Cash Grab: States Seek to “Repurpose” Mortgage Settlement Funds

February 22, 2012; Source: Associated Press

NPQ called it.

In our feature story on the $25 billion mortgage settlement agreement negotiated between the federal government, 49 state attorneys general, and five large banks, we wrote that states might try to divert their shares of the settlement to fill holes in state budgets—holes that may have little or no relation to the mortgage foreclosure problem. And now they are doing so.

Expect this to be a bipartisan effort, as state governments of both major parties are grappling with ubiquitous, unending budget deficits. Missouri jumped into the settlement diversion game when Democratic Gov. Jay Nixon proposed directing mortgage funds to pay for public colleges and universities in the state budget. In Wisconsin, it’s budget-hungry Republican Gov. Scott Walker who wants to tap the settlement funds for unrelated purposes.

Nixon justified his proposal by saying that the mortgage settlement money looked “relatively unfettered.” He then took a broad macro-economic position. “Clearly the economy was affected all across the country by foreclosure challenges,” Nixon said, “and I think it is apt and appropriate to use those dollars to help restore some of the challenging cuts that I was forced to make.” In so many words, Nixon is saying that the mortgage foreclosure crisis led to the economic problems that led to Missouri’s budget problems.

Maybe that’s the argument that Pennsylvania Democrats are using as they lean on the state’s Republican attorney general to make some of the settlement funds available for state education spending. Vermont plans to take $2.4 million for budget-balancing purposes, while Maryland’s Democratic AG, Doug Gansler, is turning 10 percent of that state’s $62.5 million payment into unrestricted funds for the governor and the legislature to use.

The expectation had been that the state allocations would be used by nonprofits for mortgage assistance counseling and legal aid. But even the lead state negotiator in the settlement, Iowa Attorney General Tom Miller, opened the door to the notion of repurposing settlement funds. According to a spokesperson for Miller, because of the “damage done to states and their budgets and services because of [the] mortgage crisis…states will have some flexibility in how they spend” their portions of the settlement funds.

This isn’t the first time. Anyone familiar with the repurposing of tobacco settlement proceeds to areas that had no relationship to alleviating health problems caused by smoking has seen it. Tobacco settlement funds went to a golf course sprinkler system and a county jail and office system in New York, to a shipping docks renovation project in Alaska, and most egregiously, to North Carolina’s effort to help tobacco farmers by marketing the state’s tobacco production and modernizing the tobacco curing process.

Some AGs think that the mortgage settlement moneys should be used to help the millions of families still facing foreclosure. Illinois Attorney General Lisa Madigan has said she “will oppose any efforts to use the money to prop up the state’s shaky budget.” But AGs can be overridden by governors and legislatures. The history of the tobacco settlement and the early indications of states with unusual ideas for repurposing the mortgage settlement funds add up to a clarion call for diligent nonprofit sector monitoring and advocacy to make sure that these dollars get used for their intended purposes.—Rick Cohen