What is earmarking?
Earmarking is the practice of designating money for a specific use. That designation can be formal (a law or contract that channels funds to a named purpose) or informal (mental accounting at the household level). Earmarking shows up across finance, law, and politics — from a company setting aside cash to upgrade IT, to legal rules that protect payments in bankruptcy, to congressional riders that send federal dollars to a particular town or project.
Key takeaways
– Earmarking means setting money aside for a particular purpose and treating it as non‑fungible.
– In behavioral economics/sociology, earmarking (or “mental accounting”) describes how people assign different meanings to different dollars.
– In bankruptcy law, an earmarking doctrine can exclude recently borrowed funds that were lent to pay a named creditor from the debtor’s estate.
– In politics, earmarks (often called “pork”) are legislative allocations that direct spending to specific districts or projects; they are controversial but also defended as a tool for building coalitions and ensuring local accountability.
– Earmarks were effectively banned in U.S. Congress in 2011, but debates continue about transparency, effectiveness, and whether regulated earmarks should return.
Understanding earmarking — types and examples
– Personal earmarking (mental accounting): Individuals assign money to specific uses (vacation fund, rent, education). That labeling changes spending behavior and perceived fungibility.
– Organizational earmarking: Businesses and governments set aside funds for projects (IT upgrades, road repairs, bond proceeds legally restricted to a project).
– Legal earmarking (bankruptcy): Under certain conditions, borrowed money meant to pay a particular creditor may be treated as never having become part of the debtor’s general assets.
– Political earmarking: Legislators add provisions or line items to spending bills directing federal funds to a specific project, entity, or district.
Earmarking doctrine in bankruptcy law — what it is and practical implications
– Concept: If a lender makes a loan to a debtor with explicit instructions that the money be paid to a designated creditor, and the funds are transferred for that purpose shortly before bankruptcy, courts sometimes treat those funds as never having become the debtor’s assets. The idea: there was no net depletion of the debtor’s estate — the borrower just channeled outside funds to a creditor.
– Typical requirements (varies by jurisdiction): clear evidence of the lender’s intent that funds be used for one creditor, contemporaneous transfer or directing of the funds, and timing limits (courts often scrutinize transfers made shortly before filing).
– Practical steps for parties:
1. For lenders who want earmarking protection: document the lender’s intent in writing; require and verify direct payment to the stated creditor; keep complete transaction records and timestamps.
2. For borrowers: be transparent about the source and use of funds; keep robust accounting that shows the loan’s flow through the entity.
3. For creditors receiving earmarked payments: maintain documentation that funds came from a third-party loan and were paid to discharge a specific obligation.
– Note: bankruptcy treatment is fact‑specific and varies by court; consult bankruptcy counsel early when funds are borrowed to pay another creditor.
Earmarks in politics and appropriations — how they work and why they matter
– Mechanism: In appropriations or authorization bills, lawmakers can insert language specifying that funding be used for particular projects, contractors, or localities. These are often referred to as “earmarks” or “congressionally directed spending.”
– Political function: Earmarks have historically been used to build the coalition necessary to pass contentious legislation by offering targeted benefits to particular members’ districts.
– Criticisms: They are criticized as pork‑barrel spending or favoritism that can waste taxpayer dollars, reward political allies, or bypass merit-based allocation.
– Defenses: Proponents argue earmarks increase legislative accountability (elected officials decide local allocation rather than unelected bureaucrats), help enact major legislation, and can be modest in cost relative to the value of breaking gridlock on big national issues.
Case study: the “Bridge to Nowhere”
– Background: Proposed federal funding for a costly bridge in Alaska that would have connected a small island with very few residents to the larger island generated national outrage as emblematic of wasteful earmarking.
– Outcome: The direct bridge funding was defunded amid political backlash, but nearby spending (a road to the proposed site) still occurred, giving rise to the “road to nowhere” criticism.
– Lesson: Highly visible, high‑cost local projects can crystallize public anger about earmarks and prompt legislative reforms, even if some local spending persists.
Earmarking moratorium and its aftermath
– In 2011, Congress adopted rules effectively banning most earmarks in response to concern about corruption and waste.
– Enforcement and practice: Watchdog groups report that spending directed in earmark‑like ways persists under other labels; the volume and form of directed spending have shifted rather than disappeared.
