BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 641
Senator Corbett
As Amended May 6, 2009
Hearing Date: May 12, 2009
Business and Professions
SK:jd
SUBJECT
State Bar Act
DESCRIPTION
This bill would authorize the State Bar of California (State
Bar) to collect active membership dues of up to $410 for the
year 2010, which would continue the current active dues amount
of $410. Consistent with existing law, those dues would fund
only mandatory programs of the State Bar, and members can deduct
$5 if they did not wish to support lobbying and other
legislative activities. Members can also deduct an additional
$5 if they did not wish to fund access and elimination of bias
programs.
This bill would also provide that the fees paid by limited
liability partnerships (LLPs) and law corporations to the State
Bar shall be used for its regulatory and disciplinary purposes.
Under existing law, the State Bar is prohibited from awarding a
contract for goods and/or services for more than $50,000 unless
it complies with specified public contracting requirements.
This bill would increase that amount from $50,000 to $100,000
for contracts for information technology (IT) goods and/or
services.
BACKGROUND
The State Bar of California is a public corporation. Attorneys
who wish to practice law in California generally must be
admitted and licensed in this state and must be a member of the
State Bar. (Cal. Const. art. VI, Sec. 9.)
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As of May 1, 2009, the State Bar had 164,392 active members and
46,589 inactive members, which represents a slight annual
increase in both active members and inactive members. Total Bar
membership is listed at 222,146, which includes 2,015 Judge
members and 9,150 members who are "Not Eligible to Practice
Law."
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CHANGES TO EXISTING LAW
1. Existing law requires all attorneys who practice law in
California to be members of the State Bar and establishes the
State Bar for the purpose of regulating the legal profession.
Pursuant to the State Bar Act, the annual mandatory membership
fee set by the State Bar's Board of Governors to pay for
discipline and other functions must be ratified by the
Legislature. (Bus. and Prof. Code Sec. 6000 et seq. All
further statutory references are to this Code.)
Existing law authorizes the State Bar to collect $315 in annual
membership fees from active members for a total annual dues
bill of $410 for the year 2009. (Sec. 6140.) The other $95
is pursuant to statutory authorization to assess annually the
following fees: $40 for the Client Security Fund (Sec.
6140.55); $25 for disciplinary activities (Sec. 6140.6); $10
to fund the Lawyer Assistance Program (Sec. 6140.9); $10
special assessment to fund information technology upgrades
(expires January 1, 2011) (Sec. 6140.35); and $10 for the
Building Fund (expires January 1, 2014) (Sec. 6140.3).
Existing law authorizes the State Bar to collect $75 in annual
membership fees from inactive members for a total annual dues
bill of $125 for the year 2009. (Sec. 6141.) The other $50
is pursuant to statutory authorization to assess annually the
following fees: $10 for the Client Security Fund (Sec.
6140.55); $25 for disciplinary activities (Sec. 6140.6); $5 to
fund the Lawyer Assistance Program (Sec. 6140.9); and $10 for
the Building Fund (expires January 1, 2014) (Sec. 6140.3).
Existing case law , Keller v. State Bar of California (1990) 496
U.S. 1, prohibits the use by the State Bar of mandatory dues
to fund political and ideological activities, as a violation
of a member's First Amendment freedom of speech rights, where
such expenditures were not necessarily or reasonably incurred
for the purpose of regulating the legal profession or
improving the quality of the legal services available to the
people of the state. Existing law allows members to deduct up
to $10 from the mandatory dues if the member does not wish to
fund legislative activities and non-Keller lobbying and
activities with his or her dues. (Sec. 6140.05, Keller v.
State Bar of California (1990) 496 U.S. 1.)
This bill would authorize the State Bar to collect active
membership dues of up to $410 for the year 2010.
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2. Existing law requires LLPs and law corporations to register
with the State Bar. (Corp. Code Secs. 16953(h), 13404.)
This bill would provide that the fees paid by LLPs and law
corporations to the State Bar shall be used for its regulatory
and disciplinary purposes
3. Existing law prohibits the State Bar from awarding a
contract for goods and/or services for more than $50,000
unless it complies with specified public contracting
requirements. (Bus. and Prof. Code Sec. 6008.6.)
