With the nation mired in the Great Recession, the Federal Reserve slashed interest rates to virtually zero in hopes of spurring economic growth. While generally regarded as a sensible and effective strategy, the tactic has had the unintended consequence of crippling hundreds of non-profit organizations that offer legal services for the needy.
The system exists because of a quirk in the way lawyers do business. By law, attorneys are not allowed to mingle client funds with their own operating expenses. That means that when a lawyer receives a chunk of change like a settlement, he or she must put the money in a separate trust account before it can be doled out. The interest that is generated as it sits untouched is typically mere pennies on the dollar.
Technically, that spare change belongs to clients, not attorneys. But the amount is so negligible that it's not worth the hassle to make the transaction. In order for the lawyers to reimburse their clients, they would have to fill out a 1099 tax form, send it to the IRS, wait for a reply, and then, finally, cut the check. In some cases, it could cost 50 bucks to get five.
Every state in the union has established some sort of system to collect these leftover dollars and redistribute them to groups that assist poor folks in court. The program here is managed by the Legal Foundation of Washington, which subsidizes 22 different organizations statewide.
"It's very obscure," Carlson says. "I always tell people, 'It's the best thing you've never heard of.' It's like scooping up pennies from the floor. But from all the lawyers in all the accounts in the state it ends up being millions."
Or at least that used to be the case. According to Carlson, at its peak in 2007, when interest rates were around 5 percent, the fund generated nearly $9.5 million annually. But with the rates now at rock-bottom, the fund has dwindled to approximately $2 million. As a result, some of the state's most crucial advocacy organizations are in dire straits.
Columbia Legal Services, a non-profit that offers representation for foster children, the elderly, disabled, and others, was forced to close their office in Moses Lake and has lost the services of eight attorneys over the past three years, largely because of the decline in IOLTA funding. John Midgley, the organization's advocacy director, says the most painful effect of the cutbacks has been a decreased ability to pursue wage claims cases -- instances where low-income workers were stiffed by their employers and have no other means of recourse.
"It's like a double whammy for poor people," Midgley says. "Not only are there more problems, there are more people who are poor and there are fewer services available. It's a really bad time. I've been around for a long time and this is about the worst I've seen."
Jorge Barón, director of the Northwest Immigrant Rights Project (NWIRP) says the IOLTA funds used to account for half of his organization's funding, contributing about $1.5 million toward operating costs four years ago. Today, that support has dropped to $800,000, and combined with state budget cuts to the Department of Health and Human Services, Barón says his organization will likely lose three or four positions out of a total staff of 39.
"There's already high demand and not enough resources to meet all the need," Barón says. "People on the wait list for our services are going to have to wait longer, potentially. People who may need representation somewhere like immigration court might be even less likely to get assistance from us."
Both Barón and Midgley say they are trying to fill the gap by soliciting private donors and stepping up their grant writing efforts, but the amount lost has simply been too great to overcome. And with the economy still sputtering, the Fed announced that interest rates will remain fixed at just above zero at least through 2013.
Until then, leaders of the non-profit legal groups say they are taking a pragmatic approach to the problem, focusing their efforts on initiatives that do the most good for the most people. Anne Lee, executive director of Team Child, an organization that helps children get back into school, secure safe and stable housing, and obtain healthcare, also says cooperation and coordination between groups affected by the cutbacks has been essential.
"In the Washington legal aid community we're really in it together," Lee says. "We're working to leverage each others resources to make sure we do the best job we can. It still means people will be doing less, but hopefully our impact and quality of work will stay high."