SD19 - Funds Held in Trust by Circuit Courts
Executive Summary: There are 121 circuit courts in Virginia. These courts are located in all counties and many cities throughout the Commonwealth. Any case coming before the circuit court can result in monies being held in trust. Circuit courts order funds to be held in trust to protect a beneficiary's financial interests. The courts also make decisions regarding who shall administer the trust funds. They may appoint one or more general receivers. Courts which do not appoint a general receiver administer all funds through the clerk of the court. At the end of FY 1987, clerks of the court and general receivers held approximately $56 million in trust funds. The Code of Virginia directs how these trust funds should be administered. There are several problems with the ways in which trust funds are being administered. Specifically, many trust fund administrators are not in compliance with the statutory requirements for transfer of unclaimed property and bonding. In addition, there are problems in the ways in which investments are selected and fees are taken by trust fund administrators. Further, the oversight of trust funds and record keeping procedures should be improved to better protect beneficiaries' interests. The recommendations in this report focus on improving the management of trust funds using the current administrative structures. Significant structural changes are not recommended. However, judges should place trust fund administration with the clerk of the court whenever possible. At the same time, the option to appoint a general receiver to administer trust funds for the court should be retained and used if the need arises. The system should be further strengthened by clarification of numerous procedures which govern trust fund administration, development of a manual which would provide uniform guidance on procedures, and dissemination of these procedures. This report summary briefly references study findings and recommendations. Detailed explanations are contained in the text of the report. Many Trust Fund Administrators Are Not in Compliance with Transfer Statutes Many trust fund administrators are not transferring unclaimed funds to the Division of Unclaimed Property of the Department of the Treasury as required by statute. As of June 30, 1987, clerks and general receivers held a conservative estimate of approximately $2.3 million which should have been transferred to the Division. The Commonwealth is losing between $48,000 and $165,000 in interest income each year the funds are not transferred. The JLARC staff recommends: • the Division of Unclaimed Property should audit those clerks and general receivers reporting transferable trust funds and claim the $2,339,709 in unclaimed funds. Three factors appear to explain some of the reluctance of clerks and general receivers in complying with the transfer statutes. First, the Code of Virginia is silent as to responsibility for designating property as unclaimed. Second, the terms "payable" and "unclaimed property" may need to be defined in the Code. Third, the current fee structures allow general receivers to profit by not transferring funds to the Commonwealth. The JLARC staff recommends: • the General Assembly may wish to designate trust fund administrators as responsible for identifying payable and unclaimed funds for transfer to the Division of Unclaimed Property; • the General Assembly may wish to amend §55-210.2 of the Code of Virginia to include definitions of "payable" and "unclaimed property." Staff of the Division of Unclaimed Property should assist in the drafting of the proposed definitions; and • the General Assembly may wish to consider amending §8.01-589 of the Code of Virginia to prohibit general receivers from charging annual fees to trust funds which have been unclaimed for more than one year. Trust Fund Administrators Should Make Better Investments The investment practices of trust fund administrators could be improved. Most of the $56 million in trust funds is invested in instruments offering safety of principal. However, many trust fund administrators are not attempting to earn high yields on the funds. Often trust fund administrators have deposited large amounts of money in low-yielding investments such as passbook savings accounts and money market accounts. Some administrators place trust funds in non-interest bearing accounts. Some trust fund administrators do not ensure that investments sufficiently protect the beneficiaries' financial interests. A few trust fund administrators place funds in instruments which are not recognized in the Code of Virginia as prudent investments. Others may be forfeiting federal insurance coverage because they do not designate the funds as being held for others. The JLARC staff recommends: • when deciding how to invest trust funds, trust fund administrators should compare available rates of return offered by different financial institutions and not limit their investments to the closest financial institution; • trust fund administrators should not invest trust funds ill stock mutual funds; • the General Assembly may wish to amend §8.01-583 of the Code of Virginia to require trust fund administrators to invest funds in federally insured financial institutions in a manner which indicates that the funds are held on behalf of another. Administrators who pool funds should keep accurate records of the percentage of the pooled funds held by each beneficiary; • only those funds which trust fund administrators know will be disbursed within 60 days may be placed in a non-interest bearing checking account. All other funds should be deposited in interest bearing accounts; and • trust fund administrators should avoid investing trust funds over $1,000 in passbook savings accounts and money market accounts. Fees Should Be Uniform For All Trust Fund Administrators Most beneficiaries' accounts are charged fees for the