- Associated Press - Wednesday, February 22, 2012

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 funding for state governments with multimillion-dollar budget gaps.

Although most of the money goes directly to homeowners affected by the mortgage crisis, the settlement announced this month by attorneys general in 49 states includes nearly $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 are already 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 state senator in Missouri who is chairwoman of the Consumers Council of Missouri.

States that use the onetime payout for immediate expenses may 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.

Republican legislative leaders in Missouri already have embraced the Democratic governor’s plan to use nearly all of the state’s $41 million settlement payment to help shore up the budget. The mortgage money enabled Mr. Nixon to reduce his proposed funding 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,” Mr. 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 straight 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. Joseph F. 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 Douglas F. Gansler said about 10 percent of his state’s $62.5 million payment will be made available for the governor and lawmakers to spend as they choose.

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