The staffers at the Legal Services for New York City (LSNY) board meeting in December didn’t hold back. “I think the first thing you’ve got to do is to figure out how to make the programs manage money properly, before you raise more money,” one woman told the nonprofit legal services agency’s top executives, after they had talked about finding more resources for the organization.

“Some programs have financial problems every year. But every year we see the same management there,” fired off another.

Next up was Ellen Wallace, the President of the National Organization of Legal Services Workers. She said that there was rarely a crisis of this magnitude in the union’s more than 100 bargaining units. “Every year we have to face layoffs,” she said. “We don’t want to see this become another Legal Aid Society.”

To an organization facing an operating deficit in the coming year amounting to nearly 8 percent of its total $34 million budget, those were icy words. Legal Services is not in the desperate straits Legal Aid was in last year, when it slashed 300 jobs to dodge impending bankruptcy after it projected a $21 million deficit. But it is suffering from similar pressures: declining government funding and a tendency to focus on delivery of legal services at the expense of attention to administration. Two years after a controversial restructuring of the local parent organization, with promises of better management and coordination of services, staff members and union leaders complain that several LSNY programs continue to overspend their budgets year after year, with seemingly little interference from the central office.

The situation came to a head this December, with the resignation of Harlem Legal Services project manager Shirley Traylor. She had held the position for more than a decade, heading one of 10 neighborhood-based legal services clinics. The board of her group reportedly pressured her to depart. (Says Traylor, “I’ve been here for 12 years. It’s very much in my own interests at this point to leave.”)

In 2003, Harlem overspent its budget by $316,412 and burned a $164,117 hole in its net assets. It ended up laying off eight people. Three more attorneys quit soon after. Now two more employees are set to be laid off. In less than two years, Harlem has lost about half its workforce. Staff throughout Legal Services have been wondering whether the Harlem office, which has been representing neighborhood residents in housing, family and employment cases for 35 years and had nearly 6,000 clients in 2003, can continue to operate.

The Harlem office had also been stung by a 2001 statewide audit conducted by the Division of Criminal Justice Services of New York State. Harlem Legal Services was questioned for its expenditures under two state contracts, after the organization failed to provide adequate records to support its spending. The case was handed to the New York State Attorney General Office, which demanded Harlem Legal Services return $93,000 to the state. Negotiations are continuing.

Harlem Legal Services wasn’t the only office spending beyond its means. One program overspent $1.6 million in three years. Seven out of LSNY’s 10 local programs forecast operating deficits. And as the organization’s leadership moves to stanch the bleeding, the only remedy it has is more layoffs.

In December, more than 100 Legal Services employees sent a letter of alarm to their citywide board of directors. “LSNY and its constituent programs face a fiscal crisis that threatens client services and the very existence of some of our programs,” it read. “LSNY has continued its hands-off policy in the fiscal management of the constituent programs other than to demand balanced budgets after a program is in deficit…. LSNY in fact makes no attempt to examine what went wrong or hold anyone accountable for failings.”

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Two years ago it wouldn’t have been the LSNY central office that got all the heat. Back then, local programs citywide had independent boards and management. The head office was mainly a distributing machine and bookkeeper for federal legal services funding in New York City.

But things changed in January 2003, when LSNY was restructured amid a nationwide move toward consolidation among legal services organizations. The effort was driven by the Legal Services Corporation, the national funding and regulatory body for the local groups doing the on-the-ground work. In the process, the LSNY central office gained the power to approve and dismiss the local board members or managers.

It hasn’t yet used that power. And there’s reason to be cautious. During the move to central management, two local programs–MFY Legal Services and Bronx Legal Services–chose to break off from LSNY, foregoing guaranteed federal funding, largely out of concern that they would lose autonomy.

But now, on the contrary, there’s an impression that top management has gone too far out of its way to allow local offices to work independently. “The restructuring from our point of view is kind of a joke,” says Jim Provost, president of the New York Chapter of the Legal Services Staff Association. “[LSNY] wanted a way to tell the Legal Services Corporation, their biggest funder, that we are changing. There has really been as little practical change as possible.”

To Andrew Scherer, executive director of LSNY, giving local offices breathing room is essential. Watching their operations on a day-to-day basis, he says, has never been a goal. “I don’t want to build a big central bureaucracy that’s going to be focused primarily on oversight,” says Scherer. “We want the local organizations to have strong boards of directors that are actively involved in the day-to-day operation. So we are not going to use the ultimate power that we have to dismiss directors or boards of directors lightly.”

