Dramatic Drop in IOLA Revenues Could Cost Legal Aid $4.5 Million in Funding for Civil Practice Clients, Says Steven Banks

Plunging interest rates causing a dramatic drop in IOLA (Interest On Lawyer Accounts) Fund revenues pose a potential "long-term looming crisis" in funding for civil legal services for low-income individuals and families throughout the State, predicted Steven Banks, Attorney-in-Chief of The Legal Aid Society. Banks told The New York Law Journal that The Legal Aid Society stands to lose $4.5 million, or nearly two-thirds of the current year funding generated through the IOLA Fund, for the Society's civil clients.

Assemblywoman Helene Weinstein, Chairperson of the Assemb ly Judiciary Committee, said the State is facing a "staggering" gap in funding for civil legal services because of the situation with the IOLA Fund. Read more in The New York Law Journal story.


New York Law Journal
'Staggering' Gap in Civil Legal Assistance Looms As IOLA Fund Is Squeezed by Interest Rate Plunge
By Joel Stashenko

ALBANY - The state is facing what one lawmaker calls a "devastating and staggering" gap in funding for civil legal services for the poor.

"We really are going into next year with a crisis on our hands because of the situation with the IOLA [Interest on Lawyer Accounts] Fund," said Assemblywoman Helene Weinstein, D-Brooklyn, chairwoman of the Assembly Judiciary Committee.

Collections for the IOLA Fund plunged from $1.5 million in January 2009 to just over $500,000 in February 2009 and have hovered at about $600,000 a month since.

If the trend continues through the end of 2009, the fund will take in about $8 million for the year, according to IOLA Executive Director Christopher O'Malley. That would be less than one-third of the $25 million allocated from the fund for civil legal services in New York for each of the 2008 and 2009 calendar years.

Earlier this year, the state Senate added $4.4 million to the budget for civil legal services, but the money has yet to be allocated. In any case, it will not come close to compensating for the plunge in IOLA revenues.

The clouds around IOLA and similar funds around the country had been gathering for more than a year before the storm broke eight months ago as the national economy soured (NYLJ, Dec. 26, 2008).

Less activity in the real estate markets meant less money being held in escrow by attorneys in accounts where interest went to the IOLA Fund. Moreover, falling interest rates, especially the federal funds interest rate directly pegged to what banks are supposed to pay to IOLA, meant a lower monthly return."It's a great model [for a fund]," Mr. O'Malley said. "But it is very interest-rate sensitive.

Historically, interest rates fluctuate. In all other ways, it is a great way to generate funding for civil legal services without adding any additional burden to taxpayers."

In early 2008, when the IOLA Fund was still taking in more than $3 million each month, the federal funds rate was 4.25 percent. It is now about 0.15 percent.

Mr. O'Malley said he does not see signs of an interest rate turnaround on the horizon.

"I think the interest rate environment is pretty discouraging right now," Mr. O'Malley, who became IOLA executive director in April, said in an interview. "[Federal Reserve Chairman Ben] Bernanke stated that he doesn't see any near-term rise of the interest rates by the Fed. That is not particularly encouraging news on how the fund will increase."

Ms. Weinstein said that even if interest rates are hiked in the last quarter of 2009, an increase would be modest and would not mean much more to the IOLA Fund than another $1 million.

Mr. O'Malley said the amount of money deposited in IOLA-bearing accounts at any one time has dropped by perhaps 10 percent due to the harsh economy, to slightly under $3 billion. At the same time, he said the vastly diminished rate of return due to interest rate declines has caused revenues coming into the IOLA Fund to sag.

The falloff in IOLA income will be felt in its next grant cycle, when providers applying for funding in December 2009 will receive allocations beginning in April 2010. Anticipating tight budgeting at many legal services providers, IOLA grants were enhanced this year to cover both the 2009 calendar year and also the first three months of 2010, Mr. O'Malley said.

With the bolstered allocations for some groups, the IOLA board actually allocated $31 million in 2009, but the year-to-year total grants for 2008 and 2009 held steady at $25 million, according to fund officials.Ms. Weinstein said the ultimate amount available for distribution next year from the fund will be closer to $6 million, once annual administrative costs of about $2 million are deducted.

