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Report Number: 2017-030
The State Bar of California It Needs Additional Revisions to Its Expense Policies to Ensure That It Uses Funds Prudently

Introduction

Background

The State Bar of California (State Bar) is a public corporation within the Judicial Branch of California (Judicial Branch). The State Bar is governed by a 19‑member board of trustees (board)—six members are elected from State Bar members, five members are appointed by the Supreme Court of California (California Supreme Court), and the remaining eight members are appointed by the Governor and the Legislature. The state constitution requires that every person admitted and licensed to practice law in California belong to the State Bar unless the individual holds office as a judge in a court of record. As of May 2017, the State Bar had approximately 262,000 members. As indicated in the text box, state law establishes public protection as the highest priority of the State Bar and its board in exercising their licensing, regulatory, and disciplinary functions.

 

 

 

 

The State Bar’s Attorney Discipline System

 

According to the State Bar, the attorney discipline system is the central component of its mission to protect the public, and it is critical to achieving the objectives of California’s regulatory and discipline system for lawyers. The discipline system is designed to protect the public, the courts, and the profession from attorneys who violate ethical rules that govern attorney conduct in California. The State Bar’s discipline system consists of several different groups, including those shown in the text box. Together, the Office of the Chief Trial Counsel (Chief Trial Counsel) and the State Bar Court are responsible for investigating, prosecuting, and adjudicating complaints against attorneys, when warranted.  

An audit report that we issued in June 2015 concluded that, although the State Bar likely did not have adequate staffing for its attorney discipline system, it had reduced its excessive backlog of disciplinary cases by imposing lower levels of discipline, reassigning staff from working on other duties to focus exclusively on decreasing the backlog, and implementing other temporary staffing decisions.¹ The backlog is generally defined as the number of complaints as of December 31 of the preceding year that were pending beyond six months after receipt without dismissal, admonition, or the filing of a notice of disciplinary charges. In its May 2016 backlog report, the State Bar used average complaint processing times to determine that it will need an additional 81 staff members to address its backlog of attorney discipline complaints.  

The State Bar’s Revenue Sources

The State Bar’s revenue totaled nearly $194 million in 2016, a 29 percent increase from the prior year. The increase resulted primarily from an influx of settlement grant funds that the State Bar distributes to legal aid organizations. As Figure 1 shows, the State Bar received $86 million in member fees and donations in 2016, representing 45 percent of its total revenue. Through an annual fee bill the Legislature authorizes the State Bar to impose on its members annual dues up to a specified maximum. Parts of the membership fee are mandatory, and they support such programs as the attorney discipline system and the Client Security Fund; members can choose to opt out of other parts of the fee, like those that support lobbying. Members can also pay voluntary fees to the State Bar’s sections, which are voluntary organizations of attorneys and associates who share a professional area of interest. The sections offer educational programs to their members in various fields of law, including family and labor law, intellectual property, trusts and estates, and antitrust law. The sections allow members to expand their professional contacts and to serve the profession, the public, and the legal system. The voluntary fees are usually $95 a year per section. In 2016 voluntary member fees provided more than $6 million in revenue to the sections. 

Figure 1
The State Bar’s $194 Million in Revenue for 2016
(Dollars in Millions)

Source: The State Bar’s 2016 audited financial statement.

^* In 2014 the U.S. Department of Justice reached a civil settlement with Bank of America to resolve federal and state claims for financial fraud leading up to and during the financial crisis. The State Bar is responsible for allocating Bank of America’s grants to legal aid organizations in California that provide legal assistance for foreclosure prevention and community redevelopment.

In 2014 the U.S. Department of Justice reached a civil settlement with Bank of America to resolve federal and state claims for financial fraud leading up to and during the financial crisis. According to the settlement agreement, the State Bar is responsible for allocating Bank of America’s grants to legal aid organizations in California that provide legal assistance for foreclosure prevention and community redevelopment (settlement grants). Revenue from the settlement grants increased from $6 million in 2015 to $45 million in 2016.

The State Bar’s Expenses

The State Bar’s expenses totaled $148 million in 2016, with the largest portions going to pay for salaries, benefits, and grants, as Figure 2 indicates. The State Bar’s expenses included $52 million in salaries and $24 million in benefits, representing a combined 51 percent of its total expenses. Settlement grants and grants to provide free legal services to indigent people totaled $31 million, or 21 percent of its total expenses.

