COMMITMENT • INTEGRITY • LEADERSHIP	View full PDF report
State Bar of California It Should Balance Fee Increases With Other Actions to Raise Revenue and Decrease Costs Report Number: 2018-030

Audit Results

State Bar’s Proposed 2020 Licensing Fee Includes a Premature Staffing Increase

State Bar has proposed a 2020 licensing fee that is higher than necessary for that year. This fee, which attorneys pay to maintain their licenses to practice law in California, provides revenue to support many of State Bar’s operations. State Bar calculated its proposed fee of $408 per active licensee for 2020 by determining the amount that it believes it will need to fund its current operations, meet its contractual commitments, add new staff to its trial counsel’s office, and pay for additional retiree health care benefits for eligible employees. However, our analysis shows that some of State Bar’s estimates are higher than necessary for 2020, as we discuss in detail below. We therefore believe that $379 is a more appropriate licensing fee.

State Bar calculated its proposed licensing fee to include a plan to hire 58 new staff for its trial counsel’s office in 2020. State Bar wants to add the additional positions to reduce staff workload and speed its case‑processing times: its staff noted that high workloads have contributed to problems with employee retention and to case‑processing delays. State Bar based its plan for the 58 staff on a workload study that it presented to its board in 2018. This study determined that the trial counsel’s office needed new staff to meet the statutory goal that, for most cases, it must either dismiss the case, admonish the attorney, or file disciplinary charges with the State Bar Court within 180 days of receiving the complaint. Processing a case involves several phases including intake, investigation, and prefiling. The study found that the trial counsel’s office had a median time of nearly 180 days for completing the investigative stage alone. To reduce the length of the investigative stage, the study calculated that the trial counsel’s office needed 58 additional staff—or about three additional enforcement teams, each including attorneys, investigators, and administrative support staff.

Although we agree that the trial counsel’s office needs additional staff, recent and planned procedural changes related to the trial counsel’s office may affect its staffing needs. State Bar staff who prepared the workload study discussed above based the study’s conclusions, in part, on a staff survey conducted in September and October 2017. At that time, the trial counsel’s office had only recently adopted its enforcement team structure, which it hoped would increase efficiency. Also, beginning in 2017 and continuing into 2018, the trial counsel’s office implemented a new case prioritization protocol that includes eliminating unnecessary tasks. Finally, in early 2019, State Bar implemented a digital case management system for the trial counsel’s office that could further increase its efficiency. We believe that it is not prudent to base significant staffing decisions on a study done in the midst of these types of changes.

Adding 58 new positions in 2020 would also be disruptive, and consistent vacancies in the trial counsel’s office makes filling so many positions in 2020 unrealistic. The 58 positions would range from entry to senior levels. Because the trial counsel’s office likely would fill some of the senior positions through internal promotions, it would create vacancies in lower‑level positions, causing disruption as promoted staff adjusted to increased responsibilities and as newly hired staff learned their duties. In addition, the trial counsel’s office has had trouble maintaining its current staffing levels. For example, in January 2018, it had 16 vacant positions in classifications comparable to those of the 58 positions, including attorneys and investigators. In January 2019, it had 20 vacant positions in these classifications. The trial counsel’s office will likely continue to have vacant positions to fill in 2020, and adding so many more open positions will only increase the hiring challenges it faces.

We recommend that instead of adding all 58 new staff in 2020, State Bar should set its goal, and the consequent licensing fee amount, at a level that would allow for a more gradual staffing increase. Specifically, we suggest that it add up to 19 new positions in 2020 and that it subsequently reassess its staffing needs as it moves forward. The 19 new hires would compose one enforcement team, as the text box describes. One additional enforcement team may not provide the staffing needed for State Bar to meet the 180‑day goal, but gradually increasing staff over time will allow State Bar to quantify the effects of implementing its new processes and of adding an enforcement team so that it can evaluate and justify any future needs for new staff and the associated fee increases.

While State Bar’s proposed staffing increases for 2020 are premature, its decision to increase its employer contribution to retiree health care benefits for eligible employees is reasonable. However, this change will require an increase to the licensing fee. Before 2018 State Bar did not provide its nonexecutive employees with health care benefits during retirement. After transitioning its benefit plans to CalPERS, State Bar began offering retiree health care benefits to all employees in May 2018. Currently, State Bar pays the minimum that CalPERS requires for the employer contribution to the monthly premiums for these health care benefits. In 2020 State Bar plans to increase its contribution to match what it offers executive retirees. However, according to the chief administrative officer, this change depends on the Legislature approving an increased licensing fee. Table 4 shows State Bar’s past, current, and planned maximum retiree medical benefits for its employees.

Table 4
State Bar Plans to Increase Its Contribution to Employees’ Post‑Retirement Medical Benefits

	MAXIMUM MONTHLY CONTRIBUTION TO MEDICAL PLAN PREMIUM WHEN EMPLOYEES RETIRE*
DESIGNATION OF CURRENT EMPLOYEES	TO DECEMBER 31, 2017	AS OF JANUARY 1, 2018	PLANNED FOR JANUARY 1, 2020
Executive
Employed as of December 31, 2017	100%	100%	100%
Hired on or after January 1, 2018	NA	80%	80%
Nonexecutive†	$0	$136‡	80%§

If the planned change takes effect, State Bar will pay 80 percent of the monthly premiums for retiree health care benefits for employees older than age 50 with at least 15 years of service. Providing health care benefits equally to all retired employees is reasonable. Thus, we have included the related necessary fee increase in our proposal. Table 5 compares State Bar’s projected costs and licensing fee for 2020 with our recommended costs and licensing fee. In Appendix B we summarize fees for inactive licensees.

