State’s Unclaimed Property Law. California law requires banks, insurance companies, and other types of entities (“holders”) to transfer personal property considered abandoned to the State Controller’s Office (SCO). Properties are considered abandoned or “unclaimed” if their owners have had no contact with the holders of the property for a specified period of time, in most cases three years. The state “escheats” (in other words, takes temporary title in) these properties and maintains an indefinite obligation to reunite the property with their owners, should they come forth and make a claim.
Unclaimed Property Includes Stocks and Other Securities. Unclaimed properties include cash properties (such as those held in bank checking and savings accounts) and security properties (such as stocks and bonds). After a period specified in statute (described later), SCO converts securities to cash. Security properties that have not yet been liquidated to cash represent about 5 percent of total unclaimed property held by the SCO. When owners claim security properties, they are either given the property itself, or if it has been liquidated to cash, the cash value of the property at the time of its sale. An owner is also entitled to dividends, interest, or other increments of income that have accrued to a security while the property is held by the SCO and remains in security form.
Historically, State Sold Shares Upon Escheat, Had Few Notifications for Owners. Before 2007, owners were only notified about their unclaimed property after it had transferred to the state. In Taylor v. Westly (2007), a federal circuit court ruled that state efforts to notify owners failed to meet due process requirements, in part because the state’s procedures failed to notify many property owners prior to escheat. In July 2007, the court issued an injunction that prevented the state from escheating property until these procedures were revised to meet due process obligations.
Current Law Now Requires Multiple Notifications, Including in Pre‑Escheat Process. As part of the 2007‑08 budget package, Chapter 179 of 2007 (SB 86, Budget Committee) responded to the court’s injunction, changing the state’s escheat and notification procedures. Under these revised requirements, both the holder and the SCO notify owners prior to escheat. First, the holder notifies owners with properties valued at $50 or more (and for whom the holder has an address). Holders must do this between six months and one year prior to their deadline to report the property to the SCO (the “holder report”). Within 165 days of the holder report, SCO notifies owners that their property will escheat to the state. If the owner does not reestablish contact with the holder at any point in this process, the property escheats to the state. After the state made these changes, the federal court found the state had satisfied its due process requirements and lifted the injunction in October 2007.
SCO Also Publishes Newspaper Notifications. Current law also requires the SCO to publish a notice about unclaimed properties in a newspaper of “general circulation” within one year of escheat. Decades ago, these notices specified apparent owners by name, but modern notices do not identify individual owners or properties. Rather, they direct the public at large to search the SCO’s public database—www.claimit.ca.gov—or call the unclaimed property call center to determine whether they have unclaimed property. In 2016, the SCO ran advertisements in 40 physical newspapers in California, reaching a circulation of about 4.3 million. The SCO spent about $30,000 on these advertisements. The 2016‑17 Budget Bill included routine provisional language that prohibits the SCO from spending more than $61,000 per year to inform the public about the unclaimed property program.
State Law Requires the SCO to Hold Securities for 18 Months to 20 Months. Senate Bill 86 requires the SCO to wait at least 18 months after the holder report before the securities may be sold. The law also requires the SCO to sell the securities within 20 months of the holder report, but the SCO is not always able to meet this requirement.
Waiting Period Results in Increased Ongoing Workload for the SCO. The 18 month waiting period results in a significant workload for the SCO. Unlike cash properties, the SCO must actively manage securities. For example, while the SCO holds a security, it must record corporate actions that affect the value and structure of that security. These corporate actions include stock splits, mergers, class conversions, exchanges, and acquisitions. The SCO also must record dividends or other income gains on the property. This ensures that, when an owner claims the property, the SCO returns the appropriate value of the property. Over the last few years, the SCO’s workload has grown as its securities portfolio has grown.
SCO Faces Significant Workload Backlog for Older Securities. The SCO cannot sell a security or pay a claim related to a security property before all corporate actions are posted and issues are reconciled on that security. As a result, the SCO faces a workload backlog of corporate actions that must be recorded on securities that have generally been in the SCO’s possession for more than 20 months. In this backlog of work, SCO staff must post past corporate actions, reconcile old security issues against broker statements, review additional funds that have been earned on already paid claims, and verify and correct data in the securities portfolio. In some cases, SCO staff can spend many hours reconciling actions for a single security property.
SCO Received Resources in 2014‑15 Budget to Address Backlog. In 2014‑15, the SCO received 23.1 three‑year limited‑term positions. These positions were requested, in large part, to address the growing backlog of corporate actions. Since then, the SCO has somewhat reduced, but has not eliminated, the backlog. Meanwhile, the SCO’s current securities workload continues to grow.
