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Brown Proposes Clever Raid of Foreclosure Fraud Settlement Funds

This was inevitable. California is $7 billion more in the budget hole than they expected at the end of last year, and they need money from any source. The federal government delivered $410 million to California in the foreclosure fraud settlement. That money is supposed to go to homeowners, but many states have raided the funds for their own budgets. So this was an inviting target for Jerry Brown.

The Sacramento Bee makes it sound like Brown is prepared to steal the money:

The Democratic governor relies on a patchwork of solutions to bridge the gap in a $91.4 billion general fund spending plan, including deeper cuts, his November tax initiative and taking money from a multi-state mortgage abuse settlement with banks.

In reality, it’s a bit more complicated than that, but the effect is actually the same as a traditional raid on the funding.

Here’s how Brown himself described the move in his revised budget today.

Provides Funding for Existing Homeowner and Consumer Assistance Programs

Existing assistance programs for homeowners and consumers affected by the mortgage crisis will be funded with proceeds from the National Mortgage Settlement, resulting in $292 million in General Fund savings.

This is a common but fiendishly clever California budget trick. In this case, the state has been funding a series of homeowner assistance and counseling programs. The funds from the foreclosure fraud settlement were supposed to augment those programs. Instead, Brown will zero out those program budgets, so that they will be entirely funded by the settlement dollars. This “saves” $292 million from the General Fund, but it’s really no different than stealing $292 million from the settlement to fill the budget hole. The settlement was not intended as a pretext for zeroing out all assistance and counseling programs. Those programs in California, and most states, were inadequate to meet demand. The settlement money would have partly fixed that; now that money will have to shoulder the entire burden of assistance and counseling on its own.

As a prior observer of the California budget wars, I’ve seen this before. We have a millionaire’s tax, approved by voters, to fund mental health services. In one past budget, ex-Governor Arnold Schwarzenegger just zeroed out all mental health funding and let it be entirely funded by proceeds from the millionaire’s tax. From a financial standpoint, there’s no difference between this and just taking the tax money for budgetary use.

Among the other measures in Brown’s May revised budget include significant cuts to health care and welfare programs, reductions of $38 million to the University of California, a 5% cut to state employee compensation (through a reduced work week), and reductions to the corrections system from compliance with a court order to decrease the population in state prisons. If the tax measures put on the November ballot by Brown fail, expect even deeper cuts to schools.

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David Dayen

David Dayen