Table 5
State Bar’s Proposed Licensing Fee for 2020 Is Larger Than Necessary
(Dollars in Thousands)

	PROJECTED EXPENSE
EXPENSE TYPE	STATE BAR PROPOSAL	STATE AUDITOR RECOMMENDATION
Wages and salaries*
Total costs for all State Bar staff, including State Bar’s projected addition of 58 staff to the trial counsel’s office.	$60,305
Total costs for all State Bar staff, including State Auditor’s projected addition of 19 staff to the trial counsel’s office.		$56,497
Health care benefits for eligible retired employees	3,215	3,215
Additional operating costs‡	34,770	33,364
Totals	$98,290	$93,076
	FEE
2020 Licensing fee†	$408	$379

State Bar’s Proposed 2020 Special Assessment Fee Includes Premature Funding for Some Projects

State Bar has proposed a one‑time special assessment fee of $250 to pay for information technology (IT) and capital improvement projects it hopes to implement over the next five years as well as to rebuild its depleted general fund reserve. State Bar stated that it wants the entire amount in 2020 to ensure the planned IT and capital improvement projects are fully funded. Although we agree that State Bar should be able to plan the projects with the assurance that it will have full funding, we recommend spreading the assessment fee over five years and adjusting it each year as necessary to ensure that it aligns with reasonable upcoming and current project costs. We also recommend a smaller total assessment fee because some of the IT and capital improvement projects the fee would pay for are unnecessary at this time or too early in the planning phase to justify immediate funding.W Similarly, we recommend that State Bar gradually rebuild its general fund reserve over a five‑year period, which will ensure that the special assessment fee reflects changes in its staffing levels and technology efficiencies that may alter its operating costs and the corresponding reserve amount.

The special assessment fee’s first element addresses IT projects, but some of State Bar’s proposed IT projects do not align with its current strategic plan or its readiness to pursue them. State Bar has proposed funding 11 IT projects from 2020 through 2024, with costs that total $16.5 million. However, only six of the 11 projects align with State Bar’s strategic priorities or with recognized best practices. As Table 6 indicates, to fund these six IT projects, State Bar would need a total special assessment of $65 from 2020 through 2024, beginning with an assessment of $22 in 2020. We discuss the special assessment amount to fund capital improvements later in this section.

Table 6
State Bar’s Proposed 2020 Special Assessment for IT and Capital Improvement Projects is Higher Than Necessary

	STATE BAR PROPOSAL	STATE AUDITOR RECOMMENDATION
PURPOSE OF SPECIAL ASSESSMENT	ONE-TIME	TOTAL 2020 THROUGH 2024*	2020 FEE ONLY†
IT projects	$82	$65	$22
Capital improvements	134	30	16
Totals	$216	$95	$38

Table 7 identifies each of the 11 IT projects and their associated costs, and it shows the six that we include in the special assessment calculation. We included three projects in the calculation—hardware upgrades, Oracle Fusion, and the Licensee Information Management System—because the board identified them as critical in State Bar’s strategic plan for 2017 through 2022. The funding request for these three projects also coincides with the projects’ planned timelines. In addition, the two IT security assessments and the disaster recovery plan warrant funding through the special assessment fee at this time. The California Department of Technology—the department responsible for all aspects of technology in California state government—has identified such plans and assessments as best practices to mitigate security and operations risk. Similarly, the Judicial Council of California—the policymaking body of the California courts—has endorsed disaster recovery plans as a good business practice.

Table 7
Six of State Bar’s 11 Proposed IT Projects Currently Warrant Funding
(Dollars in Thousands)

PROJECT	DESCRIPTION	STATE BAR ESTIMATED 5-YEAR COST	STATE AUDITOR RECOMMENDATION
State Auditor Recommended Projects
Hardware upgrades	Upgrading equipment, such as computers and printers	$7,324	✔
Oracle Fusion	Upgrading finance and procurement software	1,379	✔
Licensee Information Management System (LIMS)	Creating a single database to manage licensee records	3,512	✔
Network security assessment	Completing risk assessment for IT networks (every three years)	400	✔
Application security assessment	Completing risk assessment for IT applications (every three years)	200	✔
Disaster recovery services	Creating an IT plan for disasters	350	✔
Total		$13,165
State Bar Additional Proposed Projects
Enterprise Content and Records Management Systems	Creating a single, internal file management system	$1,400	X
Paperless State Bar projects	Transferring paper documents into a digital format	600	X
Migration of remaining AS400 applications	Updating older systems that manage business processes	633	X
Data warehouse/analytics	Creating a single database for State Bar data	540	X
Mobile applications	Creating mobile applications for licensee use	312	X
Total		$3,485

The remaining five projects do not need immediate funding because the projects do not represent critical needs for the agency and State Bar will have more planning to do before their implementation. Creating mobile applications, migrating AS400 applications (updating older systems that manage business processes), and implementing paperless projects will all require additional staff resources, and State Bar’s Office of Information Technology (technology office) has not determined its staffing needs for these projects. When we analyzed the technology office’s IT planning process, we determined that the enterprise content and record management systems and data warehouse projects could meet planned project timelines. However, a smaller project portfolio lessens State Bar’s risk of missed deadlines. Thus, we also excluded these projects from the fee calculation. The director of the technology office agreed that these five projects are not as critical as the others.

The special assessment fee’s second element addresses capital improvements, but some of State Bar’s proposed projects are not essential at this time and the costs of others exceed current market rates. Of the 11 capital improvement projects State Bar has included in its proposed special assessment fee, we recommend that eight receive funding from that fee beginning in 2020, as Table 8 indicates. According to the certified real estate appraiser we retained, building owners undertake capital improvement projects either to comply with current building codes or to sustain or improve current lease rates. The eight projects that we recommend are necessary for these reasons.

