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Vol. 37, No. 1

The IOLTA crash: Fallout for foundations

by Robert J. Derocher

In its prime, IOLTA was a virtual grant-dispensing ATM. In 2007, interest on lawyers trust accounts earned $371 million nationwide, generating more than $263 million in grants, primarily for civil legal services programs for the poor.

But is the 30-year-old IOLTA program past its prime?

American Bar Association figures show that IOLTA income in 2011 plummeted to $93.2 million, a 75 percent free fall from the 2007 peak. Bank interest rates, once regularly more than 5 percent, now hover just above zero for many IOLTA accounts, producing paltry returns in a stuttering economy. And with a recent announcement from the Federal Open Market Committee that short-term interest rates will likely remain near zero through mid-2015, the future of IOLTA indeed looks bleak.

Leaders of bar foundations and other entities that administer IOLTA programs across the country are bracing for another extended period of reduced grants, service cuts, and legal jobs in jeopardy as IOLTA revenue woes continue—all while the demand for civil legal services for the poor remains high.

“I’m worried that we’re getting a little fatigued from trying to operate in crisis mode all the time,” says Travis County (Texas) State District Court Judge Lora Livingston, immediate past chair of the ABA Commission on IOLTA.

Despite the troubling signs, Livingston and others are finding glimmers of optimism as an assortment of  ideas and programs are being explored to reshape traditional IOLTA programs and the organizations that administer them, particularly in how revenue is raised and how bar foundations, bar associations, courts, legislators, grantees, and others work together on their shared mission.

While IOLTA may never be the same, many say, it is still vital to fulfilling the critical need to provide civil legal services to the poor.

Revenue plummets, banks reduce support

Four years after the 2008 recession hit, the falling numbers continue to astound bar foundations and IOLTA programs across the country:

  • In Texas, IOLTA revenue has dropped from $20 million in 2007 to an estimated $4.4 million in 2012—an 80 percent decline.
  • Less than five years after receiving $1.9 million in IOLTA revenue, the Boston Bar Foundation has exhausted more than $850,000 in reserves after receiving just $600,000 in IOLTA funds in 2011—a nearly 70 percent decline.
  • The Montana Justice Foundation, which received $1 million via IOLTA in 2007, expects just $160,000 in such revenue in 2012-13.

“It’s settling in that this is a new way of life,” says Amy Sings In The Timber, executive director of the Montana Justice Foundation and president of the National Conference of Bar Foundations. “The days of just managing an IOLTA grant program are gone.”

Things were already bad this year in Montana, ranked 46th out of 50 in state funding for civil legal aid, according to Sings In The Timber; along with the low interest rates, the state was seeing a decline in IOLTA funds on deposit. Then, things got worse. When Federal Reserve Board Chair Ben Bernanke announced earlier this year that short-term interest rates would likely remain near zero through 2014—a somewhat rosier prediction than the 2015 date mentioned by the Federal Open Market Committee—the news came as an unpleasant surprise to the state’s 14 community banks that were offering higher interest rates for IOLTA funds in Montana.

“They stayed with us for the brunt of the recession.  But within days, I was getting calls from banks saying that they couldn’t stay on board any longer [with paying a higher interest rate],” she says. “We went from 14 banks to five.”

In Florida, one of the epicenters of the national housing and economic meltdown, the Florida Bar Foundation has seen IOLTA revenue tumble 88 percent over the last five years, from $44 million to $5.5 million, says Jane Curran, executive director of the nation’s first IOLTA program. And, as is the case in most states, the funding downturn came at a time of reduced federal aid to legal aid programs, coupled with increased public demand for such services from people facing unemployment, home foreclosure, and related economic crises.

“We’re seeing people who never, ever thought they’d need legal aid,” Curran says.  “This is an unanticipated situation, and none of us know how long this is going to last.”

