BILL ANALYSIS Ó
SB 134
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Date of Hearing: July 7, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
134 (Hertzberg) - As Amended June 24, 2015
SENATE VOTE: 37-0
SUBJECT: INTEREST ON LAWYER TRUST ACCOUNTS: ESCHEATED FUNDS:
LOAN REPAYMENT PROGRAM
KEY ISSUE: SHOULD UNCLAIMED FUNDS IN INTEREST ON LAWYERS' TRUST
ACCOUNTS, RATHER THAN ESCHEATING TO THE STATE, BE DEPOSITED INTO
THE PUBLIC INTEREST ATTORNEY LOAN REPAYMENT ACCOUNT IN THE STATE
TREASURY FOR THE PURPOSE OF PROVIDING LOAN FORGIVENESS TO
LICENSED ATTORNEYS WHO PRACTICE IN PUBLIC INTEREST AREAS OF THE
LAW AND ADMINISTERING THE PROGRAM?
SYNOPSIS
In order to address the high cost of a legal education and to
encourage law students and new attorneys to pursue careers in
public service, the author proposes, in this well-intentioned
measure, to require unclaimed funds in Interest on Lawyers'
Trust Accounts (IOLTA accounts), rather than escheating to the
state, to be deposited into the newly created Public Interest
Attorney Loan Repayment Account in the State Treasury for the
purposes of providing, upon appropriation by the Legislature,
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additional funding for the Public Interest Attorney Loan
Repayment Program. Existing state law requires attorneys to
place their clients' funds (advances for attorney expenses,
etc.) in a special IOLTA account on which interest is paid to
the California State Bar in order to fund indigent legal
services. Existing state law (the Unclaimed Property Law, or
UPL) also provides that if there is no activity for a specified
time (generally three years) on an account held by a bank or
financial institution, the property in the account escheats to
the state and the bank or financial institution (or "holder") is
required to relinquish any unclaimed property in the account to
the state controller's office. The controller deposits all
unclaimed funds, including funds from abandoned IOLTA accounts,
into the Abandoned Property Account in the Unclaimed Property
Fund, which is continuously appropriated by the state, as needed
by the state's General Fund. However, the owner of the
escheated funds, or even the owner's heirs, can always make a
claim for the funds. When a claim is approved by the
controller, the state issues a check (without paying any
interest on the funds) to the claimant.
This bill would, in effect, create an exception to UPL for IOLTA
funds that escheat to the state. Instead of being deposited in
the Abandoned Property Account for use by the state's General
Fund until and unless the owners file claims for their return,
abandoned IOLTA funds would instead be deposited into the Public
Interest Attorney Loan Repayment Account established by this
bill in the State Treasury for the purpose of providing, upon
appropriation by the Legislature, additional funding for the
Public Interest Attorney Loan Repayment Program and
administering the program. Loan repayment assistance is a
worthy public policy goal, given the high cost of law school
tuition, large amount of debt that burdens most law school
graduates and the desire for lawyers to serve in the public
interest, although the federal government and many law schools
already offer loan forgiveness programs. Nevertheless, the
author of this bill argues that because public interest law
offices must retain talented attorneys to ensure that their
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clientele consistently receive an acceptable level of service
and equal access to justice, it is appropriate to allocate
unclaimed IOLTA funds for this purpose. At the same time,
allocating the funds in this manner will have some negative
impact on the state's General Fund and it is conceivable that,
if the funds were not placed into the Abandoned Property Account
for appropriation to the General Fund, they could possibly be
used for another purpose that could serve individuals who are
more needy than attorneys employed in public interest jobs.
This bill is supported by the California Attorneys,
Administrative Law Judges and Hearing Officers in State
Employment; the California State Conference of the NAACP; Los
Angeles County District Attorney Jackie Lacey; MALDEF; and
University of California Hastings College of the Law and has no
opposition.
