Holding Federal Funds Hostage – Can They Do That?

By Published On: January 30, 2017

On January 25, 2017, President Trump signed an Executive Order (EO) that stated that the Policy of the United States will be to ensure that any state or locality designated by the Secretary of the Department of Homeland Security and the Attorney General as a “Sanctuary Jurisdiction” will not be “eligible” to receive federal grant funds.  Sanctuary jurisdictions, according to the EO, are those states or localities that “willfully violate Federal law in an attempt to shield aliens from removal from the United States.” The Executive Order directs the Office of Management and Budget (OMB) to compile a list of “all Federal grant money” received by Sanctuary Jurisdictions presumably for the purpose of enforcing the Executive Order and depriving these Jurisdictions of any federal grant funds in the future.

This most recent EO came on the heels of an earlier order reinstating the Mexico City Policy which prohibits federal grant funds from being provided to foreign non-governmental organizations which “perform or actively promote abortion as a method of family planning” with any funds not just federal grant funds.

Both of these actions are examples of using federal funds to achieve the aims of either the President or Congress and the obvious question is, can the President deprive state and local governments of federal funds?  The short answer, of course, is “it depends.”  While there are a number of Supreme Court decisions that suggest that requirements on federal grant funds that are unrelated to the purpose for which funds were provided to a non-federal entity invite greater scrutiny, federal courts have only in the most extreme cases struck down such requirements.  The EO is unprecedented in both its scope (all federal grant funds) and its focus (state and local governments) and if carried out, litigation is a certainty and there are a number of interesting arguments that would support an injunction.

Violation of the Principles of Federalism. For many years the Supreme Court and Congress have struggled with the concept of using the overwhelming power of the federal purse to, in essence, “persuade” states and localities to take actions that the Federal Government cannot outright mandate.

Over 80 years of Supreme Court decisions address the reach of federal authority under the Spending Clause of the Constitution.  The Spending Clause states that Congress can raise funds through taxes in order to “provide for the common Defence and general Welfare of the United States…”  What does it mean to “provide for the general welfare?”  The Supreme Court held in the 1930s, and has since continued to hold, that it means largely whatever Congress determines it means in a particular circumstance.  Perhaps most famously in the late 1980s, the court upheld a condition on federal highway funds requiring states to raise their drinking ages to 21.   South Dakota v. Dole, 483 U.S. 203 (1987).  While the dissent by Justice O’Connor in that case reiterated a longstanding, but never applied, limitation on funding conditions, the concept that revocation of federal funds could not be used, at least in an extreme way, to coerce state action unrelated to management of the funded project or program.

However it was not until 25 years later that the Supreme Court actually found a situation, for the first and only time, where federal grant funds were being used coercively.  That decision struck down the mandatory expansion of Medicaid under the Patient Protection and Affordable Care Act.  National Federation of Independent Business v. Sebelius, ­­ 567 U.S. ­­­___ (2012) (NFIB).  Justice Roberts’ analysis of the law in this area is worth a read as it describes how in a program like Medicaid, the percentage of a state’s budget paid by Medicaid may well be in excess of 10% and to lose that funding would be devastating.  Thus the Medicaid expansion, mandated by threat of revoking existing Medicaid funding, went from being merely persuasive to a coercive “a gun to the head” of the states.

In short, when federal grant funds are being used to strong-arm states and localities to take action that has nothing to do with ensuring that the grant funds are spent as Congress intended in the particular federally funded project or program, as is apparently the case with the EO, there is a strong argument that such federal actions are beyond the limits of the Federal Government’s power.

First Amendment Concerns. Another limit on the Federal Government’s authority to mandate non-federal behavior under its spending power is when such a mandate would be prohibited by another Constitutional guarantee.  In particular, the Supreme Court has heard a number of cases over the past few decades concerning whether federal funds are being used to mandate adoption of a federal message in violation of the freedom of speech guarantees of the First Amendment.  The most recent decision on this issue came a year after NFIB.  In a case involving funds from the U.S. Agency for International Development (“USAID”), the Court found that conditions compelling adoption of a government message or viewpoint that were not related to the purpose of the grant program were unconstitutional.  Agency for International Development v. Alliance for Open Society International, Inc. 133 S. Ct. 2321 (2013).  The Court was particularly concerned in this case that the federal program did not allow an organization to even submit a proposal without certifying that both the organization and any affiliated organizations had adopted the government’s viewpoint.

Grants are like Contracts. Over thirty years ago in Pennhurst State School and Hosp. v. Halderman, 451 U.S. 1 (1981), the Supreme Court stated a principle that it has repeated many times since – grants are in the “nature of contracts.”  Thus, the only way that the Federal Government can take away current grants is to find that the grantee, here the so-called Sanctuary Jurisdiction, is in breach of the terms and conditions of a grant agreement that it knowingly and willingly accepted.  That is, did the grantee materially fail to abide by the specific terms of the grant award being terminated.  For example, if a city received a grant from the Centers for Disease Control (CDC) to combat the Zika virus, CDC would have to show that the city is not using the funds to combat Zika, not a showing that the city is in some way ignoring immigration laws.  Accordingly, taking away already awarded grant funds would be quite difficult and would require suspending all funding to that state or locality under the suspension and debarment regulations discussed next.

Debarment and Suspension. Under longstanding federal regulations called the common rule for non-procurement debarment and suspension, 2 CFR Part 180, the Federal Government cannot just declare a “unit of government” to be ineligible for federal funds.  It must find cause that the grantee is not “presently responsible.”  That is, the grantee, its principals or affiliated organizations have a lack of business integrity as demonstrated by an indictment, conviction, or willful violation of the law that shows that the entity cannot be trusted with federal funds.   Therefore, for the Federal Government to successfully debar a state or locality, it would have to prove that first, the state or locality had a legal obligation to enforce federal immigration laws; second, it was aware of that obligation; and third, it intentionally ignored any such obligation.

If you have questions about the Executive Order, Sanctuary Cities or general Federal Grants issues, please contact the Federal Grants Law group at Feldesman Tucker Leifer Fidell LLP, www.ftlf.com or 202-466-8960.


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