Like many bar foundations and IOLTA funds, the Florida Bar Foundation dipped into reserves—more than $57 million over three years—to help steady the economic blow for many grantees. The Florida Bar Foundation has also been forced to eliminate two fundraising positions, much like other foundations that have had to trim personnel and other expenses.

With reserves exhausted or dangerously low, income down, and expenses severely curtailed, that has left one area for cuts that IOLTA fund providers have tried to spare: grantees, the nonprofit legal aid providers on the front lines of delivering civil legal assistance to the poor. And for many IOLTA funds and foundations, making those cuts has been difficult to avoid.

ABA statistics show a 54 percent decline in IOLTA grants to legal service providers nationwide from 2008 to 2011, plunging from $231 million to $106 million, according to Beverly Groudine, staff counsel for the ABA Commission on IOLTA. In just one year alone, from 2010 to 2011, such grants declined by 14 percent.

In Florida, the foundation expects to eliminate grants completely for some programs as it struggles to disburse $14.6 million in grants in 2012-13, Curran says. By 2014-15, that grant total is expected to be about $10 million—a third of the $30 million disbursed in 2010-11.

Tales of layoffs, salary cuts, and office closures for organizations providing civil legal services to the poor continue to unfold across the country, as they cope with revenue cuts and an increase in demand.  Despite those stories—or, as some say, because of those stories—several bar foundations and other providers of IOLTA funds are digging in to find solutions that some view as unorthodox and untested, yet that seem necessary to bolster IOLTA’s vital role in civil legal services.

‘We can’t rely on one source of income’

After spending the last few years watching IOLTA problems mount in her home state of Texas and sharing similar tales of funding cuts and service increases with her peers across the country, one thing is clear to Betty Balli Torres, a past president of the National Association of IOLTA Programs:  Change is necessary.

“We can’t rely on one source of income,” says Torres, also the longtime director of the Texas Access to Justice Foundation. “IOLTA was always the big money source, but it’s just not there anymore, and it probably won’t be again. It’s now just one of many sources. Our best bet is to diversify our funding.”

An area where the TAJF and other foundations have seen some success is in developing networks of preferred banks that have agreed to pay higher than average market interest rates on IOLTA accounts, usually in exchange for public recognition by foundations. In Texas, more than 70 banks have signed on as Prime Partners, agreeing to pay a minimum of 1 percent interest—not much, but still higher than the .05 to .10 interest rates many banks are paying on savings accounts.

“They’re local banks that recognize that they want to do good in their communities,” Torres says. “It also gives them name recognition in the legal community.”

While some state IOLTA programs have developed these relationships to boost returns, even they’re not immune to change, as the Montana Justice Foundation discovered when nine of 14 banks left its Leadership Banks program.

Another area of banking where IOLTA funds are eking out gains is in rate comparability, which mandates that all lawyers keep IOLTA accounts in financial institutions that offer them the highest  interest rate available to their non-IOLTA customers with similarly sized accounts. In July, Idaho became the 33rd state IOLTA fund to implement comparability, as well as the 45th to make IOLTA mandatory, eliminating the opt-out provision for lawyers.

The changes made by Idaho’s Supreme Court came only after members of the Idaho State Bar voted overwhelmingly to ask the court to make them, says Diane Minnich, executive director of the bar and the Idaho Law Foundation, which administers IOLTA.  “[Courts, bar members, and civil service organizations] are all looking for places [other than IOLTA] to get funding,” she says.

IOLTA administrators and foundations are also finding success in tapping court fees and funds as revenue sources. That’s what happened in Indiana, the last state to adopt IOLTA. A $1 fee attached to civil legal filings was approved earlier this year by state lawmakers; the fee will generate an estimated $450,000 annually for civil legal aid, according to Chuck Dunlap, executive director of the Indiana Bar Foundation.

“Less funding, coupled with increased demand, helped make it an easier case to make [to legislators],” Dunlap says. “In a healthy economic environment, IOLTA fully funds this. IOLTA is now the smallest of our three funding components. It used to be the only source.”

