Fixed Income

Are Sanctuary Cities Truly at Risk?

By John Ceffalio January 30, 2017
Are Sanctuary Cities Truly at Risk?

Last week, President Trump signed an executive order declaring that “sanctuary cities”—and hundreds of communities fall into this category—will no longer receive federal funds “except as mandated by law.” That last phrase? Telling.

That’s because the executive order can’t actually overturn the grant programs mandated under current law.

So what are the implications for these municipal credits? Although we anticipate lawsuits and political fights over the next couple of years, the credit risk to jurisdictions known as sanctuary cities is not very significant.

First, to reiterate, Congress, has established these grant programs by law. The president can’t unilaterally exclude local jurisdictions that he finds himself at odds with. Second, it’s unlikely that Congress will pass a new law forcing sanctuary cities to follow its immigration policy line. Third, if Congress were to pass such a law, it would be subject to numerous court challenges and may even be overturned.

What Is a Sanctuary City?

Sanctuary cities are jurisdictions that limit local law-enforcement cooperation with federal immigration agents. Policies vary across jurisdictions. In some instances, local police officers are instructed not to ask immigration status during traffic stops. The most common policy, however, and the one that has been raised as the largest political issue, concerns undocumented immigrants in local jails.

Take a common example: An undocumented person is arrested for a crime like DUI. Upon booking, local cops circulate fingerprints to the FBI and other jurisdictions to see if he or she is wanted elsewhere. If the person is in the country illegally, the feds may ask the locals to hold the person in jail so that they can begin deportation proceedings. In a sanctuary jurisdiction, officials will not hold the person in their jail solely for deportation; instead, they’ll follow normal procedures and release him or her once bail is met or charges are dropped.

How Widespread Are Sanctuary Cities?

According to The New York Times, sanctuary cities comprise four states (California, Connecticut, Rhode Island and Vermont), 30 cities (including Baltimore, Boston, Las Vegas, Los Angeles, New York City, Oakland, Philadelphia, San Francisco and Washington, DC) and 364 counties (much of California, Oregon and Washington, and all of Colorado, Connecticut, Florida, Maryland, Massachusetts, Minnesota, New Mexico, New York, Pennsylvania, and Rhode Island). There are even scattered sanctuary jurisdictions in very red states, such as Arizona, Georgia, Kansas, Kentucky, Nebraska, North Dakota and Texas. That there are so many counties is significant, since counties typically run jails.

Together, these jurisdictions make up a significant portion of the municipal bond market.

What Federal Funds Are in Question?

Federal aid comes to cities mostly through block grant programs such as HUD’s Community Development Block Grant and HHS’s Head Start and Child Care and Development programs. There are also programs for HIV testing and some funds for police for DNA sample analysis, summer youth jobs programs and the like. Many sanctuary cities report that 5% to 10% of their budget comes from such federal grants.

What’s important to remember is that these federal programs were set in statutory formulas by Congress and those statutes don’t include provisions regarding compliance with deportations. Congress can penalize a local government in a formula program only when there is a relationship between Congress’s restrictions and the funds at risk. In other words, Head Start grants can’t be pulled because police in that jurisdiction aren’t complying with a separate federal program. And that refers to compliance with existing statutory restrictions.

President Trump cannot by himself change the formulas to affect any local government.

Could Congress Pass a Sanctuary City Bill?

The president could—and very well may—propose to Congress that various funding programs be changed to meet his immigration objectives.

However, similar bills were introduced in the last Congress and failed to pass. Since then, Democrats gained seats in both the Senate and the House and their minority in the Senate is particularly powerful. It strikes us that this issue, then, won’t be at the top of the GOP leadership’s agenda.

Additionally, the politics are challenging, once the lens shifts from broad talk to specific action. Changing statutes to cut off childcare funds to a city as punishment for management of its jails is a difficult construct for politicians who want to be reelected. It’s possible that, as new funding programs are created, they may have a provision requiring compliance on immigration, but we would expect Democrats to forcefully fight back.

Lastly, the Supreme Court has ruled that the feds couldn’t withhold Medicaid funding from states that didn’t use the Affordable Care Act because it was “unconstitutionally coercive.” That means that even if Congress were to pass a bill mandating that sanctuary cities cooperate with changes