management and investment of trust funds. The majority of the fees charged are taken by general receivers. While most clerks do not charge fees for trust fund administration, those who do generally receive a fixed amount for each disbursement. Some clerks' offices receive indirect fees by not allocating interest earned to the funds which accrued the interest. The fees charged by all trust fund administrators should be similar since the activities performed by all administrators, including clerks, are similar. However, a uniform fee schedule is not used throughout the Commonwealth. The fees taken by general receivers vary considerably because they are allowed compensation as each court deems reasonable. The JLARC staff recommends: • the General Assembly may wish to amend §8.01-600 of the Code of Virginia to provide that interest which accrues from all trust funds, minus the allowed fees and bond costs, be paid to the beneficiaries; and • fees charged for the administration of trust funds should be uniform for all trust fund administrators, including clerks. The General Assembly may wish to amend §8.01-589 and §8.01-600 of the Code of Virginia to allow fees to be taken by all trust fund administrators according to a fixed schedule. The Majority of Trust Fund Administrators are Underbonded Most trust fund administrators hold funds which are not sufficiently covered by bond. Beneficiaries could potentially lose trust funds which are not bonded. Although the cost of the general receiver bond is to be paid from the fees charged the accounts, approximately $4 million held in trust by general receivers is not covered by bond. Trust funds held by the clerk of the court, when not specifically designated as general receiver, are covered under the clerks' constitutional officers bond. However, this bond is usually less than the amount of trust funds held by the clerk's office. The JLARC staff recommends: • the General Assembly may wish to amend §8.01-588 of the Code of Virginia to read "A general receiver shall annually give before the court a bond with surety to be approved by it, in such penalty as the court directs, sufficient at least to cover the probable amount under his control in anyone year and he shall give additional bond from time to time if the amount held exceeds the probable amount by $10,000"; and • clerks' offices should be bonded in an amount sufficient to cover the total amount of trust funds held by each office. The cost of bond for trust fund administrators varies. Most general receivers negotiate their own bond, the cost of which is usually paid from fees charged. However) the bond for clerks' offices is negotiated and purchased by the Office of Risk Management of the Department of General Services. Centralized purchasing of bond for all trust fund administrators through the Office of Risk Management could help ensure that funds are adequately protected by bond. The JLARC staff recommends: • the General Assembly may wish to consider authorizing the Office of Risk Management to negotiate and contract with sureties to provide bond coverage for funds administered by trust fund administrators. Further, the General Assembly may wish to require general receivers to annually obtain bond through the Office of Risk Management; and • the General Assembly may wish to amend §8.01-589 of the Code of Virginia to allow a separate deduction from the trust funds for the bond premium. Trust funds should be assessed a bond fee at the rate required by the Office of Risk Management to cover the cost of obtaining and administering the bond. Any funds under $1,000 should be assessed a flat rate to be determined by the Office of Risk Management. Stronger External Controls Would Better Protect Beneficiaries' Funds Judges are responsible for ensuring that administrators comply with the statutory requirements governing trust fund administration. In addition, the Code of Virginia directs that external controls be placed on trust funds. However, the external controls and enforcement within the courts are not currently sufficient to protect the beneficiaries' financial interests. These controls differ by type of administrator. Appointed general receivers are required to submit semi-annual and annual reports to the court on the trust funds they administer. The review of these reports is neither comprehensive nor routine. Funds held by clerks of the court are currently audited by the Auditor of Public Accounts. However, the funds held by general receivers, including the funds held by clerks in their appointed capacity as general receivers, are not routinely audited. Consistent and comprehensive controls should be placed on trust funds held by all administrators. The JLARC staff recommends: • the General Assembly may wish to amend §8.01-582 of the Code of Virginia by inserting a statement which gives the Auditor of Public Accounts clear statutory authority to audit trust funds held by all general receivers and to prescribe accounting standards; • if general receiver trust funds are audited by the Auditor of Public Accounts, the General Assembly may wish to amend §8.01-585 of the Code of Virginia to delete the semi-annual reporting requirement for general receivers and insert an annual reporting requirement. This report should be made to the court only. Further, if general receiver trust funds are audited by the Auditor of Public Accounts, the General Assembly may wish to further amend §8.01-585 to delete the requirement for an annual settlement of accounts to the court or a commissioner in chancery. A corresponding amendment should be made to §8.01-617 to delete the provision allowing general receiver accounts to be settled by the commissioner in chancery; and • the General Assembly may wish to amend §8.01-600 of the Code of Virginia to delete the semi-annual reporting requirement for clerks of the court and insert an annual reporting requirement on the .trust funds held by all