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New York Focus: Hochul Sparks Outcry With Proposed Cash Transfer From Legal Aid Fund

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Sam Mellins

ONE MEASURE IN Governor Kathy Hochul’s budget proposal has united the state’s judicial system, legal community, and some legislators against it: an attempt to take $100 million from a low-income legal services fund — and move it into the state’s general cash pool.

Each year, the Interest on Lawyer Account, or IOLA, fund, provides tens of millions of dollars to fund legal help for New Yorkers who can’t afford it. According to the fund’s director, Hochul’s budget proposal would remove about a third of the cash it has available, imperiling its financial health.

Unlike criminal defendants, civil defendants and plaintiffs aren’t guaranteed the right to an attorney, so the fund covers legal aid in hundreds of thousands of civil cases a year. With the fund now under threat, legal organizations that benefit from its grants warn they may have to cut services.

“We would lose the one civil social worker we have. There really isn’t any other comparable source of money,” said Alice Fontier, managing director of the Neighborhood Defender Service of Harlem.

Susan Shin, legal director of the New Economy Project, said that losing funds would endanger a hotline her organization uses to advise low-income New Yorkers on various issues, including how to respond to debt collection lawsuits.

A spokesperson for the Division of the Budget said that Hochul’s cut would not have an immediate impact on funding. The governor’s budget, released last month, would still approve the fund’s request to spend $60 million on legal aid this year, and the proposed transfer would be partially reimbursed with $18 million from the state court system’s budget. The spokesperson said the fund would have over $200 million even after the cut.

The transfer itself may be legally dubious. The fund is paid through private interest rather than tax dollars: While lawyers temporarily hold clients’ cash to pay for court fees, settlements, or other legal costs, that money accrues interest, which then goes into the fund. Every state in the U.S. maintains a similar fund, and in New York, it’s unclear if the governor has the authority to tap it.

The budget spokesperson did not answer questions about why the budget proposes the cash transfer or whether it would be legal. He noted that the IOLA fund has received over $100 million in state cash over the past seven years and that this year’s budget proposal provides over $705 million for legal services.

When state lawmakers established the IOLA fund in 1983, they specified that it should be used “exclusively” to provide legal assistance to New Yorkers in need. It’s never been tapped for any other reason.

“These are not tax dollars that you can just grab,” said Richard Lewis, president of the New York State Bar Association, which opposes the transfer. “This is not an appropriate way to use these funds and, I would say, is conceivably illegal.”

Though the fund is one of the main sources for legal aid in civil cases, it only satisfies a fraction of New Yorkers’ needs. The civil court system is in a notorious backlog, with over a million cases pending statewide as of last December. A report from the state court system last fall estimated that at least $842 million in additional yearly funding is needed to provide effective legal assistance to all low-income New Yorkers.

This isn’t the only transfer away from legal services Hochul has proposed for this year’s budget. Her plan also seeks to take $234 million for the state from the Indigent Legal Services Fund, which provides attorneys to low-income residents. Once in New York’s general cash pool, about half of the money would still be earmarked for that purpose, but $120 million would not, according to Patricia Warth, director of the Office of Indigent Legal Services.

EVEN IF Hochul’s proposed transfer goes through, the IOLA fund could keep offering grants at its current level for another several years using the cash that it currently has on hand, according to its executive director Christopher O’Malley.

But building up its cash reserves is important for two reasons, O’Malley said. First, the fund, set to give out $60 million in the current fiscal year, is seeking to expand its annual grants to help fill the large gap in legal services outlined in the court system’s report.

And second, the amount of money coming in each year is highly variable, because interest rates paid by banks fluctuate along with inflation.

The IOLA fund took in $107 million in the 2023 fiscal year, when interest rates reached historic highs. But it only made a fraction of that in the years following the 2008 financial crisis, when interest rates plummeted close to zero. As a result, it offered less in grants. In 2017, for instance, the fund gave out half as much as it does now. Interest rates are projected to decline this year, which would mean a decrease in cash coming in.

“We have to prepare for when interest rates go down so that we’re not cutting support for our grantees,” O’Malley said. “We also have 12 years of unmet demand and need.”

Whether Hochul’s proposed transfer makes it into the final budget will depend on the legislature’s response. Though a few legislators have been vocal, the plan’s overall reception remains to be seen.

“The money is not being used for what it’s intended for,” Assemblymember Jeffrey Dinowitz, who chairs the committee that oversees the legal system, told New York Focus. “I just don’t think that’s the right way to do things.”

The proposal has provoked opposition from the court system as well. At a hearing last month, one of New York’s top judges spoke against the transfer.

“We are against anything that will lower legal services providers’ funds,” Judge Joseph Zayas, the chief administrative official of the state’s court system, told a panel of legislators. “Our backlogs will be difficult to address if we don’t have lawyers in the courtrooms.”