States try to fill gaps left by federal legal-aid cutbacks

While President Reagan tries to end federal funding of legal services to the poor, states are moving to make up at least part of the shortfall caused by cuts in money from Washington in fiscal 1983.

Florida and California already have established legal- aid funds called IOLTAs (Interest on Lawyer Trust Accounts), modeled after systems established some time ago by 17 other nations, including most of Western Europe, Australia, Canada, and New Zealand.

Nine other states - Colorado, Idaho, Illinois, Maryland, Minnesota, Nevada, New Hampshire, Oregon, and Virginia - have approved IOLTAs, either through legislation or administrative court orders.

Forty-four states were represented at an IOLTA conference in January in Florida, and proponents of the idea say they expect most of the 50 states to establish such funds.

Congressional backers managed to keep funding of legal services for the poor in the fiscal 1983 federal budget. But they had to settle for a 25 percent cut in the appropriation for the Legal Services Corporation, which disburses federal money to state legal-aid agencies. Another congressional battle is certain this year, and the states are braced for more cuts, at best.

Briefly, here is how an IOLTA works: Client funds such as escrow money, turned over for safekeeping to lawyers, especially those in real estate, usually are deposited in interest-earning accounts for those clients. In many instances, however, the funds are too small or are held for too short a time to earn interest exceeding bank service charges. An IOLTA makes it possible to deposit such money, however briefly, in a central account.

If many lawyers are involved, the interest accumulated can be substantial. That money is turned over to the legal aid trust fund to finance noncriminal legal services for the indigent.

Florida's system, the first in the United States, was ordered into effect by the state's Supreme Court in September 1981. The court order established the Florida Bar Foundation to administer the fund. By the middle of last month, says director Jane Robertson, the foundation had passed the $1 million mark.

Since lawyer participation is voluntary, much of Ms. Robertson's effort to date has been directed toward recruiting participants. So far, some 2,500 attorneys have signed up; with more than 18,000 real estate lawyers in the state , she anticipates the IOLTA could eventually collect $8 million to $10 million annually.

Ms. Robertson points out that there is little actual resistance to participation, but that potentYal recruits simply need to be ''educated.''

California's IOLTA was authorized by legislation passed in 1981. Participation is compulsory, and the law is being challenged in a suit filed by a San Diego attorney. A Superior Court hearing, set for April 19, could result in an injunction against full implementation of the Legal Services Trust Fund Program. Among other states that have established IOLTAs, Minnesota is the only one making participation compulsory.

The State Bar of California administers the Legal Services Trust Fund through a 25-member Client Trust Fund Commission. The legislation setting up the program was sponsored by the state bar and has wide, nonpartisan backing among California attorneys, according to Bruce Hamilton, director of the fund.

Mr. Hamilton and Ms. Robertson acknowledge that banks in their states have not enthusiastically accepted the administrative burdens of handling the IOLTAs, since they no longer have free use of such money. But, the two directors point out, the banks are permitted to deduct ''reasonable'' service charges - and the financial institutions generally are accepting IOLTA accounts.

As to the law clients whose money is being ''used'' to help fund legal aid to the indigent, Hamilton asserts that ''the accounts involved have never earned any interest for the clients, and that would still be true if the Legal Services Trust Fund was abandoned.''

Hamilton projects that California's fund will collect from $6 million to $10 million annually. He says this year's federal cutback cost the state legal-aid program $8.5 million.

Clearly, Hamilton asserts, the IOLTAs provide a supplement, not an answer, to the need for legal-aid funding. Even in the peak year of federal funding, when California received $29.5 million from the Legal Services Corporation, that amounted to no more than 40 percent of the total need in the state.

Making a similar point, Ms. Robertson says, ''The only way for Florida to meet the need for legal services is through federal funding, IOLTA, and pro bono'' services by members of the bar.

President Reagan and his domestic counselor, Edwin Meese III, have repeatedly stated that they believe the need for legal services to the indigent can be met pro bono - by volunteered services.

Florida's Supreme Court is encouraging such efforts. This year it honored individual attorneys with pro bono awards - one statewide and others in circuit court districts.

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