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Outside counsel blows legal budget

The city Law Department had to pay law firms millions more than had been expected.

A few weeks into her new job, City Solicitor Shelley Smith put forward a plan to drastically curtail the millions of taxpayer dollars that typically flow from City Hall to law firms each year.

As it turns out, her idea didn't work. Now, as the Nutter administration faces enormous pressure to cut spending because of the fiscal crisis, the Law Department is poised to be the only city department - besides Prisons - to overspend its budget.

While Smith, after consulting with city budget officials, initially expected to spend $566,000 on outside lawyers, budget documents show those costs will be closer to $7.1 million when the fiscal year ends June 30.

That is more than the city has spent on outside lawyers in any year for at least a decade.

After nipping and tucking other areas of the Law Department's $16 million budget, the outside-lawyer expenses have left a $5 million hole. Tomorrow, City Council is expected to consider legislation to make up for the shortfall by transferring funds out of other city departments.

In an interview, Smith acknowledged the multimillion-dollar gap, saying: "We had a very ambitious plan that obviously did not work."

Said city Budget Director Stephen Agostini, who initially said he believed $566,000 would be sufficient: "Sometimes you guess right, and occasionally you guess wrong." Consequently, he said, the amount set aside for the 2010 budget, being prepared now, "will look considerably different."

The city in many ways has little control over its legal costs - if someone sues, the city has to defend itself.

Much of the work is handled by the Law Department's 192 lawyers, but not all.

Typically, law firms are hired when there is a need for expertise in a particular subject area, a potential conflict of interest, or a substantial rise in the number of Law Department cases.

Since 2000, the city has spent between $2.7 million and $5.5 million a year to hire law firms.

Nonetheless, Smith - a former city attorney who worked previously as counsel to Exelon Corp. - took a calculated risk this year in estimating she would need far less.

Exactly how much less was a subject of internal debate among Smith, Agostini, and Finance Director Rob Dubow, but they eventually settled on the $566,000 figure based on Smith's plan.

Her goal: to hire more government lawyers to handle the workload since their personnel costs are significantly less - four times less, Smith says - than those of private attorneys.

"[We] will realize better outcomes for the city because of increased use of in-house counsel with specific expertise in understanding of the city's mission, core service areas, and strategic plan goals," Smith told City Council in detailing her budget last April.

It is far less expensive for the city to use its own lawyers than to pay the $180 to $225 hourly rate for private lawyers under contract agreements.

She said she did not, however, anticipate the difficulties of hiring lawyers onto the city payroll, which in turn meant relying more on outside lawyers.

Budget documents show Smith had hoped to fill 220 staff positions. In fact, she now oversees 192 lawyers, fewer than the 197 who worked in the Law Department last year.

The main hiring obstacle, according to Smith: low city pay. Beginning lawyers earn about $49,000, compared with the $100,000 or so salaries that new lawyers may earn at private firms.

In addition, as the year went on, the Law Department shrunk as more lawyers left than she had anticipated. "We had more unexpected attrition, plus ordinary attrition. So I wasn't starting with the floor I thought I had," Smith said.

Although job interest is beginning to pick up as the economy has caused recent law firm layoffs, Smith said: "Our ability to replace lawyers is impaired somewhat by the fact that our salaries are terrible."

It is a struggle faced by previous city solicitors. Nelson Diaz, who ran the Law Department from 2001 to 2004, said: "It's very difficult to do any lateral hiring because in the public-service area you are competing with the federal government, the District Attorney's Office, and the public defender's office." All pay higher salaries than the city does, he said.

To attract younger lawyers, he developed an "honors program" in which the new hires were guaranteed a certain level of legal experience. Otherwise, he said, "the big firms steal the brightest and best from the entry level."

Besides staffing challenges, Smith's department also had to absorb costs for a high number of legal matters sent to outside counsel under the previous administration. "Once you send a matter out, that billing continues until the matter is concluded," she said.

Of the $7.1 million, the biggest expense - a total of $1.5 million - stems from costs related to the city's negotiations with its four municipal unions. That work is handled by the Center City firm of Ballard, Spahr, Andrews & Ingersoll L.L.P., where Smith once worked, and New Jersey-based Archer & Greiner P.C.

Smith said the city did not issue a request for proposals, but interviewed five firms to determine which lawyers should help the city in its labor negotiations.

"The process consisted of informally soliciting proposals for the work and firm resumes, and interviewing the proposing attorneys for more detail about their proposals," she said. No formal proposal process was conducted in part because each firm had existing contracts with the city, and initiating a new process would have "unnecessarily delayed our preparation process."

Ballard Spahr was selected because it had the most recent experience with labor negotiations with all four unions, and because Shannon Farmer, the lead negotiator, has "an excellent reputation among and relationship with the attorneys representing the other unions," Smith said.

Of Archer & Greiner, Smith said its attorneys had detailed experience with specific departmental issues related to the contract talks.

In past years, the city has negotiated contracts that last for four years. But since the Nutter administration last year struck one-year contracts that expire June 30, the city's associated legal costs are higher than usual.

"It has been kind of a nonstop labor process," Dubow said.

Including other matters handled by both firms, Ballard Spahr is expected to earn $1.7 million by year's end - making it the Law Department's top paid law firm - while Archer & Greiner is anticipated to receive $1.5 million.

Ballard Spahr chairman Arthur Makadon said he expects some of the money his firm will get includes revenue that it has been owed since last year for work on the labor contracts. "I think we are the biggest and most substantial public-sector labor firm in Pennsylvania," he said, "and we have traditionally done finance work throughout the state."