The Public Policy

Distrust Fund

Barney Frank's brainstorm will be a slush fund for the Left.

By 6.17.08

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It's almost a D.C. truism that anytime Congress creates a "trust fund" for a certain policy issue, the money flowing into the fund will be diverted to something else.

Government trust funds are set up with special taxes and fees so that they will be less subject to normal budget constraints. That makes them desirable for future Congresses to divert their proceeds to spend on pork.

Payroll tax money in the Social Security Trust Fund has for decades been emptied out to fund general government programs. Similarly, the Highway Trust Fund set up to build and improve roads from the federal gasoline tax has also seen raids on its purse for other priorities.

The 800 pound gorilla of all phony government trust funds may be soon enacted in housing bailout legislation before Congress. The so-called Affordable Housing Trust Fund is part of the legislation that passed the Senate Banking Committee in May that's poised to come to the Senate floor as early as this week.

This trust fund is not to be trusted. It is almost set up from the beginning to be diverted to purposes other than affordable housing.

THE HOLES IN the fund would allow the money to be easily siphoned off to liberal activist groups such as Association of Community Organizations for Reform Now (ACORN) for lobbying and political campaigning.

Long a priority of groups on the Left, the fund would get its revenues from a legislatively fixed share of the surpluses of the government's Federal Housing Administration or the profits from the government-chartered enterprises Fannie Mae and Freddie Mac.

The latest version -- in the housing and GSE oversight bill that cleared the Senate Banking Committee in May -- would establish the fund by taking 1.2 basis points of interest from Fannie and Freddie's loan portfolio -- about $500 million a year.

Enacting an off-budget funding entity for housing is a high priority of Rep. Barney Frank. Since he became chairman of the powerful House Financial Services Committee when the Democrats took Congress back a year and a half ago, he has inserted several versions of the this into many housing bills.

"Given our severely constrained fiscal realities," Frank has argued, there needs to be "a low income housing trust fund that will be paid for in ways that do not draw from federal tax revenues."

Yet given how important low-income housing supposedly is to Frank and other advocates, there are relatively few safeguards to ensure that most of the Trust Fund proceeds are actually spent on affordable housing.

There are pro forma prohibitions on using the funds for lobbying and political activity, but the bills -- including the Banking Committee package -- contain virtually no teeth in enforcing the bans.

There are no explicit requirements for recipients of the grants to fill out timesheets for housing activity, or restrictions on groups using grant money to pay employees who also happen to do other things -- such as lobbying and political campaigning. And there are really no penalties other than being forced to give the money back and being disqualified for a new grant.

SAFEGUARDS ARE IMPORTANT because some of the biggest "housing advocates" also have politics in their portfolios. These groups would include ACORN and the National Council of La Raza, both of which provide housing counseling as well as lobby for liberal causes and politicians.

ACORN has an especially dubious history concerning both election fraud and misuse of federal funds. Several ACORN workers have been indicted and/or convicted of voter registration fraud with phony signatures. In Washington state, seven ACORN employees were indicted in what the Democratic Secretary of State called the worst case of voter fraud in the state's history.

As Wall Street Journal columnist and election fraud expert John Fund reported, "The list of 'voters' registered in Washington state included former House Speaker Dennis Hastert ... actress Katie Holmes and nonexistent people with nonsensical names such as Stormi Bays and Fruto Boy."

And ACORN has also been sanctioned specifically for misuse of federal housing funds. In 1994, the ACORN Housing Corporation (AHC) received a grant from the newly created Americorps to assist low-income families at finding housing. In applying for the grant, the AHC claimed its activities were completely separate from ACORN.

But one year later, the Americorps Inspector General would testify that "AHC used Americorps grant funds to benefit ACORN either directly or indirectly." She found several instances of cost-shifting from ACORN's lobbying group to the housing entity, and also found several instances of the steering of recipients of housing counseling into ACORN memberships.

GIVEN THIS HISTORY of the fungibility of housing grant money, Republicans had so far blocked the creation of the new housing trust fund.

No bill containing the fund had been passed by the Senate, and the White House issued a statement containing a veto threat last fall, citing concerns that the fund would "be susceptible to political influences that could compromise the goals of assisting as many low income families in need as possible."

But just after Senate Banking's ranking Republican Richard Shelby announced he had reached a "compromise" with committee chairman Chris Dodd on the housing fund and other issues, most committee Republicans followed suit. The bill passed the committee 19-2 just before the Memorial Day recess.

Part of the "compromise" that Dodd and Shelby announced was that money from the "trust fund" would be used to fund the bill's main action of bailing out troubled homeowners through FHA guarantees of modified loans. This way, there would be somewhat less direct costs to taxpayers than in Frank's House bill, which relies solely on general tax revenues for the bailout.

But as they were rushing out for recess, perhaps the GOP members didn't notice the many devils in the details of the Senate Banking package.

In addition to unrelated items such as a bizarre requirement for a fingerprint registry for much of the mortgage industry, the bill hardly gave any ground on the trust fund.

Only part of the revenue would go toward the bailout, the rest would continue to go to grants that could find their way to groups like ACORN. And after two years, all of the money would go to the fungible housing grants.

ALTHOUGH FRANK HAS been described as angry about the compromise, it's hard to see why. The Senate committee has already given him about four-fifths of what he has always proposed.

The bill will help start an unaccountable slush fund that could be used for dubious purposes. Advocates have never really explained a policy rationale for having an off-budget entity for housing. At the very least, the "trust fund" proceeds would go to what states and the federal government are already doing.

Frank has lamely cited assistance to renters as a justification. But as the White House noted in its statement last fall, the federal Home Investment Partnerships Program of the Department of Housing and Urban Development already serves this goal, making a trust fund for this purpose "largely redundant."

Forcing Fannie and Freddie to divert money to this fund also threatens the solvency reforms contained in the same Senate banking package. Heritage Foundation economist David John calls it "very worrying" for our elected representatives "to treat the GSEs as a piggy bank that can fund specific projects without going through the normal appropriations process."

Another untrustworthy trust fund we can do without.

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About the Author
John Berlau is Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute and blogs at OpenMarket.org.