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IOLTA forced to tap reserves for second year

 By SYLVIA ADCOCK, Staff Writer

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Last year, the board members of IOLTA – the fund that comes from interest on trust accounts – sat around a U-shaped table in downtown Raleigh and did something they didn’t want to do: Withdraw $1 million from reserves.

One year later, at their annual grant-making meeting earlier this month, they did it again.

It wasn’t an easy decision, board members said. But in the current economic climate it was the only way to hold somewhat steady on the grants that fund Legal Aid and other organizations that provide help in civil actions for those who can’t afford attorneys. Those organizations are usually on the front lines of fighting for the rights of the disadvantaged in cases that can involve evictions, domestic violence and foreclosures.

“We would much prefer not to invade that reserve fund,” said Robert G. Baynes, chairman of the IOLTA board, “particularly under the circumstances that we had to do it last year.”

The move leaves the reserve fund with $700,000, down from $2.7 million in 2009.

“We’re all anxious about it,” said Evelyn Pursley, executive director of IOLTA. “But we were happy we had it,” she said, referring to the fact that some states have no reserve to draw on.

The decision comes at a critical point in IOLTA’s 26-year history. The program has been hit by a double-whammy – less principal held in trust accounts, due in part to the real estate crisis, coupled with next-to-nothing interest rates. In 2009 the fund suffered an unprecedented downturn, with total income of $2.4 million, a 55 percent decrease from 2008.

The reserve fund was established in 1995, with the idea that it could be used to keep grants stable during lean times. By 2003, the fund held $1.5 million, and the next year, the board made the only other withdrawal before 2009, when about $500,000 was taken out.

Pursley said the board spent a good deal of time mulling over the implications of dipping so deeply into the reserve again. “There was some discussion over whether this was the right amount,” she said, noting that it’s impossible to tell when the current lean times will end. “No one has a crystal ball.”

 Ultimately, the board voted unanimously to make the withdrawal. The decision was made in part because of some optimism that despite the factors that are keeping the fund’s income down, increases are expected with the implementation of comparability, the requirement that attorneys keep their trust funds only with banks willing to pay interest rates that are comparable to other such accounts.

Pursley said results are already evident. In the beginning of 2010, things looked pretty dismal, with the first two quarters down by 34 percent compared to the first two quarters of the previous year. It was only after July, when comparability took effect, that the fund began to see an uptick. The third quarter of this year showed a 25 percent jump over the third quarter of 2009.

A banking consultant told IOLTA board members they could expect an additional $1 million increase next year due to comparability. “That gives us one reason to hope,” Pursley said.

Still, the total projected income for this year is $2.069 million, down from last year. And the projected income for 2011 is $2.053 million, an expected decrease due to the low interest rate paid on IOLTA’s investment funds. “The banks are just not paying any interest, or it’s very low interest,” Pursley said.

Last year, the IOLTA board cut funding to many programs by as much as 20 percent. This year, those cuts are more like 10 percent – but that’s on top of the 20 percent cut last year. The board also decided last year to notify recipients of its grants that it would not be funding any new programs.

The cuts coming from IOLTA can make a big difference to an organization like Legal Aid of North Carolina. “Our funds are unlike foundations that make grants for specific programs. We tend to make grants for operating expenses, we pay people’s salaries,” Pursley said.

“They’re one of our biggest sources of funds,” said George Hausen Jr., executive director of Legal Aid. “I’m not laying anybody off, but I am leaving positions open.” And the positions left open, he said, translate into clients with eligible cases being turned away.

Due to budget cuts, Legal Aid has also had to cut back on a system that provided a toll-free number and allowed clients to speak with a paralegal and an attorney quickly to find out if their case was viable.

“I’m glad they dipped in” to the reserve, Hausen said. “As bad as it is, it could be worse.”

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