Organizations across the country that provide legal services to the poor face potentially dire drops in funding as a result of the cut in bank interest rates during the past four months.

From New York to Illinois to Texas, organizations that depend partly or completely on income from interest earned on accounts in which lawyers hold clients’ money for short periods of time are seeing that income dwindle. The legal service groups receive the funds through grants from what are typically called interest on lawyers’ trust accounts (IOLTA) organizations created by state court systems to collect and distribute the funds [NLJ, 10-27-08].

“It’s a time of real catastrophe for our programs,” said Lorna Blake, who is executive director of Iola Fund of the State of New York. “Iola never truly has a stable source of income, but this fall has been so steep and precipitous that it’s really having a very dramatic effect.”

A graph on the home page of the New York fund’s Web site with a jagged line downward shows that the organization had $4.5 million in interest income in February 2008, and just $500,000 last month. The New York organization, which is completely dependent on the interest for income, distributed $32 million in grants last December and provided them in 15-month periods, as opposed to the usual 12 months, to buy some time before the impact of the lower rates.

“The programs will really feel the cut in the second quarter of 2010, when we’re expecting we may have as little $3 million for grants,” Blake said.

What makes matters worse is that state and local governments are cutting back on funding for such legal services organizations, too, at a time when there’s likely to be an increase in people whose economic situations require them to seek the free or discounted legal services, the IOLTA executives said.

Betty Balli Torres, who is executive director for the IOLTA organization Texas Access to Justice Foundation, remembers the moment on Dec. 16, 2008, when her Google alert told her the Federal Reserve had cut interest rates to between zero and 0.25%, she said. She called her team together immediately to start revising their projections of the amounts the organization would be able to provide to 40 Texas legal service groups.

The foundation, which in the past derived 60% of funding from income interest, provided $12.2 million in grants last year, down from $20 million in 2007 and hopes to have $10 million to give later this year, Torres said. “The reality is that we will have a significant decrease in services available to low-income people,” she said.

The Lawyers Trust Fund of Illinois hopes to have $7.5 million to provide in grants this year for the fiscal year that starts in July, down from the $13.2 million it offered for the fiscal year that runs through June, said Ruth Ann Schmitt, who is executive director of the fund.

But some relief may be on the way. The omnibus appropriations bill, signed into law last week, increases the budget of the Legal Services Corp. by $40 million, to $390 million.