SUMMARY: Requires unclaimed property in Interest on Lawyers'
Trust Accounts (IOLTA), rather than escheating to the state, to
be deposited into a Public Interest Attorney Loan Repayment
Account for the purposes of providing, upon appropriation by the
Legislature, additional funding for the Public Interest Attorney
Loan Repayment Program. Specifically, this bill:
1)Requires escheated property held in an IOLTA account to be
deposited into the Public Interest Attorney Loan Repayment
Account, as defined.
2)Provides that notwithstanding any law, any escheated property
held in an IOLTA account shall be deposited into the Public
Interest Attorney Loan Repayment Account, which is hereby
established within the State Treasury.
3)Requires escheated property in the Public Interest Attorney
Loan Repayment Account to be used, upon appropriation by the
Legislature, by the Student Aid Commission for the purpose of
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providing increased funding for, both the administration of
and the provision of loan repayment assistance pursuant to,
the Public Interest Attorney Loan Repayment Program, as
provided.
EXISTING LAW:
1)Requires an attorney or law firm that receives or disburses
trust funds to establish an interest bearing demand trust
account and to deposit in the account all client deposits that
are nominal in amount or are on deposit or invested for a
short period of time. (Business & Professions Code Section
6211(a).)
2)Defines "IOLTA account" to mean (1) an interest-bearing
checking account, (2) an investment sweep product that is a
daily (overnight) financial institution repurchase agreement
or an open-end money-market fund, or (3) any other investment
product authorized by California Supreme Court rule or order
and established and maintained pursuant to Business &
Professions Code Section 6211(a).
a) Requires a daily financial institution repurchase
agreement to be fully collateralized by U.S. Government
Securities or other comparably conservative debt securities
and to be established only with an eligible institution
that is "well-capitalized" or "adequately capitalized" as
those terms are defined by applicable federal statutes and
regulations.
b) Requires that an open-end money-market fund: (1) must be
invested solely in U.S. Government Securities or repurchase
agreements fully collateralized by U.S. Government
Securities; (2) must hold itself out as a "money-market
fund" as that term is defined by federal statutes and
regulations under the Investment Company Act of 1940; and
(3) must have, at the time of the investment, total assets
of at least $250,000,000. (Business & Professions Code
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Section 6213(j).)
3)Defines "eligible institution" to mean a bank or any other
financial institution authorized by the Supreme Court to hold
an IOLTA account. (Business & Professions Code Section
6213(k).)
4)Defines "escheated property" to mean property that escheats to
this state, whether or not it is determined that another state
had a superior right to escheat such property at the time it
was paid or delivered to the State Controller or at some time
thereafter. (Code of Civil Procedure Section 1564. All
further statutory references are to this code, unless
otherwise indicated.)
5)Establishes the Public Interest Attorney Loan Repayment
Program for licensed attorneys who practice or agree to
practice in public interest areas of law in this state and
provides that participants are eligible for a maximum of
$11,000 in loan assistance over four years. (Education Code
Sections 69741, 69741.5.)
6)Provides, in the Unclaimed Property Law, or UPL, for the
escheat of property to the state and requires all property
that escheats to the state to be deposited into the Abandoned
Property Account in the Unclaimed Property Fund, which is
continuously appropriated for specified purposes, and
establishes procedures for submitting a claim for property
that has escheated. (Section 1500 et seq.)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
COMMENTS: This bill is intended to address the high cost of a
legal education and to encourage law students and new attorneys
to pursue careers in public service. According to the author:
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Public interest law offices must retain talented attorneys
to ensure that their clientele consistently receive an
acceptable level of service and equal access to justice.
However, the increasingly high levels of debt accrued while
obtaining a law degree, make it difficult for attorneys to
serve in public interest areas of law since the average pay
is lower than it is in private practice.
This bill allows for escheated unclaimed property in IOLTA
accounts to be deposited into the Public Interest Attorney
Loan Repayment Account. These funds will go towards helping
relieve some of that debt burden.
The Student Aid Commission is authorized to award
participants a maximum of eleven thousand dollars ($11,000)
in four years of service.