– Policy debates: Some commentators argue the ban increased gridlock and reduced the legislature’s ability to form majorities; others maintain the ban reduced abuses. Calls exist for a reformed, transparent earmark process (strict disclosure, ethics rules, public databases).
Arguments in favor of political earmarks
– Coalition building: Earmarks can be used to assemble votes for major reforms (tax, immigration, healthcare) that otherwise stall.
– Local accountability: Elected representatives are answerable to voters, whereas executive agencies and appointed officials typically are not; directing funds through lawmakers can increase responsiveness.
– Relative cost: Advocates argue that the monetary cost of modest local projects is small compared with the cost of legislative paralysis on big national problems.
Practical steps — how different actors can handle earmarking responsibly
For policymakers and legislative staff
1. Institute transparency: publicly disclose all earmark requests, sponsors, recipients, and supporting documentation before votes.
2. Set rules: require a demonstrated local match, cost‑benefit justification, and compliance with competitive procurement where applicable.
3. Create auditing: mandate post‑award audits and publicly available performance reports.
4. Cap and prioritize: limit the share of discretionary spending that can be earmarked and prioritize projects by clear public‑interest criteria (safety, infrastructure need, economic impact).
For citizens, watchdogs, and journalists
1. Monitor disclosures: use public databases and FOIA requests to track how funds are allocated and spent.
2. Demand local justification: ask elected officials to explain how an earmark serves broad community needs.
3. Follow outcomes: track whether funded projects are completed on time, on budget, and delivering promised benefits.
For municipal and state governments
1. Anticipate stipulations: when accepting earmarked federal money, document restrictions and compliance obligations at the local level.
2. Ensure fiscal sustainability: avoid relying on one‑time earmarks for ongoing operating costs.
3. Maintain procurement integrity: use competitive processes for contractors even when a project is funded as an earmark.
For businesses and nonprofits receiving earmarked funds
1. Keep clear project accounting and performance records.
2. Comply strictly with procurement and reporting rules attached to funds.
3. Be transparent about lobbying or solicitation activities that led to the funding.
For lenders, borrowers, and creditors dealing with potential earmarking in bankruptcy situations
1. Put intent in writing: documented loan agreements and disbursement instructions are essential.
2. Route payments directly: arrange for payments to be made straight from lender to creditor when possible.
3. Preserve evidence: retain emails, wire instructions, bank statements, and contemporaneous correspondence that show the flow and purpose of funds.
4. Get legal advice: because courts apply different tests, seek bankruptcy counsel before structuring transfers intended to be “earmarked.”
Conclusion
Earmarking is a flexible tool that appears in household budgeting, corporate finance, bankruptcy law, and legislative appropriations. Its consequences depend on how it is designed and governed: when transparent and accountable, earmarks can target needed local investments and help legislatures form coalitions; when opaque or abused, they can foster waste and patronage. Thoughtful rules — disclosure, auditing, and clear eligibility criteria — can preserve the useful functions of earmarking while limiting its downsides.
Sources and further reading
– Investopedia — “Earmarking” (source material): https://www.investopedia.com/terms/e/earmarking.asp
– Viviana Zelizer, The Social Meaning of Money (discussion of earmarking and money’s meanings): (see book)
– Maurice A. Deane School of Law at Hofstra University — “From the Bankruptcy Courts: The Earmarking Defense to Preference Actions: The Requirements of the Bohlen Decision”
– FactCheck.org — “Bridge to Nowhere”: https://www.factcheck.org/2006/08/bridge-to-nowhere/
– NBC News — “Alaska Ends Plan for ‘Bridge to Nowhere’”: https://www.nbcnews.com/id/wbna12251249
– CNN — “The Bridge Failed, but the ‘Road to Nowhere’ Was Built”: https://www.cnn.com/2008/US/01/22/bridge.to.nowhere/
– Citizens Against Government Waste — Congressional Pig Book (2017 and 2021 editions): https://www.cagw.org/pigbook
– The New York Times — Thomas Edsall op‑ed, “The Value of Political Corruption” (2014)
– Federal Election Commission / Supreme Court — Citizens United v. FEC (background on campaign finance environment): https://www.fec.gov/legal-resources/court-cases/citizens-united-v-fec/
If you’d like, I can:
– Draft a model set of earmark‑transparency rules lawmakers could adopt.
– Create a one‑page checklist municipal officials can use when accepting earmarked federal dollars.
– Summarize the legal tests used by different U.S. circuit courts for the earmarking defense in bankruptcy. Which would be most useful?