SENATE BUDGET AND APPROPRIATIONS COMMITTEE

STATEMENT TO

SENATE, No. 1557

with committee amendments

STATE OF NEW JERSEY

DATED: JUNE 6, 2002

      The Senate Budget and Appropriations Committee reports favorably and with committee amendments Senate Bill No. 1557.

      This bill amends the Uniform Unclaimed Property Act by shortening to three years the length of time (the "dormancy period") that private financial organizations and business associations may hold most types of property, absent contact with the owner, before the property is deemed abandoned, and custody transferred to the State.

      In general, this revision of the dormancy period aligns New Jersey's escheatment law with the laws of most other states. New Jersey is currently the only state in the nation with a 10-year dormancy period for checking and savings accounts. Most states have a five-year dormancy period for such accounts; a number have three-year periods. For other property as well, New Jersey's dormancy period is longer than that established in most states. The changes in dormancy period for particular types of property can be summarized as follows (section references are to the bill as amended):

      From 10 years to three years:

      ∙    Demand, savings and time deposits (including certificates of deposit) and funds advanced toward the purchase of shares in a mutual fund (Sec. 15).

      From seven years to three years:

      ∙    Money order (Sec. 11);

      ∙    Stock or other interest in a business association on which dividends or other distributions are paid (Sec. 21).

      From five years to three years:

      ∙    Property interests generally (Sec.4);

      ∙    Bank check or draft, cashier's check, certified check (Sec. 13);

      ∙    Proceeds of a life insurance policy or annuity (Sec. 18);

      ∙    Property held by a fiduciary (Sec. 26);

      ∙    Right to the return of funds under a credit memorandum, credit balance, security deposit, etc. (Sec. 35).

The revision in dormancy periods for an interest of any particular type is automatically applicable to any property right (e.g., payment of a stock dividend or bond interest) arising as a result of the underlying interest, N.J.S.A.46:30B-34 (amended by Sec. 24).

      The bill also extends the scope of the escheatment statute to types of property not covered under current law:

      ∙    Property distributable to policyholders by an insurance company pursuant to its demutualization (Sec. 20);

      ∙    Non-dividend-paying securities (Sec. 21);

      ∙    Bond or other debt of a business association paying periodic interest (Sec. 28);

      ∙    Non-traditional individual retirement accounts ("IRAs"), i.e., those for which no distribution is required under federal tax law (Sec. 30).

      The bill also clarifies the type of property that is to be transferred to the State after the dormancy period has fully elapsed:

      ∙    Shares in a dividend reinvestment plan ("DRIP") (Sec. 21);

      ∙    Mutual fund shares (Sec. 21).

Some property in these categories is already being transferred to the State, but is not clearly covered by the Unclaimed Property Act.

      The bill makes additional changes to the Act, as follows:

►          Revises the definition of "holder" to be consistent with the definition recently set forth by the New Jersey Supreme Court (Sec. 3g);

►          Provides that a record of the issuance of a check, draft or similar instrument is prima facie evidence of an obligation; coupled with the elapse of the dormancy period, this creates a presumption of abandonment. The bill provides that the holder has the burden of proving payment, discharge, or other defenses (Secs. 9 and 45);

►          Establishes or extends limitations on fees charged by a holder to administer a dormant account or pay a financial instrument that is presented late for payment (Secs. 6, 12, 14, 16 and 37);

►          Allows the State administrator of abandoned property to omit, from public notice of the administrator's receipt of such property, property valued at less than $100 (Secs. 41 and 43). The Division of Taxation currently advertises property valued at more than $50 on its website and will continue to do so;

►          Clarifies that in State records of escheated property, only the name and address of the apparent owner is public information, while account balances and numbers are confidential and not subject to public release (Secs. 48 and 49); and

►          Increases the penalties for willful failure to report, pay or deliver property or otherwise comply with the terms of the Unclaimed Property Act (Secs. 65 through 67).

COMMITTEE AMENDMENTS

      Committee amendments to this bill: (1) repeal R.S.46:30B-35, which limits coverage under the escheatment law of stock or other ownership interest enrolled in an automatic dividend reinvestment plan to cases in which plan records indicate that the owner has not communicated during the dormancy period with respect to interests not enrolled in the reinvestment plan. Under N.J.S.A.46:30B-31, as amended by Sec. 21 of the substitute bill, escheatment of interests in a DRIP will be tied to inability to deliver to the holder statements for the DRIP account itself, rather than to communications related to the source holding for the reinvested income; (2) eliminate a provision of the rule governing escheatment of unclaimed dividends as inconsistent with other provisions of the escheatment law; (3) delete superfluous references to both tangible and intangible property appearing in provisions wherein no distinction is made between the two; and (4) incorporate various technical changes and editorial revisions.

FISCAL IMPACT

      The Governor's proposed budget (Schedule I) anticipates that in FY2003, some $255 million will be transferred from the Unclaimed Personal Property Trust Fund to the General Fund. According to testimony before the committee by the Division of Taxation in the Department of the Treasury, some $200 million to $220 million of this projected revenue is attributable to the anticipated enactment of this bill.

      The legislation is expected to be effective beginning in FY2003. The provisions reducing the dormancy period for property already subject to the unclaimed property statute are expected to yield considerable revenue in that fiscal year, when ownership inactivity over a period of time that is one or more years short of abandonment under current law will suddenly acquire that status by operation of the legislation. This revenue will not recur in subsequent fiscal years.

      Additional receipts will be generated by the provisions that extend the scope of the escheatment law to new types of property and clarify the application of the law to categories already acknowledged by some fiduciaries (but not all) to be covered. Just as with the "reduced dormancy" categories, substantial revenue will be realized in FY2003 from these types of property, with multiple years' worth of unclaimed property newly subject to escheat. For these categories, however, the added revenue will recur in years after FY2003, albeit at much reduced levels.

      (1) The Division of Taxation projects that the reduction of the various dormancy periods to a uniform three years will raise FY2003 revenue from property categories already covered by the unclaimed property law from about $90 million to an estimated $309 million, an increase of $219 million. The increase was calculated by (i) determining, for the five-year period 1996-2000, the average annual amount of escheated property in the three categories (10-year, seven-year and five-year) for which the dormancy period is reduced under the bill, and then (ii) multiplying those separate average amounts times the number of years by which the relevant dormancy period under current law exceeds the proposed uniform period of three years (i.e., by the factors seven, four and two, respectively).

      (2) The division projects FY2003 revenue from the "new" and "clarified" categories of covered property as follows: sums payable on demutualization - $50 million; non-dividend-paying securities - $5 million; corporate debt paying periodic interest - $4 million; shares held through a DRIP - $7 million; shares in a mutual fund - $6 million; total - $72 million.

      The cumulative total of these estimated increases for FY2003 is $291 million. N.J.S.A.46:30B-74 provides that 75% of all funds escheated to the State and deposited into the Unclaimed Personal Property Trust Fund shall be transferred to the General Fund, unless the administrator of unclaimed property deems it prudent to do otherwise. Under the 75% standard, the total amount of new revenue available in FY2003 for transfer to the General Fund would be roughly $219 million. Escheatment revenue for FY2002 under current law is projected at $90 million. (It was over $100 million in both FY2000 and FY2001, but may be expected to decline with the general deterioration in security values recently experienced.) If it is assumed that a like amount would be realized in FY2003 without a change in the law, then revenue for the fiscal year under the law as revised by the bill would support the $255 million transfer from the Trust Fund to the General Fund anticipated in the proposed FY2003 budget.

      The Division of Taxation indicates that in FY2004 and thereafter, the recurring revenue increases under the bill are expected to be in the range of $10 million.