High Price of a Legal Education - Debt and Risk of Unemployment
or Underemployment After Law School. According to the American
Bar Association (ABA), the average yearly tuition at a private
law school in 2012 (the date of the ABA's most recent national
survey) was $40,634, and for residents at a public law school,
it was $23,214. Combined with living expenses, which often
exceed $20,000 a year, books and other fees, the typical private
law school student will pay in excess of $65,000 per year to get
a legal education, and a typical public law school student will
pay about $50,000 per year. (2014 ABA LSAC Official Guide to
ABA-Approved Law Schools (2013), available on the LSAC website
at
https://officialguide.lsac.org/release/OfficialGuide_Default.aspx
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.)
Costs appear to be even higher now, especially in California.
For example, tuition, housing, and other expenses for law
students at USC are estimated to be $82,333 in 2015-16. (USC
Gould School of Law, Cost of Attendance, available at
http://weblaw.usc.edu/how/jd/finaid/costs.cfm .)
The estimated costs to attend UC Berkeley's Boalt Hall are not
much less: $75,857.50 for California residents and $79,808.50
for residents of other states. (Berkeley Law, University of
California, Fees and Cost of Attendance, available at
https://www.law.berkeley.edu
/admissions/financial-aid/fees-cost-of-attendance/.)
In comparison, according to data from the U.S. Census, the
median household income in the United States in 2012 was
$51,371. (Amanda Noss, (2013) U.S. Census Bureau, Household
Income: 2012, at p. 3, available at
https://www.census.gov/prod/2013pubs/acsbr12-02.pdf .) That
means that in any given year the median American household could
put its entire income toward funding law school and still not be
able to cover a private law school education. To make matters
worse, tuition continues to increase at levels far outpacing
inflation.
According to ABA statistics, the average 2012 graduate of a
public law school borrowed $84,600, and the average 2012
graduate of a private law school borrowed $122,158. (ABA,
Average Amount Borrowed, 2001-2012,
http://www.americanbar.org/content/dam/aba
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/administrative/legal_education_and_admissions_to_the_bar/statist
ics/avg_amnt_brwd.authcheckdam.pdf.) Significantly, those
figures do not include interest that may accrue before
graduation, undergraduate debt, and debt from loans to study for
the bar exam. After tallying up all of these other costs, it is
not uncommon for law school graduates to carry a debt burden of
between $150,000 and $200,000, and many have much more.
The law school debt burden is particularly heavy for both women
and minorities. Because of the gender and race pay gap, these
groups spend a larger proportion of their earnings on repaying
loans and have less money to put toward other investments.
(Brand, How Student Debt Affects Women and Minorities, Equal
Justice Works, May 9, 2013,
http://www.equaljusticeworks.org/news/blog/studentloanranger-wome
n-minorities.) To make matters worse, minority undergraduates
have higher rates of unemployment, affecting their repayment
power. Finally, according to the National Association for Law
Placement, the average salary of a public interest attorney is
$58,000, compared to the $188,000 average salary of a private
attorney. (http://www.nalp.org/sept2010pubintsal.)
Legislative History Regarding Law School Loan Forgiveness. In
2001, AB 935 (Hertzberg, Chap. 881, Stats. 2001) created the
Public Interest Attorney Loan Repayment Program to help repay
educational loans for participating California attorneys who
practice, or agree to practice, in public interest areas of law.
Participants in the program are eligible for a maximum of
$11,000 in loan assistance over four years. The California
Student Aid Commission, charged with administering the program,
was required to establish eligibility criteria for the program
based upon need and merit. Initial regulations were to be
adopted within one year of the effective date of the initial
appropriation funding the program. Unfortunately, the program
was never funded. According to the Legislative Analyst:
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[The Legislature] authorized 100 warrants for the Public
Interest Attorney Loan Repayment Program. While it was
created several years ago, no warrants have ever been
authorized for this program. The Governor vetoed the
language authorizing these warrants, as well as the
$100,000 the Legislature had appropriated for
administrative costs. (Legislative Analyst's Office,
California Spending Plan 2007-08, The Budget Act and
Related Legislation (Oct. 2007)
[as of June 24, 2015].)