Table 8
Eight of State Bar’s 11 Proposed Capital Improvement Projects Warrant Funding
(Dollars in Thousands)

		5-YEAR COST
PROJECT AND LOCATION	DESCRIPTION	STATE BAR ESTIMATE	CONSULTANT ESTIMATE*	STATE AUDITOR RECOMMENDATION
State Auditor Recommended Projects
HVAC (Los Angeles)	Replacing half of the current HVAC system	$800	$800	✔
HVAC (San Francisco)	Replacing chiller, existing boilers, and other HVAC system components	2,095	1,146	✔
Fire/life safety (San Francisco)	Upgrading smoke and fire detection system	1,225	319	✔
Energy management system (San Francisco)	Upgrading system that controls the HVAC and life safety systems	350	350	✔
Generator (San Francisco)	Replacing emergency generator and installing pump connection to roof	1,350	572	✔
Elevators (San Francisco)	Upgrading obsolete elevator equipment	2,450	2,653	✔
Floor 4 restroom upgrade (San Francisco)	Bringing the restroom up to disability code	300	164	✔
Ground floor infrastructure (San Francisco)	Upgrading exhaust duct and electrical system	200	200	✔
Totals		$8,770	$6,204
State Bar Additional Proposed Projects
Seismic/structural upgrades (San Francisco)	Stabilizing the building's core†	$1,955	NA	X
State Bar data center (San Francisco)	Reconfiguring power supply, HVAC, generator, electrical, and room for data center	1,550	NA	X
Façade repair/resurfacing (San Francisco)	Replacing building façade and window seals	12,500	NA	X
Total		$16,005

Of those eight necessary projects, our appraiser found that the proposed costs for four of them exceed acceptable market rates. For instance, State Bar projected that the San Francisco office’s heating, ventilation, and air conditioning (HVAC) project would cost $2.1 million. However, based on the cost manual from Marshall & Swift Valuation Service—an industry‑standard appraisal guide—our appraiser determined that State Bar’s estimated cost for this project exceeds local market rates by nearly $1 million. As Table 6 shows, we recommend an assessment totaling $30 over five years. The amount of the assessment per year would fluctuate depending on the projects underway at that time, and our recommendation for 2020 is $16. State Bar noted that the final cost of these projects will ultimately depend on the results of a competitive bidding process. We agree that State Bar will need to revisit its estimates as it determines actual costs. Nevertheless, our appraiser’s estimates of project value represent a reasonable estimate at this time.

The appraiser found that three of State Bar’s proposed projects could not be justified by current building codes or by the projects’ potential to elevate or preserve lease rates. The most costly example is State Bar’s $12.5 million proposal for resurfacing and façade repair on its San Francisco office building. State Bar’s project sheet notes that this project is meant to eliminate water and air intrusion and improve the building’s energy efficiency. However, our appraiser noted that this repair is not necessary to market the property to prospective tenants.

The special assessment fee’s third element addresses rebuilding State Bar’s general fund reserve, which it recently depleted to less than the board‑required level of 17 percent of its operating costs. For the past three years, State Bar has budgeted and spent more from its general fund than it has received in related revenue, and its 2019 budget also reflects deficit spending before accounting for its using the reserve. State Bar began depleting its reserve in 2017 after the Legislature did not authorize it to collect a licensing fee for that year. Although the Supreme Court approved an interim assessment to fund State Bar’s discipline system, the amount was less than the licensing fee had been, and thus State Bar had a $4.8 million revenue shortfall. In 2018 State Bar continued to draw on its reserve to fund capital improvements and IT projects.

State Bar projects that its reserve will equal 12 percent of its operating budget for 2020. Consequently, it has proposed a one‑time $34 assessment in 2020 to immediately restore its reserve to 17 percent. Although we agree that State Bar should restore its reserve, we recommend that it achieve a target reserve amount of 13 percent in 2020 to mitigate the significant effect a one‑time assessment would have on the fee that attorneys must pay. Further, future State Bar operating costs are difficult to predict because of the potential for changes in staffing levels and for technological efficiencies. Thus, we recommend using smaller special assessments to incrementally rebuild State Bar’s general fund reserve by 1 percent each year until it reaches 17 percent in 2024. Using our recommended scenario of adding as many as 19 staff to the trial counsel’s office, we calculated that a $3 special assessment in 2020 would bring State Bar’s general fund reserve to 13 percent. To meet the board’s reserve policy by 2024, State Bar would have to determine the special assessments it will need after 2020 to achieve these 1 percent annual increases. Appendix C, Table C.1, details our recommendations for the special assessment fees to cover IT projects, capital improvements, and rebuilding the general fund reserve over the five‑year period.

State Bar’s Proposed 2020 Program Fees Are Higher Than Necessary

As we discuss in the Introduction, state law authorizes State Bar to impose mandatory fees to support specific functions, such as the security fund and the assistance program. The security fund currently has a significant number of pending claims, and State Bar will need more revenue to pay them than the current mandatory fee generates. State Bar has proposed a 2020 fee that would fund all the current pending claims it expects to pay. However, we recommend a 2020 fee that funds only those claims State Bar will likely pay that year. In contrast to the security fund, the assistance program has an excess reserve that State Bar can use to fund the program’s activities in 2020. Consequently, we recommend that the Legislature temporarily suspend the annual fee that State Bar collects from active licensees for the assistance program. In Appendix B we summarize State Bar’s program fees for inactive licensees.

State Bar Has Overestimated the Security Fund’s Revenue Needs for 2020

Although State Bar’s $40 security fund fee has generally remained unchanged for 29 years, the number and value of pending claims against the fund have increased. As we discuss in the Introduction, the security fund received an unusually large number of applications from 2009 through 2013: it averaged 3,062 applications each year in this period, in contrast to the average of 1,118 applications it received from 2005 through 2008. The influx of claims—driven by the residential mortgage crisis, according to State Bar—resulted in the security fund having 2,100 pending claims as of January 2019. State Bar estimates that it will pay 40 cents on the dollar for each claim that it investigates and substantiates. Consequently, State Bar has calculated that it needs $24.2 million to pay the fund’s current pending claims, and to meet this need, it has requested a one‑time increase of $80 to the annual security fund fee for active licensees, raising the fee from $40 for 2019 to $120 for 2020.

