In the last week, several developments in Delaware highlight the state's reliance on unclaimed property revenues in the state's budgeting process. Typically, unclaimed property is the third largest revenue source for Delaware and goes directly into the state's general fund. That money is proving to be an unreliable source for the state and now the pressure is on state legislators and administrators to find solutions.
The Delaware Economic and Financial Advisory Council's (DEFAC) released its latest budget projections for the state on April 17. Abandoned and unclaimed property collection projections were down due to "softer enforcement collections" and other refunds were up due to abandoned property owner claims. DEFAC is predicting a decrease in abandoned property revenue of approximately $30 million. Secretary of Finance Tom Cook attributes the decrease to enforcement and lack of annual compliance.
Secretary Cook blames part of the enforcement efforts on the change in the program's administrator, as Mark Udinski left the state and joined their contract auditor Kelmar last year. Cook says “we’ve had some changes in personnel and we are being challenged...”
Meanwhile, Senate Republicans are taking direct aim at Kelmar and other third-party contingent fee auditors, announcing their intention to introduce a bill that would prohibit the state from paying contingent fees on unclaimed property audits. In 2013, Kelmar was paid almost 10% of collections with fees of $53.4 million. Over the past six years, lawmakers peg Kelmar's fees at $116 million. Senate Minority Whip Greg Lavelle said "that’s an obscene amount of money that just does not pass the smell test for me. This is a business performing a service, and they should be compensated for that service, but there has to be limits.” The Delaware State Chamber of Commerce also criticized the contract audit process, saying that "outsourcing a governmental audit function and paying tens of millions of dollars to out of state contractors, rather than training and employing Delawareans to perform what audit work is fairly required, cannot continue."
In addition to prohibiting contingent fees on unclaimed property audits, the Republican bill would prohibit state employees, like Udinski, who work in the unclaimed property program from working for a private audit firm for a period of two years after leaving state service. Furthermore, audit firms would have to re-bid on audit contracts every three years.
Corporate Compliance in Delaware
Secretary Cook also blamed the lack of annual compliance on companies refusing to take part in the Department of State's voluntary disclosure program. The VDA program promises that in exchange for coming forward with late unclaimed property the state will waive penalties and interest associated with that property. Furthermore, the state will not audit companies that continue with annual compliance after the initial reporting. Companies have been hesitant to sign up for a program that no one has experience completing or know what the process will entail. In addition, Delaware went on an audit binge in 2013, with Udinski issuing hundreds of audit notices just prior to leaving the state's employment. Companies that are currently under audit by the Department of Finance are not eligible for the Department of State's Voluntary Disclosure Program.
Delaware officials also either fail to recognize or ignore that as more companies establish compliance programs, the state will receive less in unclaimed property from the compliance programs. Under the reporting priority rules, companies are to report to the owner's state, as established by the company's books and records. Only if there is no name or address does the property go to the state of incorporation. Under a proper compliance program, a company will be reporting to all 50 states with names and addresses. With the state ranking 45th in total population, Delaware will receive far less in unclaimed property and when it does receive property, it will be more likely to be claimed by residents as the property will have identifying information. Compliance programs are also the best defense against a large audit assessment.
Finally, as noted by the Chamber of Commerce, companies now have many other choices of states to incorporate, particularly their operating entities. As has been previously discussed in Lost That Loving Feeling in Delaware, Barganier has long recommended that companies choose other states to incorporate in due to the state's anti-business practices in unclaimed property. Unclaimed property audits can potentially wipe out an entire quarter's worth of profit, as it did to Travelzoo in the third quarter of 2013.
Increasing Owner Claims
David Gregor, deputy secretary of Finance and State Escheat, says “Laws are on the books — the U.S Supreme Court said that money doesn’t belong to the corporations, that it doesn’t belong to them it should be used for public good.” This point-of-view also misses the fact that unclaimed property programs are generally intended to reunite the property with its rightful owner, not to be a source of revenue for the states. As noted above, part of the budget forecast reflects additional owner claims on unclaimed property. According to an official press release from the Department of Finance, as of March 6, 2014, the the state fulfilled more than 9,700 claims for unclaimed property having a total value of $83.0 million. This compares to Fiscal 2013’s full-year total of 3,047 claims valued at $19.2 million.
Barganier has provided tips for searching for your unclaimed property and how to avoid your property from becoming unclaimed property.