Thursday, May 31, 2012

NC House gives a lesson in fungibility

Most introductory economics classes teach students about fungibility--the simple insight is that money is money. If you give people money for one purpose, they can easily spend it for another.

I usually teach this with an example of a grandparent's gift to a student to buy books. Suppose that a student has $1,000 in her budget at the start of the semester, which she has to allocate between books and her other expenses (Starbucks, new shoes, pizza, etc.). The student's grandmother sends $100 to be used exclusively for books. Will the student's book expenditures go up by $100? Probably not. If the student was already going to spend some money to buy books, she can use her grandmother's gift to offset those expenditures, and use the freed up money to buy other things. The student can abide by the letter of her grandmother's wishes by spending the $100 on books, but the student might go against the spirit of those wishes by increasing her overall book spending by less than $100 (or perhaps not increasing her book spending at all). At the end of the day, $1,000 in unrestricted money plus $100 in restricted money leads to choices that are similar to or the same as $1,100 in unrestricted money--$1,100 is $1,100.

The North Carolina House of Representative is offering a much better (and bitter) lesson than my dry classroom example. The Charlotte Observer reports that the House is proposing to play a similar shell game with money that the state will be receiving from the large legal settlement with mortgage companies and that was supposed to go to help homeowners hurt by mortgage shenanigans.
The North Carolina House budget, which was approved Wednesday, could use nearly $23 million from a blockbuster legal settlement with the nation’s largest mortgage servicers to plug budget gaps, joining dozens of states in redirecting money intended to help struggling homeowners.

Though law enforcement and housing advocates will still receive the millions directed to them in the settlement, the House budget also encourages state agencies to use settlement dollars to make up for cuts in other places.

In total, about one-third of the money sent to the North Carolina state government could be used to fill holes in the $20.3 billion budget introduced Tuesday.
So how does the House's shell game work? Consider the NC Housing Finance Agency. Under the terms of the settlement with the mortgage companies, $30.6 million in settlement funds was to go to this agency to help pay for counselors and legal representation to help struggling homeowners avoid foreclosure. Under the House plan, North Carolina would technically keep its end of the bargain, adding $30.6 million to the agency's budget. However, the House has also proposed cutting $4.3 million from another part of the agency's budget and using that money for other purposes. The net result is that only $26.3 million is actually added to the budget.

Another $2.9 million was supposed to boost the ability of the State Bureau of Investigation to investigate financial crimes. However, through the magic of fungibility, the $2.9 million that is added to that part of the SBI's budget will be offset with an equal-sized cut, and the freed-up money will be used to cover a new earmarked crime lab in Henderson County. The net result will be no additional capability to go after the criminals who prey on homeowners.

Effectively, the House is proposing to tax the funds that are slated to help homeowners. Of the $49 million in restricted funds that were supposed to help homeowners, the House would claw back $7.5 million or about 15 percent of the take. And that amount is on top of $16 million that was already going to general purposes in the state budget.

The House's message to homeowners? You've been helped quite enough, thank you.

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