U.S. AG asked to investigate use of settlements for budget

A Delaware nonprofit is calling on the U.S. attorney general to investigate whether the state was allowed to use millions of dollars from financial settlements with Bank of America and Citigroup to plug holes in its $3.9 billion budget.

Rashmi Rangan, executive director of the Delaware Community Reinvestment Action Council Inc., wrote to Attorney General Loretta Lynch on Monday asking for the government to intervene in what she and others say is a misuse of the money under the terms of the settlement agreements.

DCRAC, an agency that advocates for equitable treatment and access to credit, is also considering filing a lawsuit if state lawmakers do not backpedal on their spending decision.

During the last-minute crunch to approve a balanced budget by July 1, lawmakers had access to about $61 million from financial crisis-related settlements with Standard & Poor's, Citigroup and Bank of America.

The settlement dollars, secured under former Attorney General Beau Biden, was meant to remediate the harm the nation's top banks and rating agency caused by pushing risky residential mortgage-backed securities, which eventually crippled the financial markets in 2008.

Lawmakers opted to use all of the $25 million S&P settlement and about $6 million of the Bank of America and Citigroup settlement to balance the state's 2016 fiscal year budget. The remaining money was saved to potentially use for next year's budget.

The settlement money went to funding farmland preservation, volunteer fire companies, senior centers, corporate job grants, a transportation trust fund and charter schools.

None went to programs related to foreclosure assistance, nor to Attorney General Matt Denn's proposal to fund police foot patrols in Wilmington, provide subsidies for low-income schools and boost housing programs.

"There is a lot of anger in the state," Rangan said. "We fought really hard on behalf of homeowners who lost their homes, and in that fight, the intent was to somehow make them as whole as possible."

Rep. Melanie George Smith, a Bear Democrat who co-chairs the Legislature's budget-writing Joint Finance Committee, said the settlement funds were needed to balance a budget that could pass the General Assembly.

"We did ... what we needed to do to get a budget passed," Smith said.

The money was necessary to balance a budget that assists all Delawareans, she said, including those affected by the housing crisis.

It's not at all clear, however, that lawmakers exhausted all other options before tapping the settlement money.

Budget writers used more than $20 million to prevent higher health insurance deductibles for state employees and rejected Gov. Jack Markell's plan to reduce school tax subsidies for seniors.

And despite budget shortfall claims, the operating budget produced by lawmakers early on July 1 was slightly more expensive than the plan presented by Markell six months earlier.

The terms of the $25 million S&P settlement gave lawmakers leeway to use the money to repair "harm to the state's operating revenues." Delaware Controller General Mike Morton said that settlement money was "free and clear."

However, he said there was some question about the money from Bank of America and Citigroup.

The terms of that settlement say the money should be used for purposes of "providing restitution and remediating harms to the state and its communities allegedly resulting from unlawful conduct of the [banks], including efforts to address the mortgage and foreclosure crisis, financial fraud and deception and housing-related issues."

"When all is said and done, we were trying to balance the budget," Morton said.

Rangan and others have called the spending a violation of the terms of the Bank of America and Citigroup settlement.

They may have legal standing.

A judge in California recently ordered Gov. Jerry Brown to return $331 million from Bank of America that was meant to assist homeowners but was used to plug holes in the state's budget in 2012.

The ruling came after three nonprofit groups that assist homeowners filed a lawsuit against the governor after the funds were never restored, despite the state reporting a budget surplus in later years.

Officials with those nonprofit organizations said they have identified a dozen other states where similar action could be possible.

Rangan said the needs of homeowners in Delaware are tremendous. Nearly 3,000 Delawareans are likely to be foreclosed on this year, she said, and Delaware continues to make the top 10 states for foreclosure filings.

Contact Jon Offredo at (302) 678-4271, on Twitter @JonOffredo or joffredo@delawareonline.com. Contact Jessica Masulli Reyes at (302) 324-2777, jmreyes@delawareonline.com or on Twitter @JessicaMasulli.