Other Sources of Loan Forgiveness. The federal government
offers a variety of loan repayment assistance or forgiveness for
lawyers in public service careers. The Public Service Loan
Forgiveness program (PSLF) offers tax free forgiveness for
eligible Federal Direct Loans after a student makes 120 monthly
payments while working full time in a qualifying public service
position. Only certain types of employment qualify:
1)Government (local, state, federal or tribal government
organization, agency or entity, other than as a member of the
U.S. Congress);
2)Nonprofit: employment at a nonprofit organization that is
exempt from taxation under section 501(a) of the Internal
Revenue Code is qualifying employment;
3)The Peace Corps; or
4)A private "public service organization": a private public
service organization is a nonprofit organization (that is not
organized under Section 501(c)(3)) that provides specified
services, including military service; public safety; law
enforcement; childhood education; public service for
individuals with disabilities and the elderly; public health;
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and public education.
Applicants for federal loan forgiveness are required to work
full-time, defined as working in qualifying employment in one or
more jobs. They must make 120 qualifying monthly payments on
those eligible loans while in qualifying employment. Each one
of the 120 monthly payments must be made separately, on time,
and for the full amount due.
Many individual schools have their own programs. Justice Works,
a non-profit organization "dedicated to creating a just society
by mobilizing the next generation of lawyers committed to equal
justice," lists over 100 law schools on its website that offer
their own public interest loan repayment programs
( http://www.equaljusticeworks.org/resources/student-debt-relief/l
aw-school-lraps/list-law-school-lraps ), ranging from Harvard Law
School and other highly competitive schools, to others that are
virtually unknown. The Public Interest Attorney Loan Repayment
Program, which the author seeks to fund, acknowledges this fact
by providing that the "program is intended to supplement, and
not to replace, existing loan repayment programs operated by law
schools." (Education Code Section 69743.) In fact, "prior to
participating in the program, an applicant [is required to]
apply for any educational loan assistance from his or her
educational institution for which he or she may qualify. Only
if an applicant has received no loan repayment assistance, or
only partial assistance, from other available sources, may he or
she apply to the program for assistance in repaying the balance
of his or her educational loans." (Ibid.)
Escheated Funds Belong to Their Owners, but are Used by the
State Until and Unless They are Claimed. The UPL governs how
the state handles and disposes of unclaimed property such as
bank accounts and securities held by entities such as banks,
brokerage firms, and insurance companies that owners have not
acknowledged or claimed for several years, generally three.
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Such property by statute escheats, non-permanently, to the state
and the holder of the property must transfer it to the
controller. The controller sells the property (other than
money), and deposits the proceeds in an Unclaimed Property Fund,
from which the controller pays approved claims, as well as
expenses of administering the property. The contents of the
account are regularly transferred to the General Fund.
(Sections 1563-1564.)
When the original owner (or his or her heirs or assignees)
claims the property, the controller approves the claim and pays
the amount of the claim to the claimant. (Section 1540.) No
interest is payable on the claim (Section 1540, subd. (c)), and
any interest or other accruals derived from the Unclaimed
Property Fund is deposited in the General Fund. (Section 1562.)
The purposes of the UPL are to protect the owners of unclaimed
property by finding them and restoring their property to them;
and to give the state rather than the holders of unclaimed
property the benefit of the use of it, most of which experience
shows will never be claimed [Citations and internal quotations
omitted]." (Harris v. Westly (2004) 116 Cal.App.4th 214, 219
[Review denied 2008 Cal. LEXIS 10024 (Cal. Aug. 13, 2008)].)
According to Controller Betty Yee, the State of California
currently possesses more than $7.1 billion in unclaimed property
belonging to approximately 27.9 million individuals and
organizations.
Nationwide, more than $62 billion languishes in unclaimed
accounts. ( Makarechi , Great News for People who Love Finding
Lost Money, Vanity Fair, October 2014, available at
http://www.vanityfair.com/news/daily-news/2014/10/unclaimed-funds
-new-york-lost-money.)
