Generate Additional State Revenue From Unclaimed Property

The Legislature should make several changes to its policies regarding unclaimed property that would generate additional state revenue.

The mission of the State Treasury s Unclaimed Property Division (UPD) is to collect reported unclaimed property for Texas citizens, help join owners with their property and conduct audit and enforcement activities to ensure compliance with unclaimed property laws.

All proceeds from unclaimed property are deposited in the Unclaimed Money Fund, 551. This fund is subject to strict safe investment guidelines. Acceptable fund investments include U.S. government securities and the highest-rated commercial paper. Interes t generated from this fund is automatically deposited monthly into the General Revenue Fund. Principal deposited into Fund 551 is split once a year between general revenue and the Foundation School Fund, with a small percen tage designated for the Ethics Commission. Fund 551 also pays UPD s operating expenses, budgeted at $4.2 million in fiscal 1993, and property claims, budgeted at $30 million in the same year.

Investment authority for this fund does not include prudent person investment authority (PPIA), which, for instance, dictates investment practices for the state s retirement systems and endowment funds. However, the Unclaimed Money Fund receives unclaimed property in the form of stocks and bonds which, because the fund has no PPIA, cannot be reinvested. A greater return on these instruments could be generated if reinvestment authority was granted for these stocks and bonds.

Texas has 150 different types of unclaimed property, most of which are negotiable instruments or otherwise easily converted to cash. Claimed property is disbursed by UPD to individuals or estates. The state s average fiscal 1993 cost to process a claim is $12; in fiscal 1994 and 1995 the average cost is projected at $10.80 per claim. 1

Texas is a custodial state, which means the state acts as trustee for the property forever unless it is claimed by a legal owner. This is the common pattern among states; only one state, New Hampshire, is a pure escheat state, meaning that some entity assumes ownership of unclaimed property after a set time period. (By New Hampshire law, after 24 months unclaimed property is legally transferred by court order to state or county ownership.)

Texas does not pay interest to owners of unclaimed property or charge a handling fee. Other states vary in applying these practices.

Recent federal statutes mandate that all holders of unclaimed property report and remit property in November of each year. Previously, holders reported property in November and remitted it in May. The change allows states to receive property six months ear lier, generating additional interest. Texas additional interest due to the earlier remit time is projected at $1.9 million in fiscal 1993 and $2 million in fiscal 1994 and 1995. 2 Other cha nges due to this legislation will affect the handling of these assets. For example, UPD projects that the volume of claims paid may double because the new legislation allows newly-received unclaimed property to be advertised one year earlier.

UPD conducts a major advertising campaign once a year in an effort to reach unclaimed property owners; property received in November is advertised the following March. The division s publication, usually totalling about 125,000 names, includes the last known owner and the holder the property was received from. However, all safety deposit box contents and stocks and bonds are listed. The sale of advertising is not permitted in this publication, and only property valued at $50 or more is listed. UPD maintains a toll-free phone bank so that interested parties can call in and check on property; th e phone bank is open for about six weeks following publication of the property listing. Costs for the publication and phone bank amount to about $600,000, without cost recovery. UPD representatives attend large gatherings such as the state fair each year and set up booths allowing people to inquire about unclaimed property.

A. The Legislature should revise the Unclaimed Money Fund statute to grant the Unclaimed Property Division (UPD) prudent person investment authority, so that proceeds from unclaimed stocks and bonds can be reinvested.

The UPD should be able to maintain and manage a portfolio of stocks and bonds functioning under the PPIA guidelines currently followed by Texas major endowment funds. Stocks and bonds would be purchased from the proceeds of unclaimed property stock. About $15 million worth of unclaimed property in stocks and bonds would be available for reinvestment in fiscal 1994, with an estimated influx of $2.5 million annually thereafter. 3

Unclaimed property stocks and bonds could be reinvested after one year, during which time the property would be advertised in the annual UPD major publication.

An investment account should b e created within Fund 551 to prevent allocation and disbursement of these funds to general revenue and the Foundation School Fund. Interest generated should be used to defray program costs. This should reduce general revenue appropriations for UPD by the a mount of the estimated cost recovery.

B. UPD should assess the average cost of processing unclaimed property claims against each claim paid.

The projected average cost of processing a claim in fiscal 1994 and 1995 is $10.80; the number of claims exp ected is 26,100 per year. Charging owners of unclaimed property for the cost of processing their claim when ownership is reinstated will allow the claims processing area to recover most of its costs. The handling fee is recommended for claims valued at $50 or more.

C. The Legislature should grant the Treasury authority to allow advertising in their major UPD publication.

This publication and its associated phone bank cost the state about $600,000 each year. As production of the publication is contract ed out, only minor changes in the request for proposal (RFP) would be required to implement this recommendation. The RFP also would include controls on the type of advertising allowed in the publication.

Texans pay the operating costs of this program through their tax dollars. Meeting customer service demands regarding unclaimed property should not require additional support from taxpayers. Charging a processing fee on paid claims should pay more than 80 p ercent of the associated program costs.

PPIA also could provide means to fund UPD and possibly the entire Treasury at some point in the future.

Unclaimed property in the form of stocks and bonds would still be held for one year and advertised in the March publication. Customer service policies would not be affected. Rightful owners would still be able to apply for and receive the value of their st ocks and bonds, as under the current system. Allowing newspaper distributors to charge for advertising in UPD s major publication could result in total cost recovery.

Fiscal Impact
The fiscal impact estimate is composed of three items interest generated from stock and bond reinvestment, publication cost recovery through advertising and claim handling fees. Implementation is assumed to begin September 1, 1993. Unclaimed Money Fund dis bursements include 5 percent to the State Ethics Fund, with the remaining 95 percent divided equally between general revenue and the Foundation School Fund. To achieve these savings, the Treasury s UPD appropriat ion should be reduced to reflect the estimated cost recovery.

Gain to the Gain to the Gain to the Total Gain to
Fiscal General Revenue Foundation State Ethics All Dedicated Change
Year Fund 001 School Fund 193 Account 104 Accounts or Funds in FTEs

1994 $ 747,000 $ 747,000 $ 79,000 $1,573,000 0
1995 931,000 931,000 98,000 1,960,000 0
1996 1,086,000 1,086,000 114,000 2,286,000 0
1997 1,173,000 1,173,000 123,000 2,469,000 0
1998 1,246,000 1,246,000 131,000 2,623,000 0

1 Written re sponse by David Nesenholz, Budget Director, State Treasury, December 7, 1992, p. 2; and State Treasury, Legislative Appropriation Request for Fiscal Years 1994 and 1995 (Austin, Texas, 1992), p.11.
2 Nesenholz, p. 1.
3 Interview with John Bell, Deputy Treasurer, December 11 and 14, 1992.