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August 15, 2014
Board approves Foundation loan

By Gary Blankenship
Senior Editor

Terms for a $6 million loan to the financially strapped Florida Bar Foundation have been approved by the Bar Board of Governors.

The board at its July 25 meeting in Palm Beach approved the loan terms recommended by its Investment Committee, which include that the loan can be secured by the Foundation’s IOTA revenues.

Greg Coleman The agreement allows the Foundation to request an initial $3 million draw anytime after August 15, and a second equal payment one year later. The loan must be repaid in full within seven years after the initial disbursement.

“We took a vote [in March] under [former] President [Eugene] Pettis’ leadership to conceptually approve this loan to the Foundation, which is critical to their survival,” Bar President Greg Coleman told the board. “I can tell you that there have been daily conversations and phone calls and negotiations and renegotiations and restructuring with Gov. [Ian] Comisky [chair of the Bar’s Investment Committee] and [immediate past Foundation President] John Patterson.

“They have worked tirelessly to come up with a document that should be acceptable to our board.”

Coleman noted that some board members had queried whether the loan would be secured, and he said the agreement allows the Bar to request that the Foundation’s future IOTA revenues be used to repay the loan, if necessary.

Comisky said the Bar’s investment advisor, who also advises the Foundation on its reserve funds, is predicting an improved economy would lead to an increase in interest rates, which in turn would easily enable the Foundation to repay the loan.

“Our investment advisor believes — and he’s positioned our portfolio with the view — that interest rates have to go up, and the only question is whether it’s the fourth quarter of this year or next year,” Comisky said, adding this outlook is widespread in the investment community.

Interest rates are critical for the Foundation because its major source of income is its Interest on Trust Accounts program. With bank interest rates at near zero, the Foundation has seen annual IOTA income go from $72.6 million in FY 2007-08 to $5.3 million this year. Despite cutting grants to legal aid programs and trimming other expenditures, the Foundation has run through nearly all of its reserves and — even with the Bar loan — faces more cuts.

Foundation officials have said that even a slight uptick in interest rates would have a disproportionately beneficial effect on Foundation finances. Currently, interest on IOTA accounts averages 0.125 percent.

Comisky laid out the terms of the loan for the board:

* The Foundation can request the first draw of $3 million on August 15 or any date thereafter. The second $3 million disbursement can be made one year after the first one.

* The Foundation will begin paying interest on the loan one year after the first disbursement, with succeeding interest payments due on that annual anniversary. The Foundation can prepay all or part of the loan principal at any time without penalty. No later than January 2, 2018, the Foundation must begin making quarterly principal payments of at least $375,000, until the loan is paid off no later than seven years after the initial disbursement.

* The interest rate on the loan is 1.82 percent. Comisky explained that is the minimal rate for what the IRS considers a “mid-term loan” such as the Foundation loan, and any lower rate would be considered as a gift by the IRS instead of a loan. As the IRS adjusts that mid-term rate, then the interest rate on the loan will adjust accordingly.

* The Bar has the option to request security for the loan from the Foundation’s IOTA future revenues and, if requested, the Foundation must execute a security agreement.

* The Bar president, president-elect, and immediate past president are automatic members of the Foundation Board of Directors. Under the loan agreement, those three will be able to designate Bar members to serve in their stead.

* $1 million of each $3 million disbursement must be used “either directly or indirectly for technology and the implementation of technology that will allow the Foundation and its grantees to improve access to justice.” The loan agreement calls for the creation of a statewide nonprofit entity to pursue those technological improvements. The Foundation will report to the Bar quarterly on the technological improvements.

Comisky told the board that the Bar can afford the loan, since it has investments in a long-term portfolio and a short-term portfolio (some of these funds are earmarked for specific purposes). This position gives the Bar a much better financial cushion than most other state bars. The board had earlier approved a change to its investment policies to allow the loan to be held in the Bar’s long-term portfolio.

“The risk to The Florida Bar, even with the security, is approximately 10 percent of those [invested] funds,” Comisky said.

The final details won over two board members who had been skeptical about the loan.

Board member Carl Schwait said until two weeks ago he had been certain he would oppose the arrangement.

“Every question has been answered. For the first time, I really see a much greater partnership in what we’re doing here,” he said. “I want to thank you, and I think you all should know we’re getting the answers; it’s transparent. I think we should vote for it. I think it’s the right thing to do.”

Board member and former Foundation President Bill Davis, at a previous board meeting, had raised a question about whether the loan would be secured.

“I recognize this is not a completely risk- free thing that we’re doing. I think the risk is very small,” he said. “Our bylaws provide that we are to support the Foundation. I’ve examined my conscience and the facts. I know there is a very slight risk, and I’m voting for this.”

Board member Laird Lile remained unconvinced and cast the only vote against the loan. He said the final agreement was better than the initial presentation to the board earlier this year, but added that interest rates have already remained at near zero for a much longer period than most financial experts expected. He also said that the amount lawyers keep in IOTA trust accounts — which is around $4.1 billion — could decline from outside influences, such as if lawyer-owned title insurance companies decide not to use IOTA accounts.

Foundation Executive Director Bruce Blackwell said the total in IOTA accounts has been steady at $4.1 billion for a couple of years and traditionally has been higher than that.

(Under Bar rules, lawyers are required to place client funds in interest-bearing trust accounts with the interest going to clients if possible. The only funds that go into IOTA accounts are those where the amounts are too small or too short-term to make it practical to pay interest to clients.)

Lile also asked Blackwell about Foundation reserves.

Blackwell replied that six years ago, the Foundation had $88.2 million in reserves but has gone through almost all of that attempting to maintain its grants while IOTA revenues shriveled. He said the Foundation hopes to keep about $4 million in reserves, which is the minimum required to keep its current investment advisors. Above that, “We anticipate spending $5.6 million, which is all the money we have left,” he said.

Lile said after the meeting there was no one part of the loan agreement that prompted his negative vote but rather an accumulation of smaller details that made him decide to vote against it.

The loan comes shortly after a group of Bar members filed a petition with the Supreme Court asking it to authorize the Bar to increase annual membership fees up to $100 a year, with the extra money going to the Foundation for legal aid programs. Petition backers say the Bar loan is a good idea, but insufficient to meet the growing legal needs of the poor.

In March, the Board of Governors voted unanimously to oppose that petition. The Foundation has taken no position on it. The Bar is working instead to convene a summit on legal access, to be chaired by Supreme Court Chief Justice Jorge Labarga, sometime this fall, to look at a broader-based way to meet the legal needs of the poor and middle class.

[Revised: 10-27-2015]