According to the National Association of Unclaimed Property
Administrators, in 2006 alone, states collected nearly $5
billion in unclaimed property and paid out just $1.75 billion
that year (about 5% of the total monies held). There is no
statute of limitations in California, like the vast majority of
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states, for property owners or their heirs to collect funds held
in state custody. However, at least two states now impose time
limits on consumers to step forward and claim abandoned assets:
Idaho (10 years) and Indiana (25 years).
It is fundamental under California law that the owner of
escheated property always has a right to reclaim the property
(or funds from its sale) from the state. This bill would
instead transfer all unclaimed funds from IOLTA accounts for
use, upon appropriation, to repay the law school loans of
attorneys who are practicing in public interest legal
professions. If that were to occur, as envisioned by this bill,
those precise unclaimed IOLTA funds would not be available to
the owners of the escheated funds (the clients who entrusted
those funds to attorneys who, in turn, placed them into IOLTA
accounts that later escheated to the state), but the General
Fund would be. Whenever the owners or heirs sought repayment,
the state would be liable to pay all claims by the owners of
escheated IOLTA funds. Consequently, the state's General Fund
would experience a net loss (although the amount would
constitute a miniscule percentage of the state's General Fund)
of funds.
Background - IOLTA. In the course of their legal practice,
attorneys are frequently required to hold clients' funds for
various lengths of time. It has long been recognized that
attorneys have a professional and fiduciary obligation to avoid
commingling their clients' money with their own. Before 1980,
client funds were typically held in non-interest-bearing
federally insured checking accounts. Because of federal banking
regulations in effect since the Great Depression, banks were
prohibited from paying interest on checking accounts. As a
result, the value of the use of the clients' money in such
accounts inured to the banking institutions.
In 1980, Congress authorized federally insured banks to pay
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interest on a limited category of demand deposits referred to as
"NOW accounts." This category includes deposits made by
individuals and charitable organizations, but does not include
those made by for-profit corporations or partnerships unless the
deposits are made pursuant to a program under which charitable
organizations have "the exclusive right to the interest."
In response to the change in federal law, Florida adopted the
first IOLTA program in 1981 authorizing the use of NOW accounts
for the deposit of client funds, and providing that all of the
interest on such accounts be used for charitable purposes.
Every state in the nation and the District of Columbia has
followed Florida's lead and adopted an IOLTA program, either
through their legislatures or their highest courts. The result
is that, whereas before 1980 the banks retained the value of the
use of the money deposited in non-interest-bearing client trust
accounts, today, because of the adoption of IOLTA programs, that
value is transferred to charitable entities providing legal
services for the poor. The aggregate value of those
contributions in 2001 apparently exceeded $ 200 million. (Brown
v. Legal Found. (2003) 538 U.S. 216, 221-223.) In California,
the interest is transferred to the State Bar, where it is
deposited into the Legal Services Trust Fund Program, which
makes grants to nonprofit organizations that provide free civil
legal services to low-income Californians.
Similar Legislation in Oregon. Oregon is the only state in the
nation in which unclaimed or abandoned client funds held in
lawyer trust accounts are used to fund legal aid programs as a
result of 2009 legislation, SB 687, which amended Oregon's
Uniform Disposition of Unclaimed Property Act (ORS 98.302 to
98.436). SB 687 requires unclaimed client money in lawyer trust
accounts to be used to fund the Oregon State Bar's Legal
Services Program (OSB LSP). The OSB LSP is charged with
managing the state funds appropriated to legal aid and providing
ongoing oversight and evaluation to ensure compliance and
further the program's goals.
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After SB 687 passed, the OSB LSP became the custodian for the
reported client funds. Pursuant to the Uniform Disposition of
Unclaimed Property Act, the funds have to be held in safekeeping
for perpetuity. This created a dilemma concerning how to
disburse the principle so that legal aid received funding but
the OSB did not take on undue risk (i.e., if there were
subsequent claims to collect the funds, which belong to the
clients who deposited them). According to a recent article in
the ABA Journal:
After much deliberation a distribution method and reserve
policy was approved by the OSB Board of Governors. Under
the policy, the OSB LSP holds $100,000 in reserve to cover
potential claims and distributes the revenue that arrives
each year above that amount. The amount of funds disbursed
changes from year to year depending on the unclaimed funds
received and claims made each year. The OSB also entered
into an agreement with the legal aid providers in which the
legal aid providers agreed to reimburse the OSB if the
allotted reserve gets diminished or depleted; to date, the
legal aid providers have not had to provide any
reimbursement. This disbursement method and reserve policy
is reviewed each year to ensure that the policy is still
valid given the current circumstances of the fund. (Baker,
Claiming Unclaimed Property in IOLTA Accounts for Legal
Aid: The Oregon Experience, ABA Journal, Fall 2014/Winter
2015.)