However, we question State Bar’s need to collect fees from its licensees in 2020 to cover all the current pending claims when it may not pay them for several years. We analyzed State Bar’s claims payment data to better align the security fund’s annual revenue projections to claims activity. Our analysis of paid claims from 2016 through 2018 shows that State Bar took 511 days on average to investigate and pay claims. As we describe in the Introduction, State Bar may generally investigate claims and determine reimbursements only after attorneys meet particular status requirements, such as being disbarred or disciplined. Using this 511‑day average, we evaluated the year in which State Bar would likely approve the payment of pending claims. We determined that the security fund would need an additional $8 million for State Bar to pay eligible claims in 2020, which equates to a program fee of $80 for active licensees for that year. We summarize our calculation in Table 9. Because pending claims become eligible for review and payment over time, State Bar would have to refine and apply our analysis to determine its revenue needs for 2021 and thereafter.

Table 9
To Pay Pending Claims, State Bar Needs an Increase in the 2020 Security Fund Fee
(Dollars in Thousands)

REVENUE, EXPENSES, AND CLAIMS	AMOUNT
2019
2019 Budgeted revenue*	$8,423
2019 Budgeted administrative expenses	(2,054)
Subtotal	6,369
2019 Auditor-estimated claims payments	(9,777)
Total 2019 estimated pending claims in excess of fund revenue	($3,408)
2020
2020 Projected revenue*	$8,539
2020 Projected administrative expenses	(2,149)
Subtotal	$6,390
2020 Auditor-estimated claims payments†	($11,029)
Total 2020 estimated pending claims in excess of fund revenue	($4,639)
2019 Estimated pending claims in excess of fund revenue	($3,408)
2020 Estimated pending claims in excess of fund revenue	(4,639)
Total	($8,047)
	FEE
2020 Security fund fee needed to pay claims‡	$80

The chief of programs noted that State Bar’s history of not getting routine fee increases is driving its request to secure the revenue it needs through a one‑time fee increase. She expressed concern that if State Bar charged only our recommended smaller fee increase for 2020, and if the assumed future increases were not approved, then State Bar would not be able to effectively resolve all the pending claims. She also said that any revenue stream must be sufficient to allow State Bar to pay as many claims in a year as it approves. To address these potential concerns, we considered in our calculations the timing of when State Bar was likely to pay claims given the security fund’s payment history. We also evaluated the security fund’s payment activity from 2011 through 2014, when the fund had a deep reserve and State Bar did not have to balance the number of claims it paid with annual fee revenue limits. The chief of programs agreed that State Bar could include the timing of when it would pay claims in its revenue estimates to offer more refined analysis of the necessary annual fee.

State Bar has identified some additional steps that it can take to improve the security fund’s financial condition. In 2018 it presented 14 initiatives to its board that could help pay for the security fund’s current and anticipated needs, one of which was the one‑time fee increase. The board accepted six and rejected eight of the initiatives. Table 10 summarizes the initiatives and the board’s decisions on them. Three of the six initiatives the board accepted generated $1.8 million for the security fund in 2018. The remainder have either not yet been implemented or represent a process change. However, these initiatives alone will not generate enough revenue annually for State Bar to pay all approved claims. As we describe earlier, our analysis shows that for 2019 and 2020, State Bar may approve claims that exceed security fund revenue by $8 million.

Table 10
The Board Has Approved Some Initiatives to Increase Revenue for the Security Fund

SECURITY FUND INITIATIVE	BOARD APPROVED
Request a security fund fee increase from the Legislature.	✔
Apply the minimum reserve requirement to program administration costs only.	✔
Transfer surplus funds from the assistance program to the security fund.	✔
Properly allocate fees paid by licensees in the multijurisdictional fee category to the security fund.*	✔
Adopt new rule for the State Bar Court to impose monetary sanctions against attorneys and deposit collections to the security fund.†	✔
Reduce the time it takes to pay claims by changing security fund processes.	✔
Reduce the maximum claim payout from $100,000 to $50,000.	♦
Allow licensees to make voluntary contributions to the security fund.	♦
Eliminate or limit claims about loans or investments made through attorneys.	X
Pay claims from California residents only.	X
Adjust eligibility for a claim payout based on claimant’s income level.	X
Limit the payout amount on claims for fees for unperformed services.	X
Impose a time limit within which a claim must be filed.	X
Require licensees to pay the full security fund fee, regardless of means.‡	X

In rejecting eight of State Bar’s proposed security fund initiatives, the board noted that it did not want to harm claimants; however, we believe that some of these initiatives could improve the program. The agenda and minutes from the board’s July 2018 meeting indicate that it rejected certain security fund initiatives because it viewed those initiatives as contradicting State Bar’s priority to protect the public through the regulation of attorneys. For example, as Table 10 shows, the board rejected initiatives to limit or exclude certain categories of claims or to pay the claims of California residents only. The Legislature has also expressed concern about State Bar adopting initiatives to claimants’ detriment. However, we believe State Bar and the Legislature share an interest in balancing the fees that licensees pay with compensating individuals who have suffered financial harm because of their attorneys. Consequently, the board and the Legislature may want to explore further two initiatives that the board initially rejected—capping claims payouts and allowing voluntary contributions.

State Bar and the Legislature have the option to change the payout cap as a way to help limit security fund fees. Until January 2009, State Bar maintained a $50,000 cap. For losses that claimants incurred on or after that time, State Bar increased the payout cap to $100,000 because the $50,000 limit had been in place for more than four decades and inflation had eroded the cap’s nominal value. State Bar also commissioned an actuarial study in 2008 that concluded that increasing the maximum payout would not threaten the immediate financial viability of the security fund. The study also projected that the security fund would have a revenue reserve through 2017 without State Bar needing to seek an increase in the $40 annual fee or impose additional limits on the amount claimants could recover. However, shortly after State Bar raised the cap in 2009, the estimated payout value of pending claims grew far more quickly than anticipated. The spike in claim numbers and value, according to State Bar, was driven by the residential mortgage crisis. State Bar depleted its reserve and now does not have sufficient revenue to pay pending claims.

