Tax revenue declines drive states to eye unclaimed property.

• Author: Peters, Robert
• Position: FINANCIAL MANAGEMENT

Though most finance executives pay little attention to unclaimed property, state-level economics will likely drive this issue into the forefront. For many companies, what was once a low-profile compliance matter could soon become a costly financial mess.

Financial executives usually think of unclaimed property in terms of uncashed payroll checks. But the concept actually covers any inactive property that technically belongs to a third party.

It includes dozens of property types, including unapplied customer payments, customer credits, voided payments, duplicate customer remittances, utility deposits and more. Unclaimed property liabilities can also result from transactions with any third party including customers, vendors, shareholders, bondholders, contractors and employees.

All states and several United States territories have rules governing unclaimed property that generally require unclaimed property holders to report and remit the property to the state after a dormancy period.

But the types of unclaimed property, dormancy periods and reporting procedures vary widely by jurisdiction. Corporations must comply with the unclaimed property laws of each state in which they have an employee, customer, supplier or stockholder.

For decades, state enforcement of unclaimed property laws was inconsistent. That changed when economic disruptions following 9/11 took a bite out of state tax revenues. Looking for new sources of funding, some state revenue directors introduced campaigns to enforce unclaimed property compliance. And their efforts have paid off. The Wall Street Journal reported earlier this year that state unclaimed property collections have grown to $5.1 billion in 2006 from $3.6 billion in 2003. Only about one-third of these funds are ever returned to their true owners.

Now with the economy slowing, corporate finance leaders can expect the unclaimed property juggernaut to pick up speed. The National Conference of State Legislatures is finding that weaker-than-expected revenue performance is putting new pressure on state budgets. Last fall, seven states faced a budget gap. By this spring, that number had more than doubled to 16, and 23 states expect a revenue shortfall next year.

Revenue alternatives are few. Many legislatures are cutting spending and tapping into state reserves, but these funds can only go so far. And lawmakers are reluctant to pass tax increases to their constituents, especially in an election year.

To these near-term economic problems, add the coming collision between the baby-boom retirement wave and unfunded state retirement liabilities. According to a 2006 survey by the National Association of State Retirement Administrators, the cumulative unfunded state pension liability is $337 billion.

While monthly data on the economy fluctuates and many trends have yet to play out, one thing is...