Figure 2
The State Bar’s $148 Million in Expenses for 2016
(Dollars in Millions)

Source: California State Auditor’s analysis of the State Bar’s JD Edwards EnterpriseOne data.

^* Other includes expenses for postage, telephone, and office supplies, among other expenses.

^† Other outside services includes expenses for professional services, outside printing, and bank processing fees, among other expenses.

Outside Scrutiny of the State Bar’s Operations

The State Bar has faced scrutiny of its operations from our past audits and by the Legislature, including the Assembly Committee on Judiciary (Judiciary Committee). Our June 2015 audit report revealed that although the State Bar had reduced its backlog of discipline cases, the severity of the discipline it imposed on attorneys who failed to fulfill their professional responsibilities decreased.

Additionally, our May 2016 audit report concluded that the State Bar needed greater transparency in its communications.² For example, the State Bar did not inform stakeholders that it lacked the funds necessary to reimburse members of the public who suffer financial losses because of dishonest attorneys. At the end of 2015, it had a backlog of roughly 5,500 applications for Client Security Fund payouts totaling $19 million, at a time when there was only $2.2 million available in its Client Security Fund. The State Bar also had not clearly reported its budget assumptions to the Legislature, even though the Legislature relies on that budget to ensure the reasonableness of the State Bar’s fees.  

The State Bar has also faced scrutiny from the Legislature. In August 2016, the Judiciary Committee held a hearing on the annual fee bill, which authorizes the State Bar to impose annual dues on its members up to a specific maximum. After the hearing, the Judiciary Committee sent a letter that same month and another letter in November 2016 requesting timely, complete answers to a variety of the committee’s questions. The letters included questions about section activities, the cost and funding of the State Bar’s annual meetings, catering and alcohol expenses, and how it prioritizes discipline cases. Both the Assembly and the Senate proposed reforms to the State Bar in their respective fee bills. However, the Legislature adjourned without passing a fee bill. Thus, the Legislature did not grant the State Bar authority to collect membership dues for 2017. In response, the California Supreme Court directed the State Bar to submit a request to it permitting the State Bar to impose an interim regulatory assessment on attorneys. The California Supreme Court later granted the State Bar’s request, authorizing the collection of an interim special regulatory assessment in 2017 of $297 from each member for the single purpose of providing funding for attorney discipline activities. The California Supreme Court also appointed a special master to supervise and oversee the collection, disbursement, and allocation of the special assessment funds, and it required that the special master ensure that the State Bar uses these funds exclusively for maintaining, operating, and supporting the attorney discipline system.  

If passed by the Legislature, the current fee bill would allow the State Bar to collect member fees for 2018 and 2019, and it proposes to modify the State Bar’s structure. Specifically, it proposes separating the sections from the State Bar and establishing the California Bar Sections Association (Sections Association) as a private nonprofit corporation governed by its own board of governors. The fee bill would require the State Bar to continue to collect the membership fees for these voluntary sections. The findings and declarations accompanying the bill indicate that this separation would enable the State Bar to focus on its primary mission of protecting the public from attorney misconduct while allowing the Sections Association to advance the public interest by providing educational programs and materials to members of the State Bar and the public, supplying expertise and information on pending legislation, and advancing the ethical practice of law. While the Legislature considers these structural reforms, we have focused this audit on the State Bar’s responses to criticisms and questions related to its expenses. 

Scope and Methodology 

The Business and Professions Code requires the State Bar to contract with the California State Auditor to conduct performance audits of the State Bar’s operations every two years. For this audit the scope includes eight audit objectives. Table 1 lists the audit objectives and the methods we used to address them. 

 