Instead, he says, the goal of central management is to create a solid infrastructure that will help staff and clients get what they need. LSNY is halfway through unifying its computer and telephone systems, so local programs will soon be able to share data by just one click, and staff will be able to discuss cases by dialing a four-digit internal extension. Client calls will be easily transferred to the appropriate local branch through a main switchboard. The central office has started to solicit private donations to supplement federal funding, bringing in more than $1 million for the local offices each year. And in November LSNY opened its first office on Staten Island, a borough that desperately needs legal services for its increasing population of low-income residents. “Restructuring gave us the opportunity to look at the whole, not just parts,” says Scherer. “It gave us a different notion about the role of LSNY as a citywide operation.”

To the union representing attorneys and other employees, the broad reforms are not enough. Provost sent his own letter to the central board in December, urging it to “take a hard look at LSNY’s consistent refusal to plan in advance or to exercise reasonable authority over local program decision making.”

“Part of the promise of the restructuring a couple years ago was there would be greater oversight and accountability of consistency throughout the programs,” says a LSNY attorney who asked not to be named. “If people cannot make a realistic budget and stick to it, you should bring in somebody who can. The fact is, it’s almost like a life tenure for those project managers.”

Scherer disagrees. “The restructuring was not about trying to get the power dynamic changed so that particular individuals can be pushed out of the organization,” he says. “That was never what it was about.”

Board chair John Kiernan seconds the strategy of minimal intervention in the operations of local groups. “LSNY central is accountable for the performance of each of the local offices. There is no question of that,” says Kiernan. “All I’m saying is that so is the board of each of the local offices. So when you are not happy with what a local office is doing, one thing you can do is just fire everybody in sight. The other option is to sit down with them and talk with them and think through what is the best way to proceed.”

The organization’s leadership believes the problem of chronic overspending can be addressed by upgrading the financial reporting system the central office uses, rather than waging a bloody war against neighborhood offices.

Local managers say it wouldn’t hurt. “Some of the programs, including ours, experience a deeper deficit because they didn’t get accurate information from the central finance office,” said Traylor after her resignation was announced.

To rein in the overspending, Scherer brought in John Butler as chief financial officer in February 2004. Among Butler’s top priorities are training local managers in accounting and providing more meaningful and timely financial reports, which can help local offices better plan their spending. The impact of Butler’s reforms can’t be gauged until April, when audits of 2004 financial statements are completed and disclosed, but the union says it’s pleased so far. Butler “at least is producing paper that should be able to keep track of their funding much more closely,” says Provost.

One thing is clear: Layoffs are inevitable. To close a gap that reached $850,000 for fiscal year 2005 and a projected $2.6 million for 2006, Legal Services plans to release nine staffers from local offices and cut another six through attrition. Butler saw little choice. Labor costs make up 75 percent of the organization’s expenses and automatically increase every year under the union contract. “If you are running a quarter-million dollar deficit or worse,” says Butler, “that’s because we haven’t made the tough decisions about personnel.”

Squeezing from the other end is steadily diminishing government support. Since 1993, federal funding for legal services has decreased by 70 percent. State dollars, meanwhile, are consistently late and unpredictable. In the past five years, even with private fundraising, overall revenue has remained flat.

Of course, cuts can’t be made without reducing client services. Brooklyn Legal Services Corporation A, one of LSNY’s local programs, still hasn’t recovered from layoffs in 2001, when it eliminated half its staff. After a six-person housing unit at its east Brooklyn office was left with one attorney and a supervisor, other Legal Service offices experienced significantly increased demand from tenants but couldn’t take on clients who lived outside their service areas. Citywide, Legal Services took on nearly 35,000 clients in 2003.

“It’s very sad for the network of legal services providers when a major institution has to do layoffs, because there’s already not enough people to do the work,” says Lynn Kelly, executive director of the MFY Legal Services, one of the two local programs that cut ties with LSNY in the restructuring. That organization stopped receiving federal funding since it disaffiliated from LSNY, though it’s in a good shape, thanks to its private donors. But Kelly says for smaller organizations like hers, there is no way to make up for the slack by taking more cases, simply because there is no more funding available. “It’s just going to be shrinkage in the industry,” she says. “Fewer clients will be served.”