The Inner Workings of Unclaimed Property as State Revenue - A Follow Up on Michigan

As we briefly mentioned earlier, Michigan is attempting to increase state revenue by, among other things, making changes to its unclaimed property laws.  By way of background, Michigan is one of several states whose constitution requires a balanced budget.  And, of course, the current economic environment is decreasing the amount of state revenue collected through taxes and discretionary fees, while at the same time increasing the demand for many state services.  According to recent reports, it appears that the Michigan lawmakers have reached a deal in principle on the Governor's budget, and that significant changes to Michigan's unclaimed property act will likely become law.

Neither changes to unclaimed property laws in general, nor the shortening of dormancy periods in particular, are particularly novel or extreme concepts.  An analysis of the Governor's budget proposals prepared by the Michigan House Fiscal Agency, however, provides a rare insight into how unclaimed property is held and accounted for by the state.  In all, the HFA concluded that shortening the dormancy period for all property types to 3 years (down from 5 years for most property types, and up to 15 years for traveler's checks) would provide the state with some $229 million in new revenue over the next two years.  In fact, the report states that shortening the dormancy period for traveler's checks to 3 years will alone account for more than $60 million in additional revenue.  While the desire to increase revenue is a logical motive for changing unclaimed property laws, it is often an unstated one.  States have at times focused on raising revenue through unclaimed property at their peril, as evidenced by a federal court's decision last year to invalidate Kentucky's attempt to shorten its dormancy period for traveler's checks.  Thus, even if these changes pass the legislature, that may not be the end of the story.

The HFA analysis is also notable for its discussion of the "reserve factor;" that is, the percentage of annual unclaimed property collections that is actually set aside for the payment of claims.  According to the analysis, the normal reserve factor used by the Michigan Department of Treasury is 60% to 65%, and the reserve factor for the new property brought in by the law changes would be 40%.  In other words, about 60 cents of every dollar brought in as unclaimed property would be immediately used as general revenue (though, as the report recognizes, the state is legally obligated to honor all valid claims).  While this percentage seems like more than enough to honor valid claims, it is nonetheless striking that more than half of the money turned over by holders is placed immediately into state revenue.

Popular Posts