This bill would increase the above amount from $50,000 to
$100,000 only for contracts for IT goods and/or services.
COMMENT
1.Stated need for the bill
This bill would continue the State Bar's authority to assess and
collect dues from licensed attorneys in California in order to
support the Bar's operations, including discipline. The bill
would also clarify that the Bar can deposit fees collected from
law corporations and limited liability companies in the Bar's
general fund to be used for regulatory and disciplinary
purposes. This change is intended to assist the Bar in its
non-dues revenue adjustments to help ensure that it can fulfill
its public protection and member services roles. This bill
would also increase the Bar's informal bid contracting authority
limits from $50,000 to $100,000 for IT contracts only. The
increased threshold for these contracts is intended to help
provide the Bar with greater flexibility.
2.Flat dues bill appears appropriate
This bill would maintain the current $410 annual membership dues
level for active members for 2009. For several reasons, as
explained below, a flat dues bill for 2010 appears appropriate.
a. State Bar General Fund projections
At the end of 2008, the State Bar had a fund balance of $9
million in its General Fund. This amount is projected to
decrease to $6.8 million by the end of 2009 and to $4.9
million at the end of 2010 (see below chart). The Bar also
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has another $6.4 million in the "Public Protection Reserve
Fund" which is designed as its "rainy-day" fund to allow the
Bar to continue operations should its dues authority not be
continued, as occurred in 1998 and 1999 when Governor Wilson
vetoed the Bar's dues bill in 1997. The following table
outlines the Bar's General Fund Gap Projections provided to
committee staff:
---------------------------------------------------
| |Adjusted |Projected|Projected|
| |2009 | 2010 | 2011 |
|---------------------+---------+---------+---------|
|Revenues |$62.0* |$62.8 |$63.9 |
|---------------------+---------+---------+---------|
|Baseline |$64.2 |$64.7 |$65.3 |
|expenditures | | | |
|---------------------+---------+---------+---------|
|Gap (annual deficit) |($2.2) |($1.9) |($1.4) |
|---------------------+---------+---------+---------|
|Ending retained |$6.8 |$4.9 |$3.5 |
|savings | | | |
---------------------------------------------------
*$ millions
The Bar indicates that the ending retained savings amounts
detailed in the chart above will be reduced to address major
maintenance at the Bar's 180 Howard Street Building in San
Francisco if various capital improvement projects are
undertaken. According to the Bar, the projects are for
"essential repairs and upgrades to the building's structure
and systems that are in poor condition and/or nearing the end
of their useful lives." The Bar estimates the cost of the
major maintenance at $1.6 million in 2009 and $2.1 million in
2010. These amounts would reduce the ending retained savings
balances to $5.2 million in 2009 and $1.2 million in 2010.
The Bar notes, however, that "[t]here is some flexibility
about when to undertake some of these projects. In
particular, the major project to repair the building's masonry
and window frames, currently split into two phases in 2009 and
2010, could be deferred to 2010 and 2011, if absolutely
necessary. Elevator upgrades could be deferred one year, or
split into two years, but this is not recommended." Should
these repairs go forward in 2009 and 2010, however, the Bar's
projections indicate it will deplete its retained savings
amount and have a deficit of $200,000 at the end of 2010. At
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that point, absent any other cost savings or revenue
adjustments, the Bar asserts that it would have to begin using
its Public Protection Fund which would be depleted by the end
of 2013, if current projections held. It is important to
note, however, that in the past capital improvement costs have
been financed and it may be possible to do the same for these
pending projects, rather than deplete the retained savings
entirely. The Bar notes that while this is possible, it
relied in the past on the Building Fund (no longer in
existence) as the source of revenue to repay the loan.
Without that fund as the source, the interest rate charged for
any loan may be higher.
At the end of 2008, the Bar's Public Protection Fund contained
$6.4 million. That amount represents 10 percent of 2008
General Fund operating expenses, six percent of total
agency-wide operating expenses, and six percent of total
agency-wide operating revenues. These percentages are
consistent with the recommendations of the Government Finance
Officers Association which suggests a "minimum GF reserve of
5% to 15% of operating revenues." The Bar states that the
Public Protection Fund is needed because it is "exposed to an
unusual financial risk not experienced by most state and local
governments: the risk of an abrupt 100% loss of its dominant
source of operating revenue-mandatory member dues . . .