clerks. Section 8.01-600 should be further amended to clarify that the accounting requirement applies to all clerks who hold funds in trust. Trust Fund Administrators Need to Improve Record Keeping Procedures Trust fund administrators should be able to accurately account for funds under their control. However, many administrators were unable to provide basic information on the accounts. In addition, the record keeping procedures reported by the trust fund administrators were often insufficient to internally control the funds. All court orders establishing trust funds should be systematically filed in a separate trust fund order book to be maintained in clerks' offices. These orders should be kept and filed for accounts held by both the general receiver and the clerk. Currently, there is no special mechanism to designate court orders as resulting in trust funds. The JLARC staff recommends: • the General Assembly may wish to amend §8.01-585 of the Code of Virginia to read "accurate and particular account" instead of "accurate and particular amount"; • the General Assembly may wish to amend §17-28 of the Code of Virginia to require clerks of the court to maintain a trust fund order book. The trust fund order book should include copies of all court orders that originate trust fund accounts; and • all trust fund administrators should issue receipts for all trust funds; maintain a general control ledger or listing, individual account ledgers or listings for each case, and a cash receipts and disbursements journal; record certain information for each case under their control; post interest to each case at least quarterly; reconcile bank statements with the general control ledger on at least a quarterly basis; reconcile the balance reflected in the general control ledger with the total of the individual accounts at least quarterly; document all disbursements; and use a perpetual calendar system to project when funds are payable. Centralization of Trust Fund Administration Would Present Administrative Problems and Difficulties for Beneficiaries Although trust funds could be centrally administered at the State or circuit level, each level of centralization would present problems. Implementation of a centralized system could be costly and time consuming. The clerk of the court would continue to have an administrative role. In addition, beneficiaries might have increased difficulty accessing their funds. The JLARC staff recommends: • trust funds should continue to be administered at the circuit court level at this time. Trust Fund Administration By the Clerk of the Court Is Preferable Judges should place trust fund administration with the clerk of the court whenever possible. However, they should be allowed the alternative of appointing a general receiver to administer trust funds for the court if the need arises. While neither clerks nor general receivers are consistently better in all aspects of trust fund administration, accountability is somewhat stronger for clerks than for general receivers. In addition, clerks are already a part of the court structure and have established accounting and systems options to assist them in trust fund administration. However, the general receiver system is working well in many courts. The JLARC staff recommends: • circuit court judges should use clerks of the court to administer trust funds unless compelling reasons exist to appoint a general receiver. Further, if the decision is made to allow clerks' offices to collect fees for trust fund administration, judges should remove the general receiver designation from currently appointed clerk general receivers. If the court makes the decision to use a general receiver to administer trust funds, only one general receiver should be appointed whenever possible. Many of the recommended modifications and requirements may result in additional work in some clerks' offices. Therefore, clerks' offices may have additional staffing needs. The Compensation Board should consider the fees paid to the clerks' offices for trust fund administration when evaluating requests for additional staff. The JLARC staff recommends: • the Compensation Board may wish to consider staffing requests from clerks' offices assuming trust fund responsibilities. Problems of Lack of Information, Misinformation, and Non-compliance Must be Addressed The changes recommended in this report regarding how trust funds should be administered will not be effective unless the problems of lack of information, misinformation, and non-compliance are also addressed. The responsibilities mandated by State and federal statutes need to be clarified for trust fund administrators and judges. Guidelines manuals should be drafted for use by administrators and judges. In addition, training opportunities on the procedures outlined in the manuals should be provided for all trust fund administrators. The JLARC staff recommends: • the Executive Secretary of the Supreme Court of Virginia should request a ruling from the National Office of the Internal Revenue Service concerning the tax reporting responsibilities of trust fund administrators. This ruling is necessary to ensure that all trust fund administrators are in compliance with federal tax laws; • the Supreme Court of Virginia should draft administrative manuals for trust fund administrators and judges. The manuals should specify procedures for record keeping, investing, and compliance with State and federal laws. Portions of the manuals should be developed with the assistance of the Auditor of Public Accounts, the Division of Cash Management, and the Division of Unclaimed Property; and • the Supreme Court of Virginia should coordinate training on the procedures outlined in the manual for trust fund administrators. Training could be provided during meetings of the Circuit Court Clerks Association. General receivers should be invited to attend. |
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