'Not Our Best Days': The Fiscal Crisis Coming For Legal Aid

By Jack Karp
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Law360 (April 12, 2020, 8:02 PM EDT) --

Legal aid organizations are trying new ways to help their clients during the coronavirus pandemic, while bracing for a coming drop in funding that some worry will be "devastating."

The need is already apparent: Parents using shelter-in-place orders to defy child custody agreements. Domestic violence victims unable to meet in-person notarization requirements for restraining orders. Landlords shutting off water or electricity to force illegal evictions of those who can't pay rent.

Civil legal aid attorneys are scrambling to help low-income clients with problems arising from the coronavirus pandemic. But many of those attorneys worry that this help soon will be much harder to come by, as the virus's economic effects are about to take a sizable bite out of their budgets.

That's because much of the funding for civil legal aid in this country comes from the Interest on Lawyer Trust Accounts program, which allows each state to collect the interest attorneys earn on some of the client money they hold in pooled bank accounts to fund legal aid services for the poor.

That interest can add up to "a big chunk" of legal aid organizations' funding, according to David Holtermann, president of the National Association of IOLTA Programs. In Michigan, for instance, a combination of interest revenue and court filing fees covered 23% of the state's legal services grantees' budgets in 2018, while the Ohio Access to Justice Foundation had projected that just under a third of its budget would come from interest this year.

But that revenue is dependent on interest rates, and the Federal Reserve slashed those rates twice in March to stave off some of the economic damage caused by COVID-19. The benchmark federal funds rate, which is the interest rate at which banks lend money overnight to other banks, now stands at 0.25%, the lowest rate possible and considered to be effectively zero.

The last time interest rates were that low was after the 2008 recession, causing national IOLTA revenue to plummet to around $75 million for the 2014 fiscal year. For comparison, in fiscal year 2007, when rates were at 5.25%, IOLTA revenue peaked at over $371 million.

"Legal aid organizations are survivors and the folks who run them tend to be pretty accustomed to working against adversity," Holtermann says. "But if this results in substantial cuts in IOLTA funding to these organizations, it will ultimately result in staff reductions and reduced services."

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What the Reductions Mean

The impact of those reductions will be "devastating," says Donna Cuneo, executive director of the Louisiana Bar Foundation, which grants out that state's IOLTA funds to local legal aid organizations. Sixty percent, or $7 million, of the foundation's 2019-2020 operating revenue came from the IOLTA program, Cuneo says, and she's anticipating a 50% decrease in that revenue for the 2020-21 fiscal year, which begins July 1.

Meanwhile, the Texas Access to Justice Foundation, which doles out that state's IOLTA money, is bracing for a 75% reduction, according to Betty Balli Torres, the organization's executive director. TAJF, which had $16 million in funding last year, expects to lose $12 million of that in the wake of the pandemic.

At the Ohio Access to Justice Foundation, Executive Director Angie Lloyd says her organization is expecting to lose $1 million in interest in just April, May and June, when the fiscal year ends. "It's looking like we could lose, in the calendar year, up to $4 million in interest," she adds.

And in Massachusetts, "the lion's share of our grant program funding comes from IOLTA," says Susannah Thomas, executive director of that state's bar foundation, which uses IOLTA money to sustain 89 legal services programs. "In such times, painful decisions do have to be made to reduce or even cut funding altogether."

It's not just IOLTA that will take a hit, these legal aid attorneys say. Many IOLTA programs supplement their interest income with money from court filing fees, but with courts closing due to social distancing requirements, it's impossible to predict what the losses from that revenue will look like. Lloyd estimates her organization could lose about half of its filing fee income — which can come to over $1 million a month — but that's just a guess.

A lot of IOLTA programs are using data from the 2008 recession to project how much interest income they'll lose, she says, but "I don't have data back to [the flu epidemic of] 1918, so I don't know what happens when people are told not to go out."

The economic uncertainty will also impact donations, investment income, state-provided funding and other fundraising avenues. Torres at TAJF has already created an emergency legal aid fund, just as the organization did after Hurricane Katrina, when, she says, it raised over $1 million almost immediately. But "as of right now, we have not had a donation yet."

The loss of funding at these statewide IOLTA programs translates into a loss of funding for the front-line legal services organizations that are those programs' grantees. Southeast Louisiana Legal Services is one of those organizations. It gets nearly 30% of its funding from the Louisiana Bar Foundation, according to Executive Director Laura Tuggle, who says the organization could be forced to cut services and lay off employees if the decline in funding is deep enough or lasts long enough.

"You know we just have a lot of challenges and not a whole lot of resources to meet the need," Tuggle says, "so any time there's a hit, it has a huge impact on us."

'The Absolute Worst Time'

The legal aid community has seen its share of financial challenges. The Fed also cut interest rates down to basically zero in the wake of the 2008 recession, leaving legal services organizations scrambling to find other sources of funding.

"So, unfortunately this is all-too-familiar territory," Thomas says.