Governor Proposes $3 Million to Manage and Maintain the Securities Portfolio. The Governor’s 2017‑18 budget includes about $3 million to make the 23.1 positions, approved on a limited‑term basis in 2014‑15, permanent. (The Unclaimed Property Division—UPD—of the SCO has a total of 35.5 authorized positions who have workload related to the security properties.) Of these proposed positions, 15.1 would continue to conduct activities related to the securities backlog—including posting corporate actions, reconciling issues, and verifying portfolio data—and keeping corporate actions current for recently escheated securities. The remaining positions would provide managerial oversight to address more complex security reconciliations and provide administrative oversight.
Without a Change in Law, Additional Funds Will Likely Be Necessary in Future Years. The proposed level of resources appears to be insufficient to both maintain existing workload and to fully address the workload backlog. As the SCO’s security workload continues to grow, with more complex corporate actions and a growing security portfolio, the proposed level of resources may be inadequate in the future.
Statute, but Not Case Law, Requires State to Wait 18 Months Before Selling Securities. In an effort to improve the unclaimed property program in 2007, the state made various changes to it. This included the requirement that the SCO hold security properties for at least 18 months after the holder’s report before selling them. However, the court indicated that it is the pre‑escheat notices, not this waiting period or the newspaper notices, that fulfill the state’s due process obligations. As a result, there is a strong argument the Legislature may change the SCO’s statutory obligation to wait these 18 months.
Most Security Shares Are Reunited With Owners in Pre‑Escheat Process. Some may argue that the 18‑month waiting period increases the likelihood that owners can recoup their security properties “undistributed,” or in the form remitted before being converted to cash. (In general, at least some owners would rather be reunited with a property in its original form, not its cash value.) However, this 18‑month waiting period assists only a small minority of properties. In 2014‑15, the most recent year for which complete data are available, there were 36.6 million shares of securities reconnected or reunited with owners in their original form. Of those shares returned in their original form, the vast majority, 94 percent, were returned by holders in the pre‑escheat process. About 6 percent were returned by the SCO after escheat.
Some Owners Win, and Others Lose, Under the Current System. The value of a security can go up—or down—after it is liquidated to cash by the SCO. On average, certain owners may realize gains as a result of the 18‑month waiting period as those securities rise in value or earn income in the form of interest, dividends, and other payments. However, other securities may lose value, or even become worthless, over this period.
Cost of Holding Securities for 18 Months May Outweigh Benefits. Given the considerations outlined here, it is not clear that the benefits to some property owners from the 18‑month waiting period outweigh the costs to the state of holding these properties. There are likely better, more cost‑effective ways for the state to spend this money—potentially reuniting more property with owners. (Our February 2015 report, Unclaimed Property: Rethinking the State’s Lost and Found Program, outlined a variety of options for the state to reunite more property with owners.)
Recommend Legislature Change Statute to Allow UPD to Sell Securities Upon Escheat. We recommend the Legislature amend paragraph (b) of Section 1563 of the Code of Civil Procedure to allow the Controller to sell securities immediately upon escheat (but maintain the requirement to sell all securities within 20 months). This change could significantly reduce the SCO’s ongoing securities workload, allowing the department to focus on reducing—and eventually eliminating—the backlog of security issues. Because most security shares are reconnected with owners in the pre‑escheat process, this change would only affect a small minority of shares.
Recommend the Legislature Approve Limited‑Term Funding to Address Backlog. To continue to address the workload backlog associated with securities, we recommend the Legislature approve all 23.1 positions with three‑year limited‑term funding. With reduced ongoing workload, we believe the SCO should be able to fully address the backlog. In 2020‑21, the SCO can return to the Legislature with a smaller proposal that addresses whatever its ongoing, and significantly reduced, workload is at that time.
New System Would Still Allow Some Flexibility for the SCO. Under its current system, the SCO does not sell a security if an owner has indicated interest in the property (for example, by beginning to complete an online claim for the property). By allowing, but not requiring, the SCO to sell properties immediately upon escheat, the SCO could continue this practice, thereby increasing the opportunities to reunite owners with their undisturbed properties.
Recommend the Legislature Give the SCO More Flexibility in Newspaper Notifications. Current law requires the SCO to advertise about unclaimed property in newspapers of general circulation. Californians, however, increasingly get more of their news and information from television and the internet than from physical newspapers. The Legislature could give the SCO more flexibility in how to spend these advertising dollars, allowing the department to advertise more through other media, such as radio, television, social media, and other internet advertising. (A recently proposed bill, AB 772 [Daly], addresses similar objectives.) This flexibility could allow the SCO to more efficiently and effectively increase awareness about the unclaimed property program.