State Bar could decrease the security fund payment cap to allow it to provide more claimants with payments sooner. We analyzed the claims that State Bar paid from 2016 through 2018 to determine the effect on the number of claims paid if the cap were decreased to $50,000 or $75,000. We found that 98 percent of the claims that State Bar paid from 2016 through 2018 were less than $50,000. A $50,000 cap over that time period would have freed up $1.7 million and thus allowed State Bar to pay 245 additional claimants. Alternatively, with a cap of $75,000, the security fund would have had $604,000 more available, which State Bar could have used to pay 78 additional claimants.

The board could also reconsider allowing voluntary contributions to the security fund. Licensees can currently make voluntary contributions to certain State Bar programs, like the Legal Services Trust Fund, which provides grants to legal services programs for individuals with low incomes. A 2018 analysis by the Assembly Judiciary Committee suggests that the Legislature would likely approve of allowing similar voluntary contributions to the security fund. However, State Bar’s board and the chief of programs expressed concern that licensees would choose to donate to the security fund at the expense of other State Bar programs. We agree that some licensees might commit their contributions to the security fund in lieu of another State Bar program. However, we believe licensees should be able to make that choice if those licensees believe strongly about providing restitution to individuals who have been harmed by members of the legal profession.

The Legislature Should Suspend the Fee for the Assistance Program in 2020

Because revenue for the assistance program has consistently exceeded its expenditures, State Bar projects that the program’s reserve will reach $3.5 million by the end of 2019—a value that equals as much as 10 times more than State Bar’s reserve policy requires. The assistance program receives revenue from an annual fee of $10 from active licensees. Although that fee is already in place for 2019, our analysis suggests that the Legislature should suspend the fee in 2020 in favor of State Bar spending the assistance program’s reserve. The board mandates that State Bar maintain a 17 percent reserve for certain funds to allow it 60 days of operating revenue and that it spend any reserve amount exceeding 30 percent of operating costs. These requirements apply to the assistance program’s reserve, which State Bar calculates independently of other funds or programs. Recognizing the assistance program’s excessive reserve, the board approved a transfer of $250,000 to the security fund in 2018. Given the assistance program’s high reserve and low expenditures, State Bar does not need to charge a fee for it in 2020.

Low demand for assistance program services—both voluntary and discipline‑related—has allowed the program’s reserve to grow. According to the assistance program supervisor, in 2018 the program had 266 participants, or 0.1 percent of State Bar’s licensees. State Bar surveyed licensed attorneys in 2018 and found that the majority of respondents were unsure if they would use the assistance program if they needed it. Respondents most commonly cited concerns about privacy and the potential threat to licensure as reasons that they might not seek services from the assistance program.

To address licensees’ concerns about confidentiality, the board voted in November 2018 to separate the voluntary portion of the assistance program from State Bar. It is too soon to know how State Bar will implement the board’s decision, but this could mean an entity entirely separate from State Bar takes on those program functions. Nevertheless, the projected year‑end reserve for 2019 is adequate to fully fund the voluntary and disciplinary portions of the assistance program in 2020 regardless of whether State Bar administers the assistance program alone or in coordination with another entity. Furthermore, any future fee should account for the revenue the assistance program needs to cover its costs without its reserve exceeding the board’s requirement.

By Maximizing Revenue and Gaining Efficiencies, State Bar May Be Able To Decrease the Licensing Fee in the Future

In addition to reviewing State Bar’s proposed increases to its annual fees, we evaluated its operations for opportunities to increase revenue. We found that State Bar could improve several aspects of its operations and management. For example, State Bar could better manage its San Francisco headquarters to optimize revenue. It is currently leasing space in that building to tenants at below‑market rates and has allowed space to go unleased for long periods of time. Furthermore, according to current standards, State Bar occupies more space in both its San Francisco building and the building it owns in Los Angeles than it needs to accommodate its size. If State Bar were able to capture more revenue from its real estate holdings, it could minimize future fee increases. In addition, State Bar has recently developed performance measures and begun to collect data to implement them. Measuring performance is an important step for State Bar because it could lead to increased efficiency, which in turn could translate to decreased costs and reduced licensing fees.

State Bar Has Not Maximized Revenue From Its San Francisco Headquarters

State Bar’s headquarters is located in San Francisco’s financial district. State Bar leases those floors that it does not use for its own purposes and contracts with a real estate services firm to manage the building. However, it has not maximized revenue from its San Francisco leases. We retained a certified real estate appraiser to assess State Bar’s management of this property. The text box summarizes the key methodologies he used in his evaluation. Our appraiser’s comprehensive analysis—which evaluated 15 separate properties in San Francisco—determined that retail space comparable to State Bar’s should lease for $54 to $60 a square foot and office space for $68 to $76 a square foot. In 2018 and 2019, State Bar entered into four leases for its San Francisco building with below‑market rates that range from $12 to $28 per square foot less than those of comparable properties. Even if State Bar had leased its space at the lowest of the appraiser’s market rates, it would have earned $777,000 in additional revenue in just the first year of the four leases. The chief administrative officer had initially believed that the real estate broker had obtained the best lease rates it could, but State Bar commissioned a recent analysis, which confirmed that its San Francisco lease rates are below market, so he now agrees that State Bar could pursue higher lease rates in the future.

State Bar has also lost potential revenue by leaving portions of its San Francisco building unleased for long periods. The San Francisco building is a 13‑floor office tower, and State Bar occupies seven floors. However, as Table 11 shows, State Bar has not leased the third floor since at least 2016. At a January 2019 board meeting, the chief administrative officer stated that according to the property manager, in order to lease that floor, State Bar—as the lessor—would have to first install a heating and cooling system—termed a warm shell—initially estimated to cost $2 million. However, our appraiser maintains that a lessor may negotiate such items with a prospective tenant, especially in a market like San Francisco’s financial district, which has a low vacancy rate.