But the speed with which this crisis has hit is different. After 2008, interest rates dropped gradually over a year and a half, Torres says, so "it was bitter, but you had planning time as you watched it go down." This time around, those interest rates dropped over the course of two weeks. "You don't have that planning."

Of course, legal aid organizations, most of which already operate on a shoestring, never want to see their budgets reduced. But right now "is the absolute worst time possible for a decrease in funding," Torres says. "It just is."

The job losses and other economic fallout from the virus mean a lot more people will fall into poverty and become eligible for legal aid. On Thursday, the U.S. Department of Labor reported that 6.6 million people had filed new unemployment claims in the week ended April 4, meaning more than 16 million people have now lost their jobs amid the pandemic. And a lot of those people are going to need help, legal aid attorneys say.

Michigan Legal Help, for instance, saw a 30% jump in visitors to its website during the week of March 30 from the previous week, according to Holtermann. Visits to Illinois Legal Aid Online from people looking to get just unemployment-related information skyrocketed by 933% compared to the same period in 2019.

In Louisiana, Tuggle is already seeing illegal evictions, wage claims, and problems accessing paid sick leave and unemployment compensation. Shelter-in-place orders have also led to "a rash of calls" from parents about child custody issues, she says. She also expects to see a rise in credit card collections, bankruptcies and foreclosures because "a lot of people are going to rack up unbelievable amounts of credit card debt just trying to survive."

Her organization did a Facebook Live session in March for people having trouble paying rent. The event was only promoted for about an hour beforehand, she says, "and with that little promotion, we had over 4,300 people log onto that session."

Temporary moratoriums on evictions in Texas and Louisiana will expire soon, too, so "unless something changes, you are going to have all these people and families who are looking at evictions, and legal aid is really the only game in town in terms of representing persons on evictions," Torres points out.

And many legal aid attorneys worry that incidents of domestic violence, elder abuse and child abuse will spike as a result of people being forced to shelter in place with their abusers.

So if decreases in IOLTA and other revenue lead to cuts in services and staff at legal aid organizations, "we are going to have a lot of people who fall through the cracks," Torres says. "On our best day, on our best day, 10% of the civil legal needs of poor Texans are met ... and these are not our best days right now."

Bracing for the Hit

When the revenue loss will impact legal aid organizations depends on how state IOLTA programs budget, according to Holtermann. Some programs pay out grants from current revenue, while others make grants for their next fiscal year based on what they've already collected. So some legal aid organizations may see an immediate impact while others won't see the effects of an IOLTA decline for at least a few months, which is "sort of small consolation in the present circumstances," he adds.

The CARES Act recently passed by Congress to address the coronavirus' economic impact included an additional $50 million for the Legal Services Corporation, the largest funder of civil legal aid in the country. But while that money will help some legal aid organizations, "it won't even come close to the shortfall we're experiencing," Torres says. She points out that LSC funds three programs in Texas, while "we fund 37 programs." And in Louisiana, Cuneo expects to get about $500,000 of the LSC money. She anticipates a loss of $3.5 million.

So legal aid organizations are racing to batten down the hatches as best they can before the seas get any rougher. For the Louisiana Bar Foundation that means dipping into reserves. Having been through previous crises like the 2008 recession and Hurricane Katrina, the foundation has worked to stockpile a reserve and is hoping to maintain current funding levels for its grantees, Cuneo says, at least for now.

Cuneo is also reaching out to the banks that hold the state's IOLTA accounts asking them not to lower their interest rates on those accounts. Banks are not bound to cut rates on IOLTA accounts just because the Fed cuts rates, Holtermann makes clear, and the hope is that some may choose to keep those rates where they are, either in return for some recognition or just to be good citizens.

Cuneo's requests have met with some success from a few of the smaller banks, she says. But Holtermann says other efforts he's heard about have shown mixed results, and "there are banks that are cutting rates and have done so dramatically and quickly."

For Torres at TAJF, adapting to the new circumstances means "trying to be a more flexible funder" by being less strict with grantees about deadlines and reporting, and allowing those grantees to carry over remaining funds from one fiscal year into another.

On the front lines, Tuggle says her organization is currently writing additional grant applications and trying to cut expenses. But with over 80% of her budget going to staff, there's not a lot she can do to cut costs. One silver lining, though — with everyone working from home, at least the organization is saving on mileage, she quips.

Her ability to maintain a sense of humor in the face of the coming crisis is a sign that she is "cautiously optimistic" that "no matter what happens in terms of funding, we will always be here to help clients," she says. Southeast Louisiana Legal Services is already looking for ways to adapt: planning more Facebook Live events, opening a COVID legal helpline, and working to figure out how to allow all the lawyers and law students who have volunteered to help to do so remotely.

"So we're gonna be here, we ain't going nowhere," she insists. "We may not look the same, we may not be your mama's civil legal aid, but we're definitely going to be here."

Have a story idea for Access to Justice? Reach us at accesstojustice@law360.com.

--Editing by Katherine Rautenberg.

For a reprint of this article, please contact reprints@law360.com.

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