The filing fee comes a year after Indiana’s Supreme Court made a rules change that now sends 25 percent of cy pres awards to civil legal service providers. Under the concept of cy pres, unclaimed funds from class action lawsuits can be distributed to charitable organizations, depending on state requirements.

Several states have similar cy pres statutes; on July 1, Pennsylvania became the newest among them. Pennsylvania’s Supreme Court now requires that half of cy pres awards go directly to the state’s IOLTA board, with the remaining half to be given either to the IOLTA board or to a charitable organization related to the class action lawsuit’s objectives.

The benefits of cy pres were showcased dramatically this summer in Georgia when the Georgia Bar Foundation, administrator of the state’s IOLTA fund, picked up $300,000 in cy pres funds from the settlement of a junk fax lawsuit. The windfall —the result of a national class action filed in Washington state—nearly doubled the $345,000 the foundation had on hand from IOLTA revenue. (In 2010, by comparison, the foundation had more than $1.3 million in IOLTA revenue.)

Cy pres awards can be valuable, but they also face resistance in the business community, where they are viewed as unfairly taking money away from defendants, according to the Florida Bar Foundation’s Curran. It’s one reason, she says, that the state does not have a statute similar to Pennsylvania’s, but must instead rely on the courts to direct funds to the foundation.

Perhaps even more unpopular among many in the business community is the requirement that non-lawyers involved in real estate transactions participate in an IOLTA-like program, with the interest generated being distributed to the entity administering IOLTA funds.  North Carolina this year became just the fourth state—joining Ohio, Washington, and Connecticut—to have such provisions, although there have been unsuccessful attempts to implement them in other states.

“[In Texas], the bill was shot down pretty quickly,” Torres says. “You’re taking on banks, Realtors, and title companies—big players.”

While the issue was briefly explored and similarly dropped in Florida, Curran says, Torres, Livingston, and others are still hopeful that the efforts there and in other places won’t die, and that progress can be made. “There was pushback from banks and others when IOLTA was first created, and look where we are now,” Livingston says. “Sometimes, it takes a long time to get something like this to succeed.”

Working with grantees

For many foundations and IOLTA funds, the continuing crisis has also turned a greater focus toward the programs and providers receiving IOLTA grants and other assistance, putting a greater emphasis on fundraising and marketing.

The South Carolina Bar Foundation recently initiated a joint effort with some grantees to meet with prominent lawyers and law firms in the state to try and raise additional funds to supplement lagging IOLTA revenue, says Shannon Willis Scruggs, the foundation’s executive director and NAIP president.

“We need to tell their stories,” she says. “It gives the grantees a chance to market themselves.  It can also open up volunteering and other opportunities [for lawyers] to provide expertise to an organization, if they can’t or don’t want to write a check.”

While Livingston says bar foundations can also play a role in working with grantees on improving their efficiency, Curran adds that foundations must also take a closer look at how grantees operate, the work that they do, and where else they obtain grants and funds.

“Take a good look at their policies—make sure they have a good reserve policy,” Curran says.  “We have grantees who have over a hundred funders.”

It’s also incumbent on foundations to use the down time in IOLTA to improve the program overall. “Take advantage of these very difficult times to look for efficiencies in your delivery system,” she adds.

When it comes to fundraising, Curran says foundations can take some cues from grantees, noting that many use professional fundraisers to assist them. But she and others also recognize that foundations not only have to consider the costs of fundraising, but they also must carefully coordinate such efforts with their grantees. “You don’t want to be seen as competing with grantees,” cautions the ABA’s Groudine.

Despite the concerns, Curran would still like to hire back her fundraising staff in the near future as part of the overall effort to raise funds outside of IOLTA. She is also making plans to ramp up cy pres efforts in Florida, as well as initiating a capital campaign.

“I don’t think anything should be off the table,” she says.