BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 212 (Lowenthal) - Unclaimed property. Amended: June 24, 2013 Policy Vote: Jud 4-2 Urgency: No Mandate: No Hearing Date: August 12, 2013 Consultant: Mark McKenzie This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 212 would lower the threshold for reporting of the name and address of owners of property escheating to the state under the Unclaimed Property Law (UPL). Specifically, this bill would lower the threshold at which a holder of escheated property must report an owner's contact information to the State Controller's Office (SCO) from $50 to $25, beginning on July 1, 2014; items with a value under that threshold may be reported to the SCO in aggregate without an owner's contact information. Fiscal Impact: SCO costs of approximately $120,000 annually, beginning in 2014-15, to provide additional notices to owners of lower-valued property escheated to the state that was formerly included in the aggregate reporting without owner contact information (General Fund). The SCO estimates revenue losses of $12,544 in 2015-16, $92,544 in 2016-17, and $143,744 in 2017-18, with moderate ongoing growth, as a result of increased claims by owners of lower-valued property escheated to the state that was formerly included in the aggregate reporting without owner contact information (General Fund). Actual losses could be higher, depending on how much of the current aggregate property transferred to the state is valued over $25, and the claim rate for lower valued property. For example, if half of the aggregate property currently transferred to the state in a year has a value of $25 to $50, and the claim rate is one fourth of the overall first year claim rate for escheated property, the first year impact would be $30,400 (based on $12.8 million in aggregate property transferred to the state in 2011-12, and average overall first year claim AB 212 (Lowenthal) Page 1 rate of 1.9%) Background: Existing law, the UPL, generally requires financial institutions to transfer account balances to the SCO and deposited into the General Fund if the account has had no activity for three years and an owner of property does not respond to a specified due diligence notice. Other "holders" (such as insurance companies holding policies, publicly-traded companies holding stock and employers holding wages) are subject to similar transfer rules. After they are transferred, the accounts are managed by the SCO, and the account owners may apply to the state for return of their money and property. The purpose of the UPL is to return property to its rightful owners, prevent the holders of unclaimed property from transferring it into their business income, and provide a single source for owners to check for unclaimed property that may have been reported by holders. The SCO maintains an online database of unclaimed property through which owners of property may conduct searches and file claims. Existing law requires holders of property escheating to the state to report the name and last known address of an owner of property with a value of at least $50. Property with a value less than $50 may be reported in aggregate, without individual identifying information associated with each property. Over the last five years, the SCO has received $68 million in aggregate properties, and only about $33,000 was returned to owners over that period. In 2011-12, the most recent year for which data is available, over $12.8 million in aggregate property was transferred to the SCO. Since owner information is generally unavailable for aggregate property that escheats to the state, that property is not uploaded in the SCO's searchable unclaimed property database, which presents difficulties in reuniting owners with their property. This bill is intended to increase the ability of the SCO to succeed in that mission, and enable property owners to easily file claims for lower-valued property. Proposed Law: AB 312 would lower the threshold for holders of property escheating to the state to report and transfer that property in the aggregate as of July 1, 2014. Specifically, holders would be required to report a property owner's name and last known address for all property escheating to the state AB 212 (Lowenthal) Page 2 valued at $25 or higher, rather than $50 or higher. Property valued at under $25 may still be reported and transferred to the SCO in the aggregate. The bill would also clarify that a holder of property may impose a service charge of up to $2 to send a required due diligence notification to an owner of property, pursuant to existing law, but only if the owner's property has a value of over $2. Staff Comments: Lowering the threshold for aggregate reporting of property escheating to the state from $50 to $25 will enhance the SCO's ability to return unclaimed property to its rightful owner by requiring financial institutions and other holders of property to report owner information for individual property transferred to the state. Data on how much of the $12.8 million in aggregate property that escheated in 2011-12 had a value of $25 to $50 is unavailable, so it is difficult to accurately estimate the fiscal impact of lowering the threshold for aggregate reporting. The bill would, however, increase the number of claims paid by the SCO to owners of this unclaimed property, resulting in a corresponding loss to the General Fund. The SCO estimates a General Fund revenue loss of $12,544 in 2015-16 (beginning the year after the 2014 reporting period), $92,544 in 2016-17, and $143,744 in 2017-18 from increased claims paid as a result of the lower aggregate threshold. Using the aggregate amount reported in 2011-12, the SCO's estimate of claims in 2017-18 only represents a 1.1 percent increase in amounts claimed as a result of lowering the aggregate reporting threshold from $50 to $25. The current rate of successful payment of claims for all property that is reported to the SCO with owners' contact information is approximately 1.9 percent in the first year, which increases rapidly over the next several years, then drops by the fifth year back to around the same claim rate as year one. After about eight years the claim rate is negligible. Typically, a little over half of the property escheated to the state is ultimately claimed. Property with a lower value, however, is claimed at a much lower rate than the average overall claim rate since many owners do not deem it worth the time, cost, and effort. As such, the SCO estimates that in the first year of fiscal impacts, the bill will result in a doubling of the current average claims payment rate that applies to aggregate properties over the past five years. As noted above, only about $6,500 out of $13.6 million in aggregate AB 212 (Lowenthal) Page 3 properties were returned to owners on average in each of the past five years. Doubling the claims payment rate for the first year would result in a fiscal impact of $12,544 in 2015-16. Year two impacts would represent a higher second year claim rate applied to properties reported in the first year, plus the lower first year rate applied to properties reported in year two, resulting in a 2016-17 fiscal impact of $92,544. The impact would be compounded each year, resulting in moderate increases in each subsequent year. The SCO also indicates that it would incur annual costs of approximately $120,000 to send additional notices to owners of property since they will receive more owner data from holders of property escheating to the state. Although the SCO will receive contact information for more account owners, the process for uploading that data on the unclaimed property database and the process for filing electronic claims is automated and is not expected to result in increased SCO administrative costs.