April 12, 2019
The Honorable Elaine M. Howle
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
RE: State Bar of California Response to State Audit Report 2018-030
Dear Ms. Howle:
The State Bar (Bar) appreciates the California State Auditor’s (Auditor) careful review and ultimate affirmation of the Bar’s need for a substantial fee increase, which was supported by the State Bar’s multi-year financial forecast delineating one-time and on-going licensing, Client Security Fund, and Lawyer Assistance Program funding needs. The Bar also welcomes the Auditor’s recommendation for a multi-year fee bill which would have an unprecedented positive impact on the State Bar’s ability to meet its public protection mission.
In advance of the recent audit, the State Bar identified one-time and on-going licensing fee funding needs of $100 and $250 respectively (and $80 for the Client Security Fund). These figures were reflective of history and cognizant of current reality; 21 years has elapsed since the State Bar has realized a licensing fee increase and there is no mechanism for the Bar to secure even modest or regular fee adjustments to meet changing fiscal circumstances. Given this, the Bar developed a comprehensive funding need that, when combined with a proposed annual Consumer Price Index adjustment, could sustain the Bar for what could be another lengthy period without any ability to modify licensing fees.
The State Auditor recognizes these challenges and has recommended a significantly different paradigm, one in which the Legislature authorizes multi-year licensing fees based upon updated financial forecasts prepared by the Bar. Under the Auditor’s model, the State Bar would have the ability to justify and request a reasonable fee adjustment every three years, accurately forecast long-term budgets, and gain a level of stability and predictability necessary for sustained public protection efforts. Taken collectively, the State Bar embraces the State Auditor’s recommendations, and is hopeful that they form the foundation of the Bar’s 2020 fee bill.
Absent Legislative adoption of this new paradigm however, the State Bar has no recourse but to plan for a scenario in which, after 2020, the agency could go a significant period of time without a fee increase. As such, the moderated 2020 funding levels recommended by the Auditor, which reflect phased staffing increases, capital and information technology projects, and CSF payouts, would not be tenable.
Importantly, the State Bar is in agreement with all of the Auditor’s recommendations, with the caveat that the Bar believes that one, as described below, should be postponed. Additional context is also provided regarding other aspects of the audit narrative.
RESPONSE TO SPECIFIC AUDIT RECOMMENDATIONS
To ensure that the State Bar spends down the assistance program's excessive reserve, the Legislature should suspend the 2020 assistance program fee for both active and inactive licensees.
The State Bar does not dispute the fact that the Lawyer Assistance Program (LAP) Fund maintains a sizeable surplus. This surplus is ultimately reflective of the low utilization of LAP which has been a trend throughout its history. Concerns about that utilization rate were the impetus for the Board of Trustees’ recent action directing staff to work with the Legislature to effectuate a transition of the voluntary portion of LAP to an entity other than the State Bar.
The California Lawyers Association (CLA) has expressed interest in assuming responsibility for the voluntary portion of the program. The State Bar believes that CLA has both the mission alignment and capacity to build a thriving voluntary lawyer assistance program. It will however need resources to do so. At the same time, the State Bar will be substantially restructuring the model it uses to carry out the work of its remaining lawyer assistance program vis-à-vis those in the disciplinary system. This restructuring will involve implementing best practices in discipline-related intervention programs, namely individualized case plans stemming from validated risk/needs assessments, active supervision, and frequent accountability reviews by an adjudicative body. This new approach will give the State Bar the opportunity to more readily identify those whose misconduct may be attributable to substance use or mental health issues and to better protect the public. However, there are a number of unknowns with such a shift, including whether it will result in an increase in the number of lawyers receiving services.
Thus, with respect to both the voluntary program that is expected to grow under CLA’s leadership, and the disciplinary program to be maintained by the State Bar, a healthy reserve balance is warranted to support impending operational changes and expansion. The State Bar recommends that an LAP fee holiday be considered at a later date, after full implementation and evaluation of the impact of these transitions.
STAFFING INCREASE, OCTC, PAGES 14-17
The audit cites vacancy rates as one reason for phased implementation of the 58 new positions for the Office of Chief Trial Counsel (OCTC) included in the State Bar’s financial forecast. The State Bar notes that high caseloads drive turnover, which in turn leads to staff vacancies. The Bar conducts exit interviews with departing staff; workload is invariably cited as a motivating factor for the majority of employees who leave an OCTC position. A phased staffing approach may therefore not be entirely appropriate given the inter-relationship between caseloads and turnover.
Further, while not optimal, OCTC vacancy rates are fairly low. The audit reports cites 16 vacant positions in 2018 and 20 in 2019; compared to the 253 and 255 funded OCTC positions in those years respectively, these figures reflect 6.3 percent and 7.8 percent vacancy rates.