Table 11
State Bar Has Not Leased Portions of Its San Francisco Building in Recent Years

	YEAR				SQUARE FEET (AS OF 2019)*
FLOOR	2016	2017	2018	2019†	STATE BAR	LEASED	NOT LEASED	TOTAL
12					1,550	14,140		15,690
11						16,580		16,580
10					16,570			16,570
9					16,580			16,580
8					16,580			16,580
7					16,570			16,570
6					16,570			16,570
5					16,570			16,570
4					16,570			16,570
3							16,580	16,580
2						16,580		16,580
1						16,570		16,570
G					4,540	5,000		9,540
			Total Square Feet		122,100	68,870	16,580	207,550

At the same January meeting, a board member asked the chief administrative officer to continue looking for a tenant willing to pay for the warm shell. The chief administrative officer shared in March 2019 that State Bar had begun negotiating with an existing tenant that wanted to expand to an additional floor and was willing to pay for the heating and cooling upgrades in exchange for rent concessions. State Bar expects to have a signed lease in April. Using the current market rates estimated by our appraiser, this space could generate $1.1 million in annual revenue. Although State Bar may not initially receive full market rates because its potential tenant would assume the warm shell cost and therefore likely pay a reduced rent, had State Bar explored this option earlier, it may have been able to find a tenant sooner and would be receiving additional lease revenue.

Further, State Bar has not maximized leasable space in either its Los Angeles or San Francisco building because it uses more square footage than current standards for office space suggest that it needs. Our appraiser determined that State Bar uses 373 square feet per employee in Los Angeles and 400 square feet per employee in San Francisco, whereas the 2017 industry standard for office space allocations in North America is 151 square feet per worker.² This standard includes typical allowances for shared spaces, such as kitchens, conference areas, lobbies, hallways, and breakout rooms.

The chief administrative officer asserted that because State Bar last configured the space in both buildings some time ago, it should not be held to the most recent standard. However, even considering earlier standards, the disparity between State Bar’s allocations and prevailing standards is significant. The chief administrative officer stated that State Bar designed the office space in the Los Angeles building in 2013, about the time it purchased that building. According to the U.S. General Services Administration, which provides centralized procurement for the federal government, including constructing and acquiring office space, the prevailing office workspace average for the public sector in 2011 was 190 square feet per employee, or a little more than half of the Los Angeles office’s allocations. Similarly, although State Bar designed the San Francisco space more than 20 years ago, its space allocations still appear excessive. Our review of office space usage standards from 1995 through 2018 from government and industry experts in commercial real estate shows that the standard ranged from 150 to 225 square feet per employee—still roughly half of the space currently allotted.

Furthermore, State Bar has long been aware of its excessive space use and its effect on revenue. In 2011 a consultant that State Bar hired advised it that improving its space utilization might allow for more revenue‑producing space. We do not expect an organization to redesign and allocate space annually to reflect current standards. Nonetheless, it is common for an organization to reconfigure and remodel its space over time to accommodate increased staff or changes in organizational structure. When an organization makes such modifications, an opportunity exists for it to better align its space use with prevailing standards. We believe that State Bar should take advantage of such opportunities in the future, such as when it increases staffing in its trial counsel’s office. Considering State Bar’s dependence on the fees that licensees pay, it has an obligation to control its expenses and maximize revenue in any way it can. Leasing out the maximum available space in the two buildings that it owns is one way for State Bar to achieve these outcomes.

Finally, State Bar’s agreement with its San Francisco property management firm may not be in its best interests. State Bar contracts with a commercial real estate services firm to manage its San Francisco building. The firm’s services include managing tenants; overseeing tenant improvements; and providing engineering, janitorial, and security services. For 2019 State Bar budgeted about $300,000 to pay for property management services and about $600,000 for lease commissions.

Although such terms are common, our appraiser reviewed the agreement and identified an aspect of it that was atypical. Under its agreement, State Bar gives the property management firm almost 4,000 square feet of office space at no cost. Our appraiser questioned this term, especially given that the property management firm has offices nearby. At market rates, the space the property management firm occupies has an annual lease value of $260,000. We raised this concern with the chief administrative officer. He pointed to the bid analysis showing that State Bar’s chosen property management firm was the best option and had comparable rates to the other bids. We suggested that State Bar might benefit from retaining an expert to participate in its future solicitation and negotiation for property management services. State Bar’s existing property management agreement expires in August 2019. The chief administrative officer concurs with our suggestion.

State Bar’s Measures to Increase Its Efficiency Are Still New and Addressing Its Discipline Case Backlog Will Require Further Effort

To increase transparency and accountability, State Bar has recently developed performance measures and goals and has begun collecting relevant data across its organization. Although State Bar’s efforts are quite new, we believe that it is heading in the right direction. By measuring performance, State Bar could increase its efficiency, which could enable it to decrease its costs and reduce its licensing fee. In particular, State Bar has established new performance measures for its discipline function, which will supplement its long‑standing measure of performance: its discipline case backlog. This backlog generally consists of pending cases that are in its investigations process longer than six months. State Bar believes that the 180‑day statutory goal to process cases may be unrealistic and require reevaluation; however, we found that State Bar may get closer to the case‑processing goal by developing guidance for each step in its investigations process.

In a January 2019 report to the board, State Bar’s executive director noted that performance measures provide a quantifiable way for leaders to recognize successes and identify necessary critical improvements, such as the need to streamline existing processes, better manage limited resources, and plan for future growth. To this end, in recent months State Bar has established a mix of performance measures and program goals across all areas of the agency. For example, State Bar is now measuring the ability of the trial counsel’s office to process new cases and monitoring the speed with which it finalizes those cases. State Bar has also developed performance measures for its administrative functions. For example, State Bar will measure the time it takes to hire new employees and has set a goal for late 2019 to be able to complete the hiring process in 60 days.

State Bar has coupled its performance measures and goals with data tracking and reporting. In January 2019, the executive director outlined for the board a plan for performance data collection to occur monthly, quarterly, and annually, depending on the data source and collection method that State Bar has established for each measure. For those performance measures it has designated as monthly, State Bar completed its first round of data collection in February 2019 and reported these data to the board in March 2019. For example, the executive director’s report listed the monthly measures that State Bar did not meet. The board’s Regulation and Discipline committee has also discussed ways to improve some of the discipline measures.

