Law360 (July 7, 2026, 7:00 PM EDT) -- North Carolina Gov. Josh Stein on Tuesday signed into law the state's long-overdue budget, which includes a provision that largely strips funding for civil legal aid services provided by the state's Interest on Lawyers' Trust Accounts program.

Instead, the budget directs funding from NC IOLTA to a state agency that provides legal counsel to individuals who are charged with crimes and cannot afford attorneys.

The maneuver all but solidifies a funding freeze that took effect last year, hampering NC IOLTA's ability to dole out grants for legal assistance programs. NC IOLTA, which is a North Carolina State Bar program, has long used the income generated from interest on lawyers' trust accounts to fund civil legal services and increase access to justice. The grant funding does not come from lawyers, their clients or North Carolina taxpayers.

The largest recipient of NC IOLTA funding is Legal Aid of North Carolina, a nonprofit that provides free civil legal services to individuals without the means to pay for it.

A spokesperson for Legal Aid of North Carolina said Tuesday the organization believes it is no longer eligible to receive grant funding from NC IOLTA under the restrictions outlined in the state budget.

Stein, a Democrat, conceded Tuesday that the budget — which includes raises for teachers and law enforcement, fully funds Medicaid and earmarks additional Hurricane Helene relief aid — is in his view flawed. During prepared remarks from the North Carolina Executive Mansion, he said the budget "cruelly punishes low-income people who need access to justice."

"After careful deliberation, this morning I will sign the state budget into law," the governor said. "I won't sweep this budget's flaws under the rug, however."

$15M Stamped for Indigent Defense Services

The state budget significantly curtails both the amount of NC IOLTA funding available for civil legal aid grants and the type of organizations that are eligible to receive it.

According to the bill's text, up to $15 million of any IOLTA funds received after July 1, 2025, may be given annually to the Office of Indigent Defense Services for the Private Assigned Counsel Fund. Any leftover money "shall be carried over to the next fiscal year," the budget states.

IDS is a state agency that provides criminal defense attorneys for individuals who cannot afford them, in accordance with the Sixth Amendment of the U.S. Constitution. The PAC Fund pays private attorneys appointed by the court to represent those defendants.

NC IOLTA has interpreted the state budget as requiring that all future IOLTA earnings be directed to the state for indigent criminal defense, according to a statement on its website.

According to Judge John Arrowood, who chairs the NC IOLTA Board of Trustees, the state is already constitutionally mandated to provide criminal defense attorneys to individuals who can't afford them.

"While we stand in support of the work of the Office of Indigent Defense Services and Bar members who serve as private assigned counsel, this provision appropriating IOLTA funds — which have funded civil legal aid grants for more than 40 years — to bolster the PAC Fund shifts the burden of navigating a complex and intimidating justice system to vulnerable individuals and families facing civil legal challenges," Arrowood said in a statement July 1.

A spokesperson for IDS said Tuesday that the agency is "thankful that the General Assembly recognizes the need for more funding for Private Assigned Counsel (PAC) in North Carolina."

"Most PAC attorneys in North Carolina are being paid at a lower hourly rate than in 2011," the spokesperson said. "Those rates have proven to be a barrier in recruiting attorneys who will take court appointed cases in our state."

IDS said its staff is now assessing budget numbers to set new hourly rates, which the agency plans to present at a meeting in August.

Beyond the $15 million earmarked for indigent defense services, the state budget bill allows NC IOLTA to fund grants "designed to improve the administration of justice" of up to $2 million a year — but only from money that it received prior to July 1, 2025.

NC IOLTA is additionally barred from awarding those grants to any organization that offers immigration services, provides representation for gender-affirming healthcare or engages in public policy or grassroots advocacy.

The state budget bill also revamps the makeup of the NC IOLTA Board, which chooses the recipients of grants. Previously, all nine members of the nonpartisan board were appointed by the State Bar Council, which is the governing body of the state bar.

Under the new structure, six of the nine members will now be political appointees chosen by the chief justice of the North Carolina Supreme Court and the General Assembly. The chief justice will also get to select the chair, according to the bill's text.

"Loss of Funding Will Prove Devastating"

State bar leaders had opposed the last-minute provision targeting NC IOLTA after lawmakers in the North Carolina General Assembly announced the proposed budget last week.

"This loss of funding will prove devastating to the tens of thousands of low-income North Carolinians facing legal concerns that threaten their housing stability, income, access to health care and benefits, and safety from domestic violence and human trafficking," Peter Bolac, executive director of the state bar, said in a July 1 statement.

Bolac pointed to "months of good-faith efforts" by leaders in the state bar and the NC IOLTA program to understand lawmakers' concerns with the grantmaking process and to adjust accordingly.

Last summer, legislators froze NC IOLTA's grant funding ability until June 30, 2026. State bar leaders were called to appear before a House committee in October to shed light on how the money from lawyers' trust accounts was being spent, with some Republican representatives accusing NC IOLTA of giving grants to "leftist groups with leftist ideologies."

Before the freeze took effect, NC IOLTA said it awarded more than $12 million in grants to 42 organizations statewide in 2025.

Data provided by civil legal aid groups in North Carolina in the year since IOLTA grant funding came to a standstill has provided a snapshot of what could come to pass under the new state budget. According to NC IOLTA, prior grant recipients reported an average of 22% fewer cases closed and 11% fewer clients served in the first quarter of 2026 compared with the same time period in 2025.

NC IOLTA Executive Director Mary Irvine said in a July 1 statement that those numbers represent "thousands of North Carolinians" who no longer have access to legal aid.

"That's a significant step backward in the journey toward fulfilling America's promise of 'justice for all,'" she said.

Legal Aid of North Carolina, meanwhile, said it has been forced to shutter offices in rural communities and lay off staff in response to the funding freeze. The organization is nonpartisan and does not engage in political advocacy or lobbying, according to its website.

Its clients include members of the Lumbee Tribe, which is headquartered in Pembroke, North Carolina. Legal Aid of North Carolina's Pembroke office, in rural Robeson County, was among those forced to close in the fall.

In 2025, the nonprofit said it received $6.3 million in funding from NC IOLTA, making NC IOLTA the organization's second-largest funding source. The first is the Legal Services Organization, a public nonprofit established by Congress to fund civil legal aid nationwide. Because Legal Aid of North Carolina accepts those federal dollars, it is strictly prohibited from engaging in any kind of political work or advocacy.

In a statement Tuesday, Legal Aid of North Carolina called the signing of the state budget a "deeply sad moment for the hundreds of thousands of North Carolinians who rely on civil legal aid each year."

According to the nonprofit, "North Carolina is now the only state in the country to redirect IOLTA funding away from civil legal aid."

Legal Aid of North Carolina said it was prepared for the possibility of a more permanent loss of NC IOLTA funding given the turmoil of the past year. The organization said it made adjustments accordingly, including approving a balanced budget that accounted for no NC IOLTA grants in 2026.

Its current operations and staffing are stable, the nonprofit said.

"It is disappointing to see a critical resource for thousands of North Carolinians redirected away from civil legal aid at a time when the demand for civil legal services is rising," Legal Aid of North Carolina said. "Through all of this, we remain resilient and look ahead."

--Editing by Patrick Reagan.

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