Table 1
Audit Objectives and the Methods Used to Address Them

AUDIT OBJECTIVE		METHOD
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed relevant laws and other background materials related to the State Bar. Reviewed the Rules of Procedures of the State Bar.
2	Describe which categories of State Bar expenses have increased the most over the past three years and evaluate both the reasons and the State Bar’s efforts to control such costs.	Obtained and reviewed the State Bar’s expenditure data for 2014 through 2016 and identified the categories that have increased the most over time. Interviewed State Bar officials to determine the reasons for the increases in expenses, including salary and benefit expenses, and to identify any efforts to control these costs.
3	Examine the management processes the State Bar has implemented to reduce or control costs to ensure that all expenses are reasonable and appropriate, particularly expenses related to travel, reimbursed meals, catered events, and meetings.	Interviewed State Bar personnel and reviewed the State Bar’s policies related to travel, meals, and meetings to identify changes the State Bar has made to control costs and ensure the expenses are reasonable and appropriate.
4	For a selection of expenses, determine whether the expenses are allowable, reasonable, and consistent with the purposes of their funding sources and the mission of the State Bar.	Reviewed a selection of 90 expenses occurring from 2014 through 2016. These included expenses related to catered events, alcohol, and travel expenses, among others. To determine whether the selected expenses were allowable, we tested the expenses against State Bar procurement and travel and business expense policies. To determine whether the selected expenses were reasonable and consistent with the purposes of their respective funding sources, we reviewed the State Bar’s listing of object codes and judgmentally selected expenses from several of them. We reviewed the expenses to ensure that the transactions appeared to align with the purpose of the object code.
5	Describe the conditions under which it is appropriate for the State Bar to expend resources on lobbying activities, and determine whether these conditions were met for a selection of the State Bar’s lobbying expenses.	Reviewed the relevant U.S. Supreme Court decision regarding appropriate conditions for the State Bar to expend resources on lobbying activities. Interviewed State Bar personnel and reviewed audited financial statements, financial data, and individual lobbying expenditures to determine whether the State Bar had complied with relevant restrictions on lobbying expenditures.
6	Describe the results of the recent State Bar salary survey conducted by an outside consultant and determine whether the State Bar has taken appropriate action in response to the survey results.	Obtained and reviewed the consultant’s April 2017 total compensation study. Reviewed relevant State Bar employment rules and regulations and its memorandum of understanding with its represented employees’ union. Interviewed State Bar personnel regarding the results of the compensation study and the State Bar’s plan to implement the consultant’s recommendations.
7	Determine whether any core mission functions of the State Bar, including the disciplinary function and its provision of low‑cost legal services, have been underfunded as the result of a lack of control efforts in other areas.	To identify the core mission functions of the State Bar we reviewed state law and State Bar reports, and interviewed officials at the State Bar. According to the State Bar, the attorney discipline system is the central component of its public protection mission and is critical to achieving the objectives of California’s regulatory and discipline system for lawyers. To determine whether the core mission functions are underfunded, we reviewed the State Bar’s budgets, audited financial statements, spending plans, and backlog reports.
8	Review and assess any other issues that are significant to the audit.	To gain an understanding of the internal controls and work environment at the State Bar, we surveyed its employees using an electronic questionnaire. To describe the conditions under which it is appropriate for the State Bar to hire outside counsel, we interviewed State Bar staff and reviewed State Bar rules outlining the use of outside counsel. Reviewed the State Bar’s expenses for outside legal counsel from 2014 through 2016. To determine whether the State Bar’s contracts with outside counsel were appropriate, we reviewed invoices from seven different contracts.

Sources: California State Auditor’s analysis of state law, planning documents, and information and documentation identified in the table column titled Method.

Assessment of Data Reliability

In performing this audit, we obtained electronic data files extracted from the information system listed in Table 2. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support findings, conclusions, or recommendations. Table 2 describes the analyses we conducted using data from this information system, our methods for testing, and the results of our assessment.

 

Table 2
Methods Used to Assess Data Reliability

INFORMATION SYSTEM	PURPOSE	METHOD AND RESULT	CONCLUSION
State Bar JD Edwards EnterpriseOne (JDE) data Accounting data as of March 27, 2017	To categorize and total expense transactions from 2014 through 2016.	We performed data‑set verification procedures and electronic testing of key data elements and did not identify any issues. We reviewed existing information to determine what is already known about the data and found that prior audit results indicate the JDE data is sufficiently reliable for this audit purpose from 2014 through 2015. To test the accuracy of the JDE data, we relied on previous testing for the years 2014 through 2015. For 2016, we traced key data elements to supporting documentation for a selection of five expense transactions and found no errors. To test the completeness of the JDE data, for 2014 through 2016 we traced expense transaction totals from the JDE data to the State Bar’s audited financial statements and found the data to be materially complete.	Sufficiently reliable for this audit purpose.

Sources: California State Auditor’s analysis of various documents, interviews, and data obtained from the State Bar.

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Footnote

¹ See our report titled State Bar of California: It Has Not Consistently Protected the Public Through Its Attorney Discipline Process and Lacks Accountability, Report 2015‑030, June 2015. Go back to text

² See our report titled The State Bar of California: Its Lack of Transparency Has Undermined Its Communications With Decision Makers and Stakeholders, Report 2015‑047, May 2016. Go back to text

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