Opinion

California Running Ponzi Scheme with Unclaimed Property Program

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Posted: Apr 22, 2018 12:01 AM
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California Running Ponzi Scheme with Unclaimed Property Program

Bernie Madoff became an infamous individual a decade ago for running what appears to be the largest Ponzi scheme in United States (and possibly world) history.  At some point his investment program stopped operating as a normal investment vehicle and just took the funds from new investors and paid returns to the old investors.  It all ended when the market crashed in 2008 and no new suckers were drawn into his web of deceit. California (and most likely your home state) is running its own Ponzi scheme with their Unclaimed Property program.  The question is when will their merry-go-round stop and the fraud be on full display for the world to see.  

Unclaimed property programs at the state level are based on a simple concept.  If a business has assets in their possession that belong to a customer and that customer has not claimed their asset for a set period of time, it has to be turned over to a state official and that state official will then notify the person of their lost asset.  In the state of California, the state controller operates this program which was established in 1959.  In the United States, it is estimated there is north of $58 billion in unclaimed property held by states.  But are they really being held?

In a recent letter to a client of mine, the State defined what they consider unclaimed property.  The letter says “Unclaimed property includes, but is not limited to, payroll checks, refunds, accounts receivable, credit balances, bank accounts, customer overpayments, money orders, traveler’s checks and insurance proceeds.”  

The letter goes on to threaten the business owner with the following statement in bold type:

If a business fails to report, pay or deliver unclaimed property with the time prescribed by law, it is liable for penalty and/or interest at the rate of 12 percent per annum.  

When the law was first passed in 1959, unclaimed assets were anything over 15 years old.  Then in 1976 that was changed to seven years; in 1988 it was changed to five years; and, in 1990, it was changed to the current three years.  It was not analyzed whether the program was best able to handle the issue.  If that would have been done, the State might have made a decision that the assets were better left in the hands of the business, requiring those businesses to track down the owner themselves and return the assets.

Government officials rarely think private enterprise can do better.  The question here is whether they had an ulterior motive.   In 1992, this clause was inserted into the California Civil Code 1564 (c): "At the end of each month, or more often if he or she deems it advisable, the Controller shall transfer all money in the Abandoned Property Account in excess of fifty thousand dollars ($50,000) to the General Fund. Before making this transfer, the Controller shall record the name and last known address of each person appearing from the holders’ report to be entitled to the escheated property and the name and last known address of each insured person or annuitant, and with respect to each policy or contract listed in the report of a life insurance corporation, its number, and the name of the corporation. The record shall be available for public inspection at all reasonable business hours."

Since most assets are cash, that means any monies identified and turned over to the state are quickly swept into the state general fund.  If there is a claim on a previously-listed asset the question is where does the money come from to pay that claim unless fresh money was coming into the fund from another unclaimed asset?

I spoke to the Taryn Kinney, public relations head for the California Controller’s office.  She told me the state of California did not take any assets from the Unclaimed Property fund.  I asked if that means if an asset is turned over to the state in 2018 and not claimed in 2118 it would still be there.  She said “Yes.” 

Then I did a little research and found out that the Unclaimed Property fund was the fifth largest source of revenue for the state of California.  I asked her how that could be and she stated over and over and over again that they transfer the funds.  When asked whether they took the funds or borrowed the funds, she said no they just transfer the funds.  

If the monies go into the general fund, which is a black hole from which nothing ever is seen again, then how are the funds still there for someone to collect 100 years from today?  In fact, in the fiscal year (California’s budget year runs from July 1 to June 30), I cited to her the general fund had received $378 million from unclaimed property. Kinney told me in the year that ended June 30, 2017, they had taken in $399 million.   

Kinney told me the fund stands at $8.6 billion, but how much is really there? I asked how much the State has cumulatively transferred over the years.   I received no answer so we do not know how much of that $8.6 billion is there to be claimed.  

The state always boasts how much is returned to people which in the last fiscal year was $313 million out of $765 million collected.  If you take the returned assets and money soaked out of the fund by the state, that leaves $53 million which is not in cash because the law says they must take all cash funds for the state purposes.  It makes you think the next law change will be to set up an auction house to sell the non-cash assets to go into the general fund.

Here is some food for thought: Though California returned 41% of the assets claimed last year, how hard are they really trying to return this money?  California has a high level of interest in taking assets away from businesses, but a low level of returning it to the owners.  Do they match the Unclaimed Property records to income tax files? That I can say clearly is a no.  

Their interest is in funding the state coffers which are always out of whack and ran a deficit of $1.6 billion in the last fiscal year.  Since California is running a budget deficit and has unfunded pension debt of over $100 billion, how motivated are public employees to get more of this money to the rightful owners since those funds would either decrease their revenue source or have to be paid out of the general fund?

If there was actually a better notification of the rightful owners, then the state would have to cough up money they don’t have or wait to take it from some other unclaimed property.  The money in the unclaimed property fund has even less than the social security fund.  At least with the social security fund they put IOUs in the fund. Here they do nothing.

The Unclaimed Property Fund in California has turned into a Ponzi scheme and this is being replicated in states across the country.  Keep an eye on your assets.  Don’t let these thieves steal it.