By David A. Lieb
JEFFERSON CITY, Mo. — The ink wasn’t even dry on a settlement with the nation’s top mortgage lenders when Missouri Gov. Jay Nixon laid claim to a chunk of the money to avert a huge budget cut for public colleges and universities.
He’s not the only politician eyeing the cash for purposes that have nothing to do with foreclosure. Like a pot of gold in a barren field, the $25 billion deal offers a tempting and timely source of money for state governments with multimillion-dollar budget gaps.
Although most of the money directly goes to homeowners affected by the mortgage crisis, the settlement announced this month by attorneys general in 49 states includes almost $2.7 billion for state governments to spend as they wish.
Some are pledging to use it as relief for struggling homeowners or to help related initiatives such as a Michigan plan to assist children left homeless by foreclosures. But several states already are planning to divert at least some of the money to prop up their budgets, and more will be wrestling with those decisions in the coming weeks.
For some consumer advocates, the diversion is reminiscent of the 1998 tobacco settlement in which states spent billions on projects that had nothing to do with curbing smoking.
“We shouldn’t be in the position of taking money that is intended to help consumers and their mortgage tribulations and putting that to another purpose,” said Joan Bray, a former Democratic Missouri senator who now is chairwoman of the Consumers Council of Missouri.
States that use the onetime payout for immediate expenses also could face the question of what to do next year when the money is used up. But officials in struggling states say they must deal with the most immediate problems first.
A federal judge in Washington could approve the final settlement by the end of February. Once that happens, money could begin flowing to states within a couple of weeks, arriving just as lawmakers are crafting budgets for the upcoming fiscal year.
In Wisconsin, Gov. Scott Walker wants to use $26 million to plug a state budget hole because the foreclosure crisis had a “direct impact on the economy.” But the Republican governor’s plan has ruffled some Democrats, including Milwaukee Mayor Tom Barrett.
Republican legislative leaders in Missouri already have embraced the Democratic governor’s plan to use almost all of the state’s $41 million settlement payment to help shore up the budget. The mortgage money allowed Nixon to reduce his proposed spending cut for public colleges and universities from 12.5 percent to 7.8 percent — potentially easing student tuition increases.
The money was “as we looked at it, relatively unfettered,” Nixon said. “Clearly the economy was affected all across the country by foreclosure challenges, 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 Pennsylvania, where a fourth consecutive budget deficit is projected, Democrats are pressing the Republican-run attorney general’s office to use some of its $69 million payment to offset $2 billion in cuts to programs that benefit education, the elderly, disabled or poor.
“The governor’s budget has so many cuts to so many valuable programs, if the attorney general’s office has $69 million, why not use that to offset these cuts to essential programs?” said state Rep. Joe Markosek, the ranking Democrat on the House Appropriations Committee.
Vermont plans to use $2.4 million from the settlement to help balance its budget. Maryland Attorney General Doug Gansler said about 10 percent of his state’s $62.5 million payment would be made available for the governor and lawmakers to spend as they choose.
St. Louis homebuilder Bob Suelmann, who has a background in real estate and finance, said it was “ridiculous” for states to divert mortgage settlement payments to other purposes.
“It’s like taking tax money that was supposed to go to road improvements, and then suddenly the bridges are falling down and you don’t know what to do about it,” Suelmann said. “That money should go to something that can directly improve the situation with the housing program.”
When the tobacco settlement was reached, initially states promised to beef up public health with the $206 billion paid out over several decades. Instead, much of the money went to general government operations. State spending for tobacco-prevention programs has fallen to its lowest level since 1999, according to recent estimates.
“The lesson is advocates have to be vigilant,” said Marie Cocco, a spokeswoman for the Campaign for Tobacco-Free Kids.
Most states probably will use the money for mortgage-assistance hotlines, mediation between borrowers and lenders, legal aid and financial counseling, said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who was the lead negotiator on the settlement.
But, he added, officials “have to acknowledge that there has been damage done to states and their budgets and their services because of this mortgage crisis. …So states will have some flexibility in how they spend” the money.
Illinois Attorney General Lisa Madigan said she would oppose any effort to use the money to prop up the state’s shaky budget.
California, which was one of the hardest hit states by the mortgage crisis, will receive the largest payment, about $430 million at a time when the state is facing a $9.2 billion deficit. A spokesman for Gov. Jerry Brown said no decision had been made on how to spend the money.
Some consumer advocates say they will be watching closely to see where the payments are spent.
“As insufficient as it is,” said Kathleen Day, a spokeswoman for the nonprofit Center for Responsible Lending, “this money was intended to go directly to help struggling homeowners.”