WASHINGTON — A provision tucked away in the Senate’s two-year budget deal would cut the Federal Reserve's operating surplus by $2.5 billion, the second time in recent years that Congress has diverted Fed funds to pay for unrelated legislation.

The deal announced Wednesday — which would avert a government shutdown on Thursday night and raise the debt ceiling — includes a provision that would amend the Federal Reserve Act to reduce the central bank’s operating surplus from $10 billion to $7.5 billion. That would result in an extra one-time remittance of $2.5 billion from the Fed to the Treasury.

But critics say the plan is yet another example of Congress turning to the Fed as a source of funding rather than finding more constructive ways to plug budget holes.

Federal Reserve building
A 2015 transportation bill both set the Federal Reserve's surplus cap at $10 billion — down from $29 billion — and included a provision, opposed by the financial industry, that adjusted the way the central bank pays dividends. Bloomberg News

“This is a pathetic gimmick that saves taxpayers nothing and masks deficit spending,” said Aaron Klein, policy director at the Center on Regulation and Markets at the Brookings Institution. “There’s no magic between $10 billion and $7.5 billion … or zero. What Congress is doing, at its core, are accounting gimmicks, which are as honest as Enron.”

Congress established the surplus cap as part of a 2015 transportation bill that both set the cap at $10 billion — down from $29 billion — and included a provision, opposed by the financial industry, that adjusted the way the central bank pays dividends to member banks on their proprietary Federal Reserve stock. The changes resulted in a one-time transfer of more than $19 billion to the Treasury in 2016.

Member banks buy Fed stock when they become members. Before 2015, that stock paid a set dividend of 6% — historically below average but far above the prevailing rates in recent years. The 2015 highway bill adjusted that formula to tie the dividend payment to the 10-year Treasury rate, but created a carve-out for banks with less than $10 billion in assets.

The further reduction in the Fed's surplus this time would not appear to affect those dividends. But diverting Fed funds for budgetary purposes this time around is already drawing groans.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, said he is exploring how to remove the provision in a final package.

“I do have concerns about that and I am working to see if we can eliminate that. I don’t believe that Congress should be using that fund to operate," Crapo said. "I think that is just bad budget policy in Congress. I fought it the last time they tried it and I have fought the other efforts they have used in budget deals."

Paul Merski, group executive vice president of congressional relations and strategy at the Independent Community Bankers of America, said the move appeared similar to what Congress did in the 2015 highway bill. While the ICBA was able to keep small banks from being affected in 2015, the group is still worried that Congress could come after them next.

“[It is] now common to use the Fed as a piggy bank for all kinds of things from funding [the Consumer Financial Protection Bureau] to paving roads,” Merski said. “ICBA was able to protect banks of $10 billion or less in assets from the Fed dividend cut last Congress, but we remain on guard to ensure they don’t go after these banks next.”

Karen Shaw Petrou, managing partner at Federal Financial Analytics, agreed the biggest problem the move poses is that there is little keeping Congress from raiding the Fed again.

“The Fed’s surplus is easy money for Congress, but hard luck for the rest of us,” Petrou said. “Turning a central bank into a piggy bank threatens its independence and ability to respond in a crisis.”

The American Bankers Association sued the government over the 2015 dividend cut, although the U.S. Court of Federal Claims granted the government’s motion to dismiss the case in a sealed judgment in October. The case is currently being appealed in the U.S. Court of Appeals for the Federal Circuit.

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