SPECIAL ASSESSMENT FOR CAPITAL IMPROVEMENTS, PAGES 20-21
The audit generally validates the State Bar’s capital improvement plan but
reflects a position that certain costs have been overstated. The cost
estimates included in the State Bar’s financial forecast were generated not
by the State Bar alone but in consultation with a team of outside experts:
a construction project management firm (CBRE), a general contractor, and an
engineering firm. The estimates are based on these experts’ knowledge of
project scopes, market/industry conditions, and comparable projects
completed in other buildings. The State Bar appreciates the Auditor’s
recognition that ultimately competitive bidding and the market will
determine the true costs of approved projects, and the related
recommendation that the amount of the capital assessment to be levied for
the period 2021-2024 be responsive to these actual costs as they are
STATE BAR HAS NOT MAXIMIZED REVENUE FROM ITS SAN FRANCISCO HEADQUARTERS, PAGES 28-34
Lease Rates Below Market . As noted in the audit, the State Bar contracts with a professional third-party real estate services company which was selected in 2012 via a competitive bidding process that involved a thorough evaluation of several leading national and regional companies. The firm the Bar selected, CBRE, is a nationally-recognized leader in all of the real estate services it performs for the State Bar – property management, construction project management and leasing brokerage services. It manages approximately 400 buildings in the San Francisco Bay Area, comprising over 40 million square feet, and is regularly ranked as one of the top commercial real estate brokers in the area. The Bar has accordingly relied on CBRE’s expertise to obtain the best leasing deals possible, which reflect the building’s overall condition and limited amenities. The State Bar appreciates the attention to this issue that the audit has generated and looks forward to issuing a new Request for Proposals for property management and brokerage services this summer.
Unleased Space. The State Bar secured a loan in 2016 to invest in warm shell renovation and tenant improvements for the three vacant floors identified in Table 11 of the audit (1, 3, and 11). Although originally the loan could have provided for completion of the work for all three floors, the loan terms were restructured to add a debt service reserve fund, reducing the amount of funding available for capital investments; only two floors could be completed. Those floors (1 and 11) are now fully leased. No funding has been available for warm shell renovation or tenant improvements for the remaining floor (3). As noted by the Auditor, recently, the State Bar’s floor 1 tenant expressed an interest in making the requisite investments in floor 3 to support expansion. The Bar is actively pursuing this option and hopes to have a lease finalized in the near term.
State Bar Occupied Space Utilization. The State Bar appreciates the Auditor’s identification of square foot per employee as an area of improvement for the Bar. As staffing increases are realized the State Bar will implement the recommendation to reconfigure its space and reduce the per employee footprint. It is important to note however that reconfiguration of the type contemplated by the Auditor is not without a significant cost; related costs are not included in the special assessment amounts recommended by the audit, but will be included in future special assessment calculations.
Regarding the property management company using tenant space for its
management office, the company has been using un-renovated space for this
purpose; it has never occupied space in lieu of a paying tenant.
Property Management Fee. The majority of the fees paid to CBRE -- $590,000 for 2019 -- are lease commissions, which are based on industry-standard commission rates. The property management fee for 2019 is $285,000. The audit report states that the industry-standard property management fee should be approximately 2 percent of gross rent. Taking into account the rental value of the State Bar’s own space, a 2 percent property management fee for 2019 would be $220,000; the actual fee is equivalent to 2.59 percent, a difference of $65,000.
With additional rental income from newly signed leases, the fee in 2020 and
2021 would be the equivalent of 2.32 percent and 2.22 percent,
respectively. Although the audit report questions the amount of the
property management fee, the fee is comparable to that originally proposed
by other bidders, who were also leading national or regional real estate
In closing, I note that, from the State Bar’s perspective, the transformative nature of this audit cannot be overstated. The Bar’s significant efforts to systematically address the legitimate criticisms that have been leveled against it over the last many years, to institutionalize good governance and operational management, and to make meaningful its public protection mission, have been recognized. The methodology for calculating both on-going and one-time fee increases has been validated. And, most significantly, the need for a multi-year fee bill and a rational and predictable process for securing adjustments going forward, has been independently asserted. In addition, the Auditor has raised important issues for the Bar to consider as it seeks a new real estate services company for its San Francisco headquarters this summer.
Leah T. Wilson
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE STATE BAR OF CALIFORNIA
To provide clarity and perspective, we are commenting on the State Bar of California’s (State Bar) response to our audit. The numbers below correspond to numbers we have placed in the margin of State Bar’s response.
The intent of our recommendation is to ensure the assistance program fee aligns with the program’s costs. Given the history of underutilization of the program, which we describe here, we find it unlikely that program participation will increase so significantly by 2021 that the program’s current high reserve would not provide sufficient funding for that year, regardless of whether the California Lawyers Association or another entity assumes management of the voluntary portion of the program. As we discuss here, the Legislature should include the assistance program in a multiyear fee-approval cycle. Thus, in 2020, the Legislature could determine an appropriate fee level for the program moving forward, based on the program’s projected expenses.
While preparing our draft report for publication, some page numbers shifted. Therefore, numbers State Bar cites in its response may not correspond to the page numbers in our final report.
We note that high workloads have contributed to problems with employee retention here of the Audit Results and took this factor into account in our recommendation to increase the trial counsel office’s staff by up to an additional 19 positions in 2020. We do not discount the possibility that the trial counsel’s office may determine it still needs more staff beyond these additions, but continue to believe that adding staff gradually is a more prudent decision for the reasons we elaborate here.
We do not dispute the relative vacancy rate in the trial counsel’s office; rather, as we note here, any vacant positions in this office would need to be filled in addition to filling any new positions. Again, this supports our belief that gradually adding new positions would be a more realistic and effective approach.
here that State Bar should do so “when practical.”
During the five-day period it was reviewing our draft report, State Bar provided us with information regarding the annual fee it pays its property management firm that it had not provided to us during fieldwork. We reviewed this new information, which included the calculation in State Bar’s response, with the certified real estate appraiser we retained. We determined State Bar’s calculations were reasonable and have removed the finding in our draft report that this annual fee was higher than industry standard. Nonetheless, we continue to believe that State Bar would benefit from retaining an expert to participate in its future solicitation and negotiation for property management services, as we suggest here.