortiz on Massachusetts'.

In all, state governments have $41.7 billion in unclaimed property on their books, according to the National Association of Unclaimed Property Administrators. Changes in law have accelerated the collections; for example:

-- Last year, Pennsylvania lawmakers shortened from five years to three the period before bank accounts, insurance policies and many other types of property can be considered abandoned. Money claimed by the state jumped to $669 million from $265 million the year before. Until the change, Pennsylvania returned about 43 percent of what it collected each year; afterward, payouts rose only slightly.

"It's a one-time source of revenue that helped us to meet our balanced budget requirement," said Greg Jordan, executive director of the state Senate Appropriations Committee.

But Pennsylvania's change in law merely followed the lead of two dozen other states.

-- Before 2008, Delaware -- with a national reputation as the most aggressive in going after unclaimed property -- waited until mail sent to owners of stock was returned as undeliverable before declaring their property abandoned. But that year, it began requiring only that shareholders have no contact with their account for three years, without making any effort to reach them, an example followed by other states.

-- Minnesota used to send letters directly to state residents telling them when the state had their money. But lawmakers eliminated that provision in 2005, while also ditching the requirement to publish the names of property owners in newspapers.

On the other hand, Minnesota is one of several states where officials set up booths at their state fairs to inform people of the missing money and help them file claims, efforts that have helped boost its return rate over the last decade to about 45 percent of what it takes in.

But the state -- which took in $72.7 million in unclaimed property last year -- still does too little to find owners, said Atkins, the Minnesota legislator.

He said he stumbled on the issue last fall when a friend sitting next to him at a youth basketball game mentioned the state had taken control of $700 belonging to his grandmother. Like other unclaimed property, it went directly to the state's general fund.

Atkins decided to search the state's unclaimed assets list for people in his district. In three weeks, working 10 minutes a day, Atkins said he easily located people holding claims for $309,363.

"These are people I see at the grocery store. They're not hard to find. They live down the street from me," Atkins said.

To return property, though, costs money, said Michael Rothman, Minnesota's commerce commissioner. Rothman said he wants legislators to double or triple funding for the unclaimed property program to hire finders who will search for people and to step up advertising and outreach.

"It's great to have a goal, but if you don't give the resources to do it, we can't achieve it," Rothman said.

For those unaware that the state has claimed their property, "it's a stealth tax, I'd guess you'd call it, but a very arbitrary one," said Ferdinand Hogroian of the Council on State Taxation, which represents big companies in pushing for uniformity in unclaimed property laws.

But state officials argue that businesses frequently do not act in the best interest of consumers.

Many insurance firms, for example, search death records to determine if they can cut off payments on annuities they've sold. But until recent settlements between large insurers and a number of states, the companies did not check for deaths that would necessitate payments on old life insurance policies -- and some still do not do so.

"There is the potential for companies to do as little as possible to get the money back to the owners," Vermont State Treasurer Beth Pearce said. "We would like to see more due diligence by the holders, so it gets to the individuals before it even becomes unclaimed property."

Consumers' right to claim missing money never expires, and states keep reserves to pay expected claims, even as legislators spend a portion of the funds. On average, states' net of unclaimed property amounts to a small part of their budgets -- about half a percent as of 2011, according to NAUPA.

Still, states vary. Delaware has turned unclaimed property into its third largest source of revenue. Last year, it brought in $514 million, accounting for more than 13 percent of the budget.

But Delaware's aggressive pursuit of that revenue -- often via audits delving back decades -- has angered many companies. The Council On State Taxation gave Delaware its lowest grades -- F and D minus -- in two recent rankings of states' unclaimed property laws.

Some complaints have focused on Kelmar Associates, a Massachusetts-based auditing firm which at times handled more than three-fourths of Delaware's business, earning more than $100 million in contingency fees and other payments since 2013.

With criticism mounting, Delaware legislators last year embraced a law giving companies the right to enter into a voluntary agreement before an audit and shortening the period that audits can cover. And they limited any single auditor to no more than half the state's business.

Delaware also has increased the percentage of unclaimed property it returns to owners.

In 2011, a state-by-state table showed Delaware paying out less than 5 percent of the $427 million it received that year, a time when states were returning an average 34 percent. David Gregor, the deputy finance secretary who runs Delaware's unclaimed property program, said the return rate has risen to about 20 percent.

Though business groups say Delaware needs to do more, state officials sound content with steps they've taken.

Gregor said the state has been evenhanded -- "preserving our ability to enforce things when companies really have a responsibility, but also being business friendly."

Several companies have taken Delaware to court over audits.

One lawsuit was filed recently by Houston-based Plains All American Pipeline even before an audit was fully under way. The suit says estimation procedures used by Kelmar are "pure guesses and speculations."