Alternative Funding Sources

Sean C. Delany, executive director of the Lawyers Alliance of New York, said the diminished IOLA resources come at a time when other traditional funding sources for legal services providers, such as foundation grants and law firm donations, also are suffering due to the poor economy.

"It's a package of problems that people are confronting while making decisions about downsizing and reducing programs," said Mr. Delany, whose agency provides legal services to groups that work face-to-face with low-income clients. "As organizations are squeezed in any of their revenue streams, they necessarily must go out and seek other revenue streams."

Advocates for improved civil legal services argue that only about 15 percent of the legal needs for low-income New Yorkers are met by existing programs, and that groups have never been busier with economic-related matters, such as home foreclosures, evictions and unemployment issues.

"Even in good times, we don't even begin to meet the needs," Mr. Delany said.

Senate Funding Delayed

Of shorter-term concern to legal services advocates is the Senate's failure to yet allocate $4.4 million in new money set aside by Democrats in the 2009-10 budget.

Senate Democrats, whose leadership was fractured as the result of a paralyzing fight with Republicans for control of the Senate this summer, have yet to announce how they will divide the new money between civil and criminal legal services programs, and which groups will receive funding.

There is some $8.3 million more in the current state budget for civil legal services. For years, the money has been divided among long-established groups providing legal services such as the Legal Aid Society of New York City and other regional Legal Aid Society organizations.

The $4.4 million will be disbursed through the Department of State's budget when the Senate decides on its allocation.

"State funding for providers of civil legal services remains critical in helping to address the needs of homeowners who are facing foreclosure or the parents trying to obtain child protection services for their children," Michael E. Getnick, president of the New York State Bar Association, wrote in a letter to Senate leaders earlier this month urging passage of authorization to spend the allocation. "In today's economy, these funds are even more essential."

Steven Banks, attorney-in-charge for the New York City Legal Aid Society, said that in the past the Legislature has occasionally kept providers waiting for their money for months as they have worked out the details of new allocations.

Mr. Banks said he was more concerned about the potential "long-term looming crisis" posed by the dramatic dropoff in IOLA revenues. Mr. Banks said his group stands to lose $4.5 million, or nearly two-thirds of the current-year funding generated for the Legal Aid Society's 30,000 civil clients through IOLA.

The Senate did not release the funds during its return to Albany for an Aug. 6 session called mainly to deal with New York City school governance legislation. The Senate is expected to return in September, when Governor David A. Paterson said he wants both the Assembly and Senate to close a gap in the current state budget that has grown to more than $2 billion.

Another $609,000 in funding for legal services for the poor is being held at the Division of Criminal Justice Services awaiting spending authorization by the Senate.

Repeated calls to Senator John L. Sampson seeking an explanation for why the Senate has not yet made the legal services allocation were not returned last week. Mr. Sampson, D-Brooklyn, is now conference leader of the Democratic majority in the Senate and chairman of the Senate's Judiciary Committee.

In addition to Mr. Sampson, Senate Democratic sources said Codes Committee Chairman Eric Schneiderman, D-Manhattan, Crime Victims, Crime and Correction Committee Chairwoman Ruth Hassell-Thompson, D-Bronx, and Veterans, Homeland Security and Military Affairs Committee Chairman Eric Adams, D-Brooklyn, also are involved in discussions on allocating the legal services appropriation.

Mr. Getnick, of Getnick Livingston Atkinson & Priore in Utica, said the Senate legal services allocation contained in the 2009-10 budget is important, but that the precipitous drop in IOLA revenues creates a potentially "dire" situation for next year and beyond.

"I don't have any answers on the IOLA," Mr. Getnick said in an interview. "Hopefully, the federal government and the state government will be doing whatever they can to get the housing markets back where they should be."

The diminished IOLA collections are in stark contrast to the scenario Eliot Spitzer laid out for the fund during his brief governorship. In 2007, he announced that several leading banks had agreed to pay interest into the fund based on the prevailing federal funds interest rate and that IOLA might soon be taking in $40 million to $50 million a year to channel to civil legal services providers (NYLJ, June 1, 2007).

Non-IOLA allocations by the governor and Legislature have fallen from their high of $15.3 million in the 2007-08 state budget.