Oregon law differs significantly from California law. Whereas
existing California law provides that owners (and their heirs)
always have the right to obtain payment of unclaimed funds from
the state controller, Oregon law provides unclaimed funds held
by a fiduciary are deemed abandoned if the owner has not
accepted payment of the funds, corresponded in writing about the
funds or otherwise indicated interest in the funds within two
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years after the funds are payable or distributable to the owner.
(ORS 98.332.)
Since the Oregon program's inception in 2010, the state has
received approximately $530,000 in unclaimed property from
lawyer trust accounts. The amount received each year has ranged
from $54,000 to $140,000. The Oregon State Bar maintains a
reserve fund for owners who claim their property. The Oregon
State Bar keeps a minimum of $100,000 in the fund to pay claims.
Only sixteen claims have been made since 2010, totaling just
$32,500. When a large amount of money is delivered to the Bar
Association from one account, the entire amount is placed in the
reserve because it is assumed the owner will eventually claim
the funds.
There are significantly more licensed attorneys in the State of
California (over 163,000, according to the ABA, in 2013) than
the State of Oregon (12,273 in 2013, according to the ABA).
Therefore, there should be considerably more IOLTA accounts in
California (at least ten times as many, if the number of IOLTA
accounts is proportionate to the number of attorneys in
California and compared to the numbers of attorneys in Oregon)
that escheat to the state each year. If approximately $50,000
in unclaimed IOLTA accounts escheat to the State of Oregon
annually, and there are likely at least ten times as many IOLTA
accounts in California, it is possible that at least $500,000 in
unclaimed IOLTA funds escheat to the State of California each
year.
How Many Lawyers Working in Public Interest Law Positions Would
Likely Benefit. Once it is funded, the Public Interest Attorney
Loan Repayment Program will provide grants to eligible
recipients (licensed attorneys who practice or agree to practice
in public interest areas of law in this state) for a maximum of
$11,000 in loan assistance for four years. (Education Code
Sections 69741, 69741.5.) If $500,000 in unclaimed IOLTA funds
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escheat to the state each year and this bill were to become law,
approximately 200 attorneys could obtain grants in a four-year
period. The number of attorneys could be significantly fewer
given that the unclaimed IOLTA funds would also be used, in
accordance with the requirements of this bill, to fund the costs
of administering the Public Interest Attorney Loan Repayment
Program.
Similar Past Legislation. AB 212 (Lowenthal, Chap. 362, Stats.
2013) requires a person holding escheated property to include in
his or her report to the State Controller the name and last
known address of the apparent owner of any escheated property.
Also, authorizes a banking or financial institution to impose a
service charge for notice if the deposit, account, shares, or
other interest has a value greater than $2.
AB 1809 (Monning, 2012) would have directed unclaimed rebates of
premiums owed to enrollees, by health plans and insurers for
failure to spend a certain percentage of premium dollars on
medical care, to a newly created account to be used for health
care outreach and enrollment efforts. It also exempted this
redirection of rebates from current law governing unclaimed
property. AB 1809 died on the Suspense File in Assembly
Appropriations.
REGISTERED SUPPORT / OPPOSITION:
Support
California Attorneys, Administrative Law Judges and Hearing
Officers in State Employment
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California State Conference of the NAACP
Los Angeles County District Attorney's Office, District Attorney
Jackie Lacey
MALDEF
University of California Hastings College of the Law
Opposition
None on file
Analysis Prepared by:Alison Merrilees / JUD. / (916)
319-2334