"Kelmar first determines the size of the target company to determine how much revenue it may be able to collect, and second, goes back almost 35 years in time to try to confiscate what it can because it is paid a contingent fee based on the size of the confiscation," the lawsuit says.

Gregor and Kelmar's president, Mark McQuillen, declined comment on the lawsuits but defended the state's arrangements with the company and the auditing procedures.

"Delaware certainly feels the things they are doing are appropriate, and I feel they're appropriate," McQuillen said.

A Chicago lawyer, Matthew Mock, said some of his corporate clients have left Delaware because of the unclaimed property procedures. He acknowledged that the state has taken steps to address the complaints, but predicted that the broad changes sought by businesses would come only through court rulings.

"These companies have nothing to lose and everything to gain," he said.

California, meanwhile, continues to battle a lawsuit filed in 2001, accusing the state of aggressively seizing property and doing too little to find and notify owners. In 2007, a federal court temporarily shut down the state's property claims process, forcing legislators to pass a law to fix it.

Yet since the process restarted, property claimed by California has swelled from $4.1 billion to $7.6 billion, leading to criticism that the changes did not go far enough.

"In particular, because property not reunited with owners becomes state general fund revenue, the unclaimed property law creates an incentive for the state to reunite less property with owners," California's non-partisan Legislative Analyst's Office concluded earlier this year.

Months after California changed its law, Mary Ann Steele, 68, of Sacramento, sought to claim property that belonged to her adoptive father, John Fred Hill, who died in 1981. Years earlier he had reviewed with her paperwork detailing cash and stock holdings, and his will lists her as his heir.

"He did not leave that to the state. He left that to me and my children," she says, though she's uncertain of the assets' final value.

A few years ago, she spotted Hill's name on the state's unclaimed property site. An employee in the state controller's office, she says, told her the state had destroyed the contents of Hill's safe deposit box, which Steele believes contained his bank account books. The state, she says, refused to give her an accounting of the box's contents -- while issuing her two checks totalling $68.

At the controller's office, spokeswoman Taryn Kinney said staffers were not aware that a box belonging to Hill was ever claimed by the state. California used to auction such items and destroyed those deemed as not having commercial value, but stopped doing so in 2006, she said.

In March, the U.S. Court of Appeals in San Francisco ruled in the state's favor in a suit brought on behalf of Steele and other claimants. Their lawyer, William Palmer, has asked the U.S. Supreme Court to hear the case.

"You're unknown when they have your property, but you're known when it's time to tax you," Palmer said.

Kinney said the controller's office doesn't have the budget to step up search efforts for individual property owners.

Other states also have drawn criticism.

In Oklahoma, a lawsuit alleging the unclaimed property program amounts to a Ponzi scheme was dismissed in September. But those who brought it point out that lawmakers recently approved using $60 million in unclaimed property to balance the state budget.

"You cannot confiscate and appropriate the proceeds of a trust for the legislature to spend, but they've done it," said Mike Reynolds, a former Republican state representative behind the lawsuit against Treasurer Ken Miller, also a Republican.

Oklahoma officials point out that, with $100 million kept in reserve, they've never been unable to pay a claim. But the treasurer's office "disagrees with this legislature's overuse" of unclaimed property to pay state bills, said Tim Allen, deputy treasurer.

At the same time, Oklahoma is one of the states working to increase the amounts they return to consumers.

It began paying incentives to treasurer's employees in 2013 to encourage them to match more consumers with money it was holding. In the most recent fiscal year, it paid $86,000 in incentives, as money returned to consumers roughly doubled to $38.7 million. Oklahoma now returns about 45 percent of what it claims.

In Kentucky, Treasurer Todd Hollenbach has visited all 120 counties as part of his Treasure Finders program, which recruits local volunteers to comb through the state's database to look for names they recognize.

"It's amazing how quickly the calls start going out, and people start coming in," Hollenbach said.

His office says the $135 million he's returned during two four-year terms is more than the combined sum returned by his predecessors over 60 years. That payout represents about 40 percent of the $333 million in unclaimed property collected by Kentucky during that period.

Among the recent beneficiaries was Fred Meyer, a retired engineer from Louisville who had lost track of some Apple Inc. stock many years ago when it was valued at only $2 per share. The stock eventually was reported as unclaimed property and sold by the state in 2012; a few weeks ago Hollenbach called Meyer and said he'd be getting a check for $461,000.

"When Todd called, I thought it was a scam," Meyer said in a TV interview. "I was quite surprised."

"With other policy acts, you hope it's going to trickle down and benefit people, but you don't get to see it," Hollenbach said. "With unclaimed property, you can see the impact. It gives you that warm and fuzzy feeling that makes you glad you went into public service."

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