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Earmarking

The process of appropriating particular money aside for a specific purpose

What is Earmarking?

Earmarking is the process of appropriating money aside for a specific purpose. The term is used in several contexts; for example, in congressional appropriations of taxpayer funds to individual practices like mental accounting. In the case of organizations, the term relates to how companies or governments budget spending. For individuals, earmarking can imbue money with symbolic value based on the purpose it is earmarked for, with mental accounting being a special case of self-earmarking one’s funds.

 

Earmarking

 

One of the famous instances of a political earmark is the Gravina Island Bridge, commonly referred to as the “Bridge to Nowhere,” a $398-million bridge that would have connected an island housing an airport to a larger island containing the city of Ketchikan, Alaska. In 2005, members of the U.S. Congress pushed to defund the bridge and divert the money to rebuild a bridge destroyed by Hurricane Katrina, but Senator Ted Stevens (R-Alaska) threatened to quit Congress if the earmark was scrapped.

 

Summary

  • Earmarking is the process of appropriating particular money aside for a specific purpose.
  • The term has an agricultural origin; farmers would cut recognizable notches in their livestock’s ears to mark the animals as belonging to them.
  • Earmarking is a controversial and longstanding practice in the U.S. Congress, where parties have historically won support for contentious votes by offering or threatening to revoke funds for projects in particular members’ districts.

 

Usage of the Term “Earmarking”

 

In Agriculture

The term “earmarking” has an agricultural origin; farmers would cut recognizable notches in their livestock’s ears to show ownership. Practically, it means to set funds aside for a particular project. For example, a city’s municipal corporation may earmark the proceeds of a municipal bond issue to pay for a new road or bridge, or a company may earmark a sum to spend on upgrading its accounting system.

 

In Social Science

The term has been associated with social scientist Viviana A. Zelizer, who identifies earmarking as imbuing certain dollars with specific meaning related to the relational ties and cultural meaning for what that money is earmarked for – claiming that “not all dollars are equal.”

Hence, money earmarked for a loved one will be treated more carefully than money for a friend. The concept of mental accounting in behavioral economics is a case of personal earmarking whereby people allocate money to specific tasks/purposes, making the funds non-fungible.

 

In Bankruptcy Law

The earmarking doctrine provides that when a new lender gives a loan to enable a debtor to pay off a specified creditor, they are particularly set aside for that creditor so that, in case the debtor lacks control over the disposition of the funds, they do not become part of the debtor’s estate and hence subject to preference.

The doctrine rests on the idea that the funds never really belonged to the bankrupt party as there was no net decrease in the bankrupt party’s asset base and gets its name probably because the loan has been earmarked.

 

In Politics and Appropriations

In the United States, earmarking is used in relation to the legislative allocation process. It is a controversial and longstanding practice in the U.S. Congress, where parties have historically won support for contentious votes by either offering or threatening to revoke funds for projects in particular members’ districts. Absent such earmarking, funds are apportioned to agencies of the executive branch, which decide what specific projects to spend federal money on.

Suppose a certain political party wants to pass a law banning some toxic substance, a move that will be popular with its supporters nationwide. However, one of the members is hesitant to vote for it because a factory in her district would need to cut jobs in case the substance is banned. For winning her vote, the party may amend the bill to include an earmark; a port in her district will receive federal funds for an upgrade, rather than a port fifty miles up the coast.

Such earmarks are also known as “pork-barrel spending” or “pork” for short. Pork barrels are controversial and are seen as a form of corruption, allowing D.C. power brokers to trade in the fortunes of the people they represent and squander taxpayers’ money on giveaways to particular districts.

 

Additional Resources

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In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

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  • Shortfall
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