The National Pulse

Expressing Their Interest

Rise in rates swells IOLTA, and legal services gain

Posted Jun 5, 2007 3:36 AM CDT
By Terry Carter

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It is a truism for lawyers providing legal services for the poor: When revenues go up, they are certain to come back down--whether it involves congressional funding of the Legal Services Corp. or interest on lawyers’ trust accounts.

That reality has dampened the glee over significant increases in IOLTA funds in a number of states the past few years. But the legal services folks aren’t exactly wringing their hands as they try to solve a novel problem: What to do with found money? For example, Florida, the first state to use interest on lawyers’ trust accounts for legal services, in 1981, saw a 298 percent increase in those revenues between fiscal years 2004 and 2006.

In June 2004, the state began enforcing in earnest a rule implemented three years before that required its fund to receive rates comparable to those given to other short-term depositors. Rates that had ranged from 0.1 percent to 1.5 percent rose to a new range of 0.15 percent to 4.22 percent.

As a result, the total income from what the state calls IOTA (without the “L” for lawyers) jumped from $22.7 million in fiscal year 2004-05 to $67.3 million in 2005-06.

Rules On Rates

Florida was one of the first states to adopt a comparability rule. For a long time, lawyers’ IOLTA funds had been stuck with the interest-on-checking-account rates, known as NOW accounts, while other customers were able to get newer banking instruments paying higher percentages.

So some IOLTA programs got approval from their authorities to put their funds in accounts such as those held in daily bank repurchase agreements, which offer the higher rates.

Still, the change didn’t make a big difference until interest rates started climbing more recently--coupled with real estate closings (which account for a lot of the money lawyers park overnight in about half the states) going through the roof.

“People have asked how I can go to the legislature and ask for increased funding with IOLTA revenue so high,” says Jane Curran, executive director of the Florida Bar Foundation in Orlando, which distributes the money. “But it’s not like the increases in the past two years could bring us anywhere near meeting needs of those eligible for legal services.”

Indeed, in 2005 the Legal Services Corp. conducted an exhaustive study that found 80 percent of the civil legal needs of low-income citizens eligible for help still are not being met. This was three decades after the LSC was launched.

Last August, the ABA House of Delegates adopted a resolution urging federal, state and territorial governments to develop a “civil Gideon” policy ensuring that low-income citizens receive legal representation in cases “where basic human needs are at stake, such as those involving shelter, sustenance, safety, health or child custody.”

“We’re delighted with the greater rate of return [for IOLTA] over the last year or so, but it is clearly not going to solve anything practically,” says Joanne Garvey of San Francisco, co-chair of the ABA’s Commission on IOLTA, which has been giving technical help to states seeking rate increases. This can be done with comparability rules or, where it might work better, simply by negotiating with banks. “Most of the unmet needs remain unmet.”

A combination of too many years of static funding levels, increased numbers of people living in poverty and gnawing inflation mean, in effect, that the sudden influx of cash brings little more than parity with the highest level of IOLTA funding back in the early 1990s, according to Curran.

Thus some of the discussion about what to do with the found money quickly focuses on finally getting new shoes for the cobbler’s children: Replace antiquated computers and phone systems, give raises to legal services lawyers making only $30,000-$40,000 while swamped with law school debt, and replenish reserve funds that were depleted in lean years.

Lonnie Powers, executive director of the Massachusetts Legal Assistance Corp. in Boston, which distributes most of the IOLTA funds in that state, says he expects those revenues to increase by 20 percent. The Supreme Judicial Court of Massachusetts adopted a comparability rule for IOLTAs that went into effect this year.

Powers’ first thought among many: “It’s going to allow us to raise the average starting salary for attorneys from the low 30s to around 40,000 over the next couple of years. We tend to lose them after three or four years, and we’re not like big law firms that can afford to hold on to just one-seventh of their associates. We need to keep them.”

The influx of cash also is expected to launch new programs and expand current ones.

Help for Staff, Children

After restoring cuts of more than 30 percent in funds for its grantees since the late 1990s, the Florida Bar Foundation has used the IOLTA increases for various efforts. These include repayment assistance for staff lawyers with law school loan obligations and a significant increase in funding for legal services for children, especially those in foster care or with special education needs.

“We’re also spending a lot on technology that can save money to be used elsewhere,” says Paul Doyle, director of the Florida Bar Foundation’s Legal Assistance for the Poor program. The biggest such chunk is $2 million for a statewide case-management system in development for the foundation’s 29 grantees.

IOLTA programs exist in every state and the District of Columbia, but not all are getting interest rates comparable to those given to some other depositors.

Since 2001, 12 states have adopted mandatory comparability rules, which require lawyers to put trust account funds in banks offering the higher rates. Others have simply negotiated for them, and some have comparability as an option--meaning lawyers are not required to use banks that do so.

Among the biggest states, California saw legislation introduced earlier this year for comparability, and New York--where the court system could do so by amending a rule--is considering it.

For some states, IOLTA funding has proved a significant supplement over the years to offset deep cuts in funding for the Legal Services Corp.

That began with the Reagan administration as part of an effort that actually was aimed at killing the beast. The president vowed to end federally funded legal services, but he settled for scaling them down and limiting their scope.

On the heels of those initial efforts against the LSC, Florida created the first IOLTA program in the U.S. in 1981. When Congress put greater restrictions on the LSC in 1996 and cut its funding by 30 percent as part of the Republicans’ “Contract with America,” other programs funded through IOLTA were able to pick up some of the slack. Those restrictions included a prohibition on class actions, on seeking court-ordered attorney fees, and on representation of aliens in certain matters.

Critics challenged the IOLTA funds in court, but the U.S. Supreme Court put the most significant argument to rest in 2003.

The court ruled that it does not constitute a taking when the interest gained on pooled funds from many clients goes to IOLTA for legal services, if the funds of those individual clients are not large enough to generate earnings that are greater than the cost of investing. Brown v. Legal Foundation of Washington, 538 U.S. 216.

But the economy itself had already started chipping away at IOLTA. Interest rates started going way down in the ’90s, and IOLTA revenues shrank.

Easy come

For now, curran is enjoying the fund’s good fortune; but she sees it as a windfall with tailwinds--many of the dollars likely will blow away as easily as they came.

“We absolutely cannot bank on that nearly 300 percent increase continuing,” Curran says.

Much of the newfound money, she says, came from real estate closings, which thrived in Florida with the now-fading nationwide boom, and from rebuilding and redevelopment forced by several hurricanes. Likewise, interest rates have been higher of late, and that cannot be expected to last.

Says Curran: “There will come a time when short-term interest rates will fall again, and with that IOLTA funding will fall--even under comparability rules.”

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