State Bar has made a solid start to its goal of increasing transparency and accountability and has developed plans for staying on track. The executive director noted in her January 2019 report to the board that the metrics will need adjustments and that State Bar is committed to continuous improvement. To that end, the executive director sent a memo in March 2019 to all staff announcing that if a particular office is unable to meet its goals, she will ask management to provide an explanation and a plan to achieve the goals. She also stated that each office should make metrics a standing item on staff meeting agendas and that performance evaluations for executive staff should include metrics. Although State Bar’s initial steps to apply metrics are welcome, the success of the effort will only be known over time.

For several years, a primary measure of efficiency for State Bar’s discipline system has been its discipline case backlog. According to State Bar, in 2018 the complaint backlog stood at about 1,750 cases, and has remained over 1,100 for the past five years. With its introduction of new performance measures, State Bar will supplement the backlog measure as an indicator of its efficiency with additional measures. We also identified certain reforms that State Bar should consider to help address its backlog. In 2016 State Bar developed time benchmarks for its investigations process but, according to the executive director, did not implement them because of a lack of staff. When we reviewed the investigations process and identified 17 discrete steps, we found that State Bar lacked benchmarks delineating the duration of 10 of them. Defining how long each step in a process should take to accomplish is critical to performing work within time constraints—like the 180‑day case processing goal—because such time frames help an organization identify areas for targeted improvement.

State Bar’s policy and guidance documents about benchmarks also contain contradictions. For example, the rules that govern its discipline process as a whole state that conducting an evaluation conference with the accused attorney to provide opportunity for settlement of a discipline case should take 25 days. However, State Bar’s training documents say that this same step should take 30 days. Another source advises staff that the evaluation conferences should overlap with other procedural steps that can take up to 60 days. This lack of clarity highlights the need for consistent standards and benchmarks to help staff stay on schedule.

State law requires State Bar to report its case‑processing activity against a 180‑day goal, yet State Bar believes that this goal may not be appropriate. The 180‑day goal has existed in statute since 1986, but we found no explanation of its origin. The interim chief trial counsel stressed that the 180‑day goal may be unrealistic because many steps in the investigations process are not in State Bar’s control. For example, she stated that obtaining the documents needed for an investigation can take a significant amount of time. She specifically identified that procuring immigration documents can take upwards of six months. She also said that State Bar has developed metrics to reduce the backlog by prioritizing cases to maximize public protection. For instance, it plans to prioritize those cases with the potential for significant, ongoing, or serious potential harm to the public.

The interim chief trial counsel also noted that the discipline case backlog represents the difference between the volume of cases State Bar receives and the staff resources available to do the work. As we discuss earlier, State Bar has requested a licensing fee increase to hire 58 staff for its investigations functions, and we recommend a fee increase for 19 staff. With the data it collects from the new metrics and the work it intends to do to use these data to implement process improvements, State Bar can set benchmarks that will help it move closer to meeting the 180‑day statutory goal. It can also make more informed estimates for staff resource needs and work with the Legislature to develop a different, more appropriate goal for processing a case, if necessary.

A Multiyear Fee Cycle Could Improve State Bar’s Management Practices

A multiyear licensing fee‑approval cycle would stabilize State Bar’s revenue, allowing it to improve its planning and management practices, while still affording the Legislature necessary oversight. Although in recent years the Legislature has favored an annual fee‑approval cycle, it generally authorized the licensing fee for two‑year periods in the 1990s. However, in 1997, after it became evident State Bar was not using its resources effectively, the Governor vetoed that year’s fee bill. The Legislature subsequently authorized the fee on an annual basis in 1999 and 2000. In 2001 the Legislature again authorized the fee for two years, then returned to approving the fee on an annual basis in 2003, a practice it has generally continued through 2018.

A legislative analysis of the 2001 fee bill noted that approving the fee annually allowed the Legislature to closely monitor State Bar. However, an annual fee‑approval cycle does not align with best practices. Both the Government Finance Officers Association and U.S. Government Accountability Office provide best practice guidelines for regulatory entities that are supported by user fees. We determined that State Bar’s current annual approval cycle does not meet these guidelines because it does not ensure consistent revenue over time or allow for better planning for long‑term revenue needs.

State Bar’s current annual licensing fee‑approval cycle has been detrimental to both licensed attorneys and the public. An annual approval cycle does not allow licensed attorneys to anticipate future expenses. For State Bar, the lack of consistent revenue makes implementing long‑term projects, such as replacing its aging technology systems, riskier because it has no guarantee that funding for these types of projects will continue. Further, in years when the Legislature did not pass a licensing fee bill, such as 2016, State Bar has had to make sudden staffing reductions in the trial counsel’s office, compromising its ability to process complaints against dishonest attorneys.

We believe the Legislature should adopt a multiyear licensing fee‑approval cycle that would require State Bar to engage in fiscal planning, that would impose fee caps, and that would enable legislative review to ensure that fees are set at appropriate amounts. Figure 2 shows a potential three‑year cycle that includes fee reviews and a three‑year cap on the fee. This multiyear cycle would require that State Bar develop a longer‑term budget in the first year of the cycle to justify its anticipated licensing fees across the three‑year period. In the other two years in the cycle, State Bar would set the fee at an amount that reflected its annual budgeted operating costs but did not exceed the established fee cap. Because State Bar’s authorization to set the fee would not expire at the end of each year, as it does currently, State Bar could anticipate consistent revenue and plan accordingly.

