Almost every time Congress creates a "trust fund" for a certain policy
issue, the money flowing into this "trust fund" is 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.
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 — attached to broader legislation
concerning subsidies to troubled banks and borrowers and the
government-sponsored enterprises Fannie Mae and Freddie Mac — is set
up 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 money from a
legislatively fixed share of the surpluses of the government’s Federal
Housing Administration or the revenues from Fannie and Freddie. The
latest version — in the housing bill that passed the Senate this month
— would establish the fund by taking 1.2 basis points of interest from
Fannie and Freddie’s loan portfolio. This would reduce their capital
levels — now shown to be in peril — by around $500 million a year.
can be almost certain that House Financial Services Committee Chairman
Barney Frank (D-Mass.) will make a strong attempt to include this
“trust fund” in the housing legislation he is now negotiating with the
Bush administration. Enacting an off-budget funding entity for housing
has long been a goal of Frank’s, and since he became chairman of the
powerful committee 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
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
recently passed Senate legislation — contain virtually no teeth for
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.
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
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 John Fund has 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. (This report by the
Employment Policies Institute contains the Inspector General’s
testimony in full.)
A new report from the free-market Consumers
Rights League charges that ACORN is has continued to misuse housing
funds — this time from the Department of Housing and Urban
Development. (It also finds that ACORN encouraged banks through the
Community Reinvestment Act to make some of the risky loans now at the
center of the housing mess.)
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 a 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
Committee’s ranking Republican Richard Shelby announced he had reached
a "compromise" with committee chairman Chris Dodd on the housing fund
and other issues, most Senate Republicans unfortunately followed suit.
The bill passed the committee 19-2 just before the Memorial Day recess.
of the "compromise" that Dodd and Shelby announced was that money from
"trust fund" contributions from Fannie and Freddie 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. Since now taxpayers may
be on the hook for bailing out Fannie and Freddie as well, this has
turned into almost a distinction without a difference. And the GOP
members didn’t seem to notice the many other devils in the details of
the Senate package.
In addition to unrelated items such as a
bizarre requirement for a fingerprint registry for much of the mortgage
industry, the Senate 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
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
Although Frank has been described as angry about the
compromise, the fact is the Senate bill gives 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 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 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 very solvency reforms
contained in the same Senate bill. 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 change in the
Dodd-Shelby Senate "compromise" should not lessen distrust of the
"trust fund" or the other untrustworthy features of Frank and Dodd’s
Mr. Berlau is director of the Center for Entrepreneurship at the Competitive Enterprise Institute. He is the author of "Eco-Freaks: Environmentalism is Hazardous to Your Health." Contact him at [email protected].