It's almost a Washington truism that anytime Congress creates a "trust fund" for a certain policy issue, the money flowing into this "trust 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 -- but this makes them all the more desirable for future Congresses to divert their proceeds to spend on pork.
Payroll tax money in the Social Security Trust Fund, for instance, 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.
But the granddaddy of all phony government trust funds may be soon enacted in housing bailout legislation before Congress. The so-called Affordable Housing Trust Fund -- part of the legislation that passed the Senate Banking Committee in May and is poised to come to the Senate floor as early as this week -- is almost set up from the beginning to be diverted to purposes other than affordable housing. The holes in this "trust 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 even political campaigning.
Long a priority of groups on the Left, the "trust fund" -- also called the "affordable housing 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-sponsored 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 has long been a goal of Rep. Barney Frank, and since he became chairman of the powerful House Financial Services Comittee when the Democrats took Congress back a year and a half ago, he has inserted several versions of the "trust fund" 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 prohibitions on using the funds for lobbying and political activity, but the bills -- including the Banking Committee package -- contain virtually no teeth in enforcing these 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.
These safeguards are important, because some of the biggest "housing advocates" also have politics in their portfolios. These groups would include the 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 histrory 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 employess 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 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 completley 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 steering recipients of housing counseling into ACORN memberships. (This report by the Employment Policies Institute contains the Inspector General's testimony in full.)
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 White House issued a statement containing veto threat last fall, citing -- among other things -- concern 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 grant.
As described by a press release from the National Low Income Housing Coalition (NLIHC), a group that has long pushed for the trust fund, "The bill as passed ... diverts half of the money intended for the housing trust fund in its first year and 25% in its second year. After that 100% of the funds go into the housing trust fund."
Although Frank has been described as angry about the compromise, the fact is the committee has already given him about four-fifths of what he has always proposed. The NLIHC press release calls the Senate Banking bill a "milestone" and boasts that "the National Housing Trust Fund Campaign has moved one step closer to accomplishing its core goal: establishing a housing trust fund at the federal level with a dedicated source of revenue."
But what we're really a step closer to an unaccountable slush fund that could be used for dubious purposes. Advocates have never really explained a policy rationale for having an off-budget entitity for housing. At the very least, the "trust fund" proceeds would go to what states and the federal government are already doing. Frank has 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 also threatens the very solvency reforms contained in the same Senate banking package. As Heritage Foundation economist David John notes, "It is very worrying for Congress to treat the GSEs as a piggy bank that can fund specific projects without going through the normal appropriations process." The White House statement argued that this would create "an undue and counterproductive reliance" on Fannie and Freddie.
In short, the cosmetic changes in the Dodd-Shelby "compromise" should not lessen distrust of the "trust fund" or the other untrustworthy features of Frank and Dodd's bailout bills.