Figure 2
A Multiyear Licensing Fee Cycle Would Allow State Bar to Better Plan for Long-Term Needs

Such a cycle would also provide the Legislature necessary oversight through State Bar’s reporting on its performance measures. As Figure 2 shows, the fee review at the beginning of the cycle could involve State Bar’s justifying its costs by demonstrating the efficiency and effectiveness of its current operations, as well as by providing its reasons for any planned cost increases. State Bar has developed a methodology for projecting costs and revenues, and as we previously discuss, it has also recently developed performance measures for its operations that the Legislature could use to hold it accountable for meeting goals and demonstrating efficiency. Therefore, a rigorous and transparent process for setting a multiyear licensing fee would provide ample opportunity for legislative oversight.

Further, a multiyear fee cycle would supplement rather than eliminate the Legislature’s existing oversight opportunities. For example, the Legislature already oversees State Bar through an annual report on the discipline system, a biennial report on efforts to increase access and diversity in the legal profession, and biennial audits. A fee review to set a multiyear fee cap would complement this oversight. Moreover, because the Legislature would maintain the authority to set the fee, it could change the fee cap before it expired or intervene to set a specific fee amount for a year if circumstances warranted.

The Legislature could also streamline the fee review process by merging the current $25 discipline fee—which provides additional support for State Bar’s disciplinary activities—with the annual licensing fee. The Legislature added the discipline fee in 1986 to address the rising costs of the discipline system, and consequently the fee is authorized under a separate statute. In our calculations of our recommended 2020 fees, we assumed that this fee would continue at its current level, as Table 1 in the Results in Brief shows. However, both it and the licensing fee go into State Bar’s general fund, and State Bar uses portions of the licensing fee to support its discipline system. Instead of reviewing and adjusting two fees that provide revenue to the same fund, the Legislature might find it simpler to merge the two.

In addition, we believe the Legislature should incorporate State Bar’s program fees into the multiyear fee cycle. The security fund’s and assistance program’s fees are set in state law. They would benefit from regular fee reviews as part of a multiyear fee‑approval process. As we previously discuss, the security fund has been underfunded, while the assistance program has been overfunded because the fees have not been adjusted to align with operating costs. Regular reviews and adjustments would allow decision makers to align revenue with the programs’ goals and operating costs, and they would also provide opportunities for the decision makers to evaluate the programs’ functions. As with the licensing fee, a three‑year cap could be set on each of these program fees.

Finally, special assessment fees should remain part of the multiyear fee cycle. Whereas the licensing fee funds recurring operating costs, special assessment fees fund discrete projects with defined timelines, such as capital improvements. Because a special assessment fee is designated for specific projects, it is an effective way to ensure that State Bar spends collected revenue only on approved projects. The fee review at the beginning of each multiyear fee cycle would provide an opportunity for State Bar to request and justify any future special assessments. Because a special assessment fee might extend longer than the three‑year cycle, the subsequent fee review could be used to hold State Bar accountable for meeting the funded projects’ goals and projected costs.

Recommendations

Legislature

To ensure funding of State Bar’s operating costs and those costs associated with adding 19 trial counsel staff and increasing retiree health benefits, the Legislature should set the 2020 licensing fee at $379 for active licensees and $88 for inactive licensees.

To ensure funding for State Bar’s IT projects, capital improvements, and general fund reserve, the Legislature should set a 2020 special assessment fee of $41 for active licensees and $11 for inactive licensees. To align the special assessment fee with State Bar’s needs in the future, the Legislature should adopt the fee schedule that we present in Appendix C and do the following:

• As necessary, adjust the assessment related to the recommended IT projects and capital improvements each year from 2021 through 2024 to align that amount with State Bar’s projected costs.
• Direct State Bar to determine the assessment amount necessary to rebuild its general fund reserve so that the reserve increases by 1 percent each year and reaches 17 percent by the end of 2024.

To enable State Bar to pay the security fund claims that it is likely to approve for payment in 2020, the Legislature should set the 2020 security fund fee at $80 for active licensees and $20 for inactive licensees. Should the Legislature decide that it wants to control how much it increases the security fund fee, it can consider State Bar’s initiatives to reduce the security fund payout cap and give licensees the option to make voluntary contributions to the security fund.

To ensure that 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.

To provide State Bar with consistent revenue and to enable it to improve its management practices, the Legislature should adopt a multiyear fee‑approval cycle for the licensing, security fund, and assistance program fees. This change should take effect before the Legislature determines the licensing fee for 2021, and the cycle should include the following components:

• A multiyear budget, fee justifications, and related performance data submitted by State Bar.
• A fee cap for the multiyear period set by the Legislature.
• The authority for State Bar to adjust the fee each year up to the maximum amount.

To simplify the fee‑setting process, the Legislature should amend state law to merge the $25 discipline fee with the licensing fee in a single statute and repeal the statute authorizing the discipline fee. This change should take effect before the Legislature determines the licensing fee for 2021.

State Bar

To enable it to effectively determine its budget, State Bar should continue to annually prepare five‑year projections.

To ensure that it maximizes the revenue from its San Francisco building, State Bar should do the following:

• Lease all available space and ensure that its leases reflect market rates.
• In the event of any future staff growth, it should avoid adding space by reducing its space allocations when practical to more closely match industry standards.

To further its ability to operate more efficiently and reduce the backlog of discipline cases, State Bar should do the following:

• Develop benchmarks by December 2019 delineating the duration of each step in its investigation process.
• Ensure consistency by December 2019 in the policy and guidance documents its staff follow when performing investigations work.
• Use its performance measures and collected data going forward to evaluate its case processing goals and work with the Legislature to revise the 180‑day statutory goal if necessary.

To better assess the security fund’s revenue needs after 2020, State Bar should develop by August 2019 a methodology for estimating the payments that it is likely to make in a particular year. This methodology should consider the average length of time it will spend processing applications that are eligible for reimbursement and estimate the number of applications anticipated to become eligible for reimbursement during the course of that year.

We conducted this audit under the authority vested in the California State Auditor by Government Code 8543 et seq. and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
California State Auditor

Date: April 30, 2019

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Footnotes

² In both buildings, State Bar has dedicated courtrooms that total 20,000 square feet. Our appraiser excluded this space—which has a special use—from his calculation of State Bar’s space per worker. Go back to text

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