Mandatory member dues account for over 90% of the State Bar's
General Fund revenues, financing operating costs exceeding
$1.0 million per week. If the State Bar were to lose the
authority to collect mandatory dues, the Public Protection
Reserve would provide a small but crucial window of time for
the organization to react in a manner that best protects the
interests of the public."
Active member dues levels have increased slightly over the
years as follows: $250 (1999); $395 (2000); $345 (2001); $390
(2002); $395 (2006); $400 (2007); and $410 (2009) (the 2009
amount includes a $10 building fund assessment to be used for
the construction, purchase, or lease of a facility in southern
California).
The Bar had initially requested a $10 dues increase which
would fund full step increases for eligible employees, but the
Bar also notes that if a $5 dues increase were given over the
next three years for both active and inactive members it would
be able to "fund negotiated one-half step increases in each of
those years OR balance [the] budget without an operating
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deficit." It does not appear that a dues increase is required
this year, however, as the Bar states, "at current staffing
and operating levels, the Bar will be unable to continue to
operate without significant cost reduction measures or modest
increases in authorized dues levels beginning in 2011"
(emphasis added). And, as the numbers in the above table
further demonstrate, the Bar still has a retained savings
amount that would not be depleted until the end of 2010, if
certain capital projects are undertaken. If those projects
are delayed, or modified in some way, or if some or all of the
costs can be financed, the retained savings amounts would
likely be less impacted.
b. Cost reduction measures and possible revenue enhancements
The Bar indicates that it is planning to implement the
following cost reduction measures: (1) defund 46 vacant
positions totaling a nine percent workforce reduction (saves
$4 to $5 million annually); (2) end General Fund subsidy of
the Lawyer's Assistance Fund and implement plans to reduce
funding to the statutory minimum (saves approximately $300,000
in 2010 and increasing in future years); and (3) end the print
edition of the CalBar Journal in 2010 (saves approximately
$1.1 million annually).
In addition, this bill would clarify that fees paid by Law
Corporations and LLPs are to be allocated to the General Fund
and used for regulatory purposes. This clarification permits
the transfer of $1.2 million annually into the Bar's General
Fund. The Bar has also indicated that it is "currently
evaluating potential additional sources of revenues including
increases in State Bar Court filing fees and the
implementation of new State Bar Court-related fees." At this
time, it is not clear how much revenue such changes would
raise.
c. History of General Fund activity
Documents provided to committee staff from the Bar indicate
the history of the Bar's General Fund activity. Over the past
few years, the Bar has generally taken in more money than it
has spent. As illustrated below, 2006 and 2007 revenues were
higher than expenditures. In 2008, however, expenditures
outpace revenues. The same is true for the 2009 adjusted
figures.
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-----------------------------------------------------------
| |Actual |Actual |Actual |Adjusted |
| |2006 |2007 |2008 |2009 |
|---------------+----------+----------+----------+----------|
|Revenues |$58.0* |$61 |$61.5 |$62 |
|---------------+----------+----------+----------+----------|
|Expenditures |$54 |$58 |$62.3 |$64.2 |
| | | | | |
-----------------------------------------------------------
*$ millions
When committee staff inquired as to the reason for the
increase in expenditures, Bar officials explained that much of
the increase was due to increased personnel costs (for
example, rising health care costs and a change in CalPers
calculations which will take effect in 2010). In addition,
costs for "buildings and equipment"-which includes tangible,
durable goods such as computers, monitors, printers, and
lower-tech items such as hand-trucks, desks, chairs, and file
cabinets-have nearly doubled over the last three years. It is
not clear why that has been the case.
d. Delay of State Auditor's biennial report on State Bar's
performance
The State Auditor is required by law to conduct a performance
audit every two years of the State Bar's operations during the
prior fiscal year. This year, the audit was due to the
Legislature on April 30, 2009, however the State Auditor
determined that it was necessary to conduct a more in-depth
review of the Bar's attorney discipline process. As a result,
the audit will not be completed until July 2009.
In the past, the State Auditor's biennual report has helped to
inform this committee's oversight responsibilities. For
example, in 2007 the report raised questions regarding how the
Bar prepared its budget. The State Auditor noted that the
Bar's "budget preparation methodology does not ensure that all
resources are identified and properly allocated so that the
State Bar effectively and efficiently accomplishes its
statutory mandates." In particular, the State Auditor raised
concerns that the Bar's budget process focused primarily on
estimating the costs of current staff and other resources
using known or anticipated price increases. As a result, the
State Auditor recommended that the Bar instead align its
budgets with the results of its strategic planning process in
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order to "effectively allocate its resources and justify its
membership fees." The Bar agreed with this recommendation and
indicated that it was "currently developing a budget
preparation system that will enable it to align budgets with
functional areas as defined in the strategic plan." The Bar's
2009 Proposed Budget provided to committee staff appears
intended to align the budget "with the Bar's strategic
direction and management structure."
The 2007 State Auditor's report also brought to light the
Bar's action in collecting the assessment of the $10 building
fund fee for the potential purchase of a State Bar facility in
Los Angeles. That action was taken without notice to the
Legislature and without any opportunity for legislative
review. The Auditor's report played a critical role in
highlighting the issue, as this committee's analysis of SB 686
(Corbett, 2007) noted at the time, ". . . the first notice
committee staff received of this plan was in the Auditor's
report."
As a result, it will be especially helpful to this committee's
work over the next two years to have the benefit of the
expertise and reporting of the State Auditor's report, due in
July.
3.Recent embezzlement and Bar's response
On April 6, 2009, the Attorney General filed embezzlement and
tax evasion charges against Sharon Pearl, the Bar's former
Director of Real Property (DRP). Pearl embezzled Bar funds over
a period of eight years, and estimates of the loss ranged from
$655,000 to $675,820. In response to the incident, Laura Chick,
Chair of the State Bar Board of Governors' Audit Committee,
submitted a six-page letter to the Chairs and Vice Chairs of the
Senate and Assembly Judiciary Committees explaining how the
embezzlement occurred and describing the Bar's response to the
incident. According to the letter:
The [Bar's internal] investigation determined that the DRP
diverted tenants' payments for rent and fees to a non-State
Bar account over which she had control, and hid the
non-receipt of those payments by manipulating information
about expected rent revenue and falsifying documentation
supporting rent credits for various tenant renovations or
service interruptions due to the Bar's seismic retrofit
project. . . . She used her position to become the single
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point of contact between the State Bar and its tenants; she
verified the rent payment schedules prepared by the Office of
Finance; and she was personally responsible for both issuing
invoices to tenants and collecting rent checks from them.
This, ultimately, was the point of failure in the internal
controls over rent billing and collection, as the DRP was able
to divert rent payments while providing plausible explanations
for their absence to the Office of Finance, and to the Bar's
independent auditors (Deloitte & Touche) during the annual
financial audit.
After the incident came to light, the State Bar hired a
certified public accounting firm specializing in local
governments to perform an independent forensic review and make
recommendations for improvements to the internal controls
relating to rent billing and collection procedures. As a
result, according to the letter, the Bar has taken a number of
actions to improve rent billing and collection procedures
including:
the Office of General Counsel prepared a lease profile
for each tenant, clearly outlining all lease terms and
conditions;
the Office of Operations prepared a rent income schedule
for each tenant, listing the expected rent, by month, for
the entire term of the lease;
leases, lease profiles, rent income schedules, and all
relevant supporting documents related to tenants have been
jointly verified and signed-off by the State Bar's Offices
of Operations, Finance and General Counsel and are jointly
accessible to all three in a secure location on the State
Bar's network. This change ensures appropriate checks and
balances, as no single department or individual employee
has a monopoly on information; lease terms and expected
revenues are verifiable and any deviations are transparent;
the Office of Finance now invoices tenants directly,
based on the rent schedules that have been loaded into the
accounting system. Tenants have been instructed to mail
rent checks directly to the Office of Finance. The Bar is
also exploring the possibility of collecting rent payments
via electronic funds transfer from tenants; and
the State Bar will explore the possibility of engaging a
professional property management company.
