Legal services fund ‘raided,’ prompting outcry from attys
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A proposal from Governor Kathy Hochul to sweep the Interest on Lawyer Account fund of $55 million received widespread condemnation from the state’s legal community over the weekend following the passage of the state’s budget. File photo by Susan Watts/Office of Governor Kathy Hochul
By Jacob Kaye
New York’s legal community has responded with outrage after the governor decided to move forward with a sweep of a pot of money meant to fund civil legal services for low-income New Yorkers.
Making its way into the state’s budget belatedly passed over the weekend was a $55 million sweep of the state’s Interest on Lawyer Account, or IOLA fund. The money taken from the fund will primarily be used to boost funding for the Homeowner Protection Program, which provides free housing counseling and legal services to New York homeowners at risk of foreclosure.
But few seem to be celebrating the extra funding for the Homeowner Protection Program at the expense of the IOLA fund.
The sweep was introduced into the budget at the eleventh-hour, after Hochul had previously back tracked on a proposal that would have taken $100 million out of the fund used to support over 80 nonprofit legal organizations that offer civil legal services to indigent New Yorkers.
But as budget negotiations dragged into the third week beyond its original April 1 deadline, the IOLA fund sweep again found its way into the state’s fiscal document. The sweep was passed as part of the state’s $237 billion over the weekend.
Several bar associations and legal groups were quick to decry the cut.
“The [New York City Bar Association] is extremely disappointed with the news that IOLA funds have been swept to the tune of $55 million in the final budget deal,” said New York City Bar President Susan Kohlmann. “This was done despite earlier collective and sustained opposition from the legal profession, which must now direct its efforts toward advocating for measures that will protect IOLA funds from this sort of sweep in the future.”
Even those expected to benefit from the boost to the Homeowner Protection Program criticized the funding measure.
Jacob Inwald, the director of litigation-economic justice at Legal Services NYC, a contractor with the HOPP program, said that while he was grateful for the funding to HOPP, he and his organization were “deeply concerned that [Hochul] only agreed to fund the program at the expense of low-income New Yorkers.”
“We cannot rob Peter to pay Paul and celebrate it as a win for all New Yorkers,” Inwald said. “Nor should we use IOLA as a slush fund or as a way to avoid spending state funds on HOPP which keeps thousands of struggling homeowners in their homes each year.”
The IOLA fund is not composed of taxpayer dollars. Instead, the fund is made up of cash earned through private interest and being held in attorney escrow accounts. The interest is derived from client cash being held by attorneys to pay for court fees, settlements and other legal costs.
Because of its funding source, the money that goes into IOLA fluctuates year to year.
Last year when interest rates were high, the fund brought in $107 million in interest, according to reporting by New York Focus. However, at the start of the financial crisis in 2008, the fund only took in $2.6 million.
Because of the fluctuation in incoming cash, the fund’s managers previously warned against a sweep of the fund’s cash, which they say may be needed in the near future when interest rates aren’t as high.
The sweep included in this year’s budget marks the first time money has been taken from the IOLA fund and used to pay for a state-funded program.
The proposal first came about in January, when Hochul pitched taking $100 million out of the fund as part of her executive budget proposal. The initial plan was met with outrage from nearly all corners of the state’s legal community.
In February, dozens of leaders of some of New York’s most prominent law firms wrote an open letter to the governor demanding she keep the IOLA fund intact.
“We believe this proposal, if enacted, would create an existential threat to a primary funding stream for essential civil legal services while simultaneously robbing the IOLA Fund of a unique opportunity to create a reserve that could permanently protect the Fund’s ability to support those services regardless of fluctuations in the interest rate,” they wrote.
“It took twelve years after the 2008 economic crisis for IOLA fund revenue to return to its 2007 level,” they added. “The prolonged drop in interest rates created a crisis in legal services funding that a reserve fund could prevent from recurring in the future.”
A week later, Hochul announced that she had eliminated the sweep from her budget proposal. The announcement was widely celebrated.
Richard Lewis, the president of the New York State Bar Association, “strenuously object[ed] to the state’s sweep of the Interest on Lawyer Account Fund in the recently-passed budget. File photo via NYSBA
“The IOLA Fund is grateful for the support of the entire legal community in preserving the integrity of the IOLA Fund and ensuring that the revenue from IOLA accounts remains dedicated solely to the provision of civil legal services for low-income New Yorkers,” Chris O’Malley, the executive director of IOLA said in a statement in February.
But again, the state’s legal community was enraged by the sweep’s inclusion in the final budget plan.
“The New York State Bar Association strenuously objects to the transfer of $55 million from the IOLA Fund to pay for other state programs,” Richard Lewis, the president of the state bar association said in a statement.
“When Gov. Kathy Hochul originally proposed in her executive budget to remove $100 million from the IOLA Fund and place it in the state’s general fund, we and many other legal advocates protested,” he added. “When the governor withdrew the proposal, we commended her. We are now distressed that this ill-conceived plan has been resurrected, and strongly urge the governor and legislature to reconsider.”
The IOLA fund was formed by the legislature in 1983. It was created “to provide funding for the providers of civil legal services in order to ensure effective access to the judicial system for all citizens of the state to the extent practicable.”
However, with the sweep, legal services providers warn that they will have difficulty providing their services to low-income New Yorkers, having already been struggling for several years with high attrition rates and inequitable funding when compared to prosecutors’ offices.
“Never, in the IOLA Fund’s 40-year history, have the funds been removed like this,” said Kristin Brown, the president of the NY Legal Services Coalition. “New York has a civil justice gap of over $1 billion and providers are struggling to hire and retain staff due to low wages and burnout – now there is $55 million less available to fill that gap.”
Despite the novel nature of the sweep, Kohlmann, the president of the NYCBA, said that she was concerned that its inclusion in the budget could mean more sweeps in the future.
“The governor’s last-minute diversion of IOLA funds sets a precedent that could lead lawyers to question whether they should use IOLA accounts at all, creating an existential threat to a primary funding stream for civil legal services in New York,” Kohlmann said. “Stakeholders can freely and fairly debate whether the universe of IOLA grantees should be expanded or whether changes to the IOLA structure should be considered, but a last-minute sweep of funds to be diverted to a particular cause or causes outside the grant-making purview and integrity of the IOLA governance structure should raise alarm bells for the legal profession and policymakers alike.”
The governor’s office did not respond to requests for comment for this story.