1.Bill would clarify ability of Bar to deposit fees collected
from law corporations and limited liability partnerships into
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the General Fund
This bill, by providing that the Bar can deposit fees collected
from law corporations and limited liability partnerships into
the Bar's General Fund for regulatory and disciplinary purposes,
is intended to assist the Bar in its non-dues revenue
adjustments. This change will enable the Bar to transfer $1.2
million into its General Fund on an annual basis.
Currently, registration fees collected from law corporations and
LLPs are maintained in a separate account and only used to
process applications from entities that wish to obtain
designation as a law corporation or LLP. The Bar points out,
however, that its "other disciplinary and regulatory functions
related to these entities and the attorneys who are associated
with them go beyond the administrative operations that are now
supported by these revenues." As a result, this bill would
clarify that these fees may be transferred to the Bar's General
Fund and used for regulatory and disciplinary purposes.
Under existing law, both law corporations and LLPs must maintain
security for claims. Only law corporations, however, must
include a statement in their application attesting to the fact
that they have liability insurance. The bill should therefore
be amended to require LLP applicants to also state, as a
check-off on the Bar's LLP application, that the LLP has
complied with Corporations Code Section 16956(a)(2), which
requires security.
Suggested amendment
On page 3, after line 38, add new Section 6174.5 to read:
6174.5. The State Bar shall require on its form for the
Application for Issuance of a Certificate of Registration as a
Limited Liability Partnership that the applicant declare that
he or she has complied with the security requirements of
Corporations Code Section 16956(a)(2).
2.Bill would increase informal bidding requirement threshold for
IT projects
Under existing law the State Bar is prohibited from awarding a
contract for goods and/or services for more than $50,000 unless
it complies with specified public contracting requirements.
This bill would increase that amount from $50,000 to $100,000
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only for contracts for IT goods and/or services. This change is
consistent with a recent change by the Department of General
Services to increase the dollar thresholds for conducting
informal competitive solicitations for non-IT goods from $50,000
to $100,000 and IT goods and services from $500,000 to $1
million. These changes did not apply to the Bar, which seeks an
increase which it asserts is "necessary to keep pace with the
cost of contracting for these goods and services."
In order to ensure that the Bar is using its current employees
to the best of their abilities, the bill should be amended to
provide that the Bar should have a preference for using in-house
employees for IT projects whenever possible.
Suggested amendment
Add a new Section 6140.37 to read:
6140.37. The State Bar shall have a preference for using
in-house employees for information technology projects,
whenever possible. Nothing in this section shall be read to
be inconsistent with any memorandum of understanding between
the State Bar and the recognized employee organizations or
relevant principles of labor law.
The bill should also be amended to require that the Bar report
back to the Legislature regarding the bill's increase in
contracting authority.
Suggested amendment
Add a new Section 6140.38 to read:
6140.38. (a) The State Bar shall report to the Senate
Committee on Judiciary and Assembly Committee on Judiciary on
or before April 1, 2010, and annually thereafter, on the
impact of the changes made to this section as proposed to be
amended by Senate Bill 641 of the 2009-10 Regular Session of
the Legislature. In addition to a description of the impact
of the changes, the report shall also include, with
specificity: (1) the projects which previously would have been
required to comply with Article 4 (commencing with Section
10335) of Chapter 2 of Part 2 of Division 2 of the Public
Contract Code but are no longer subject to that requirement
because the contract amount is between $50,000 and $100,000;
and (2) whether the changes have improved the efficiency of
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the contracting process. The information required by this
section may be included in the report required under Section
6140.36.
(b) This section shall remain in effect only until January 1,
2014, and as of that date is repealed, unless a later enacted
statute, that is enacted before January 1, 2014, deletes or
extends that date.
Support : None Known
Opposition : None Known
HISTORY
Source : State Bar of California
Related Pending Legislation : None Known
Prior Legislation :
AB 3049 (Judiciary), Chapter 165, Statutes of 2008
SB 686 (Corbett), Chapter 474, Statutes of 2007
AB 1529 (Jones), Chapter 341, Statutes of 2005
SB 1490 (Judiciary), Chapter 384, Statutes of 2004
AB 1708 (Judiciary), Chapter 334, Statutes of 2003
SB 352 (Kuehl), Chapter 24, Statutes of 2001
SB 1367 (Schiff), Chapter 118, Statutes of 2000
SB 144 (Schiff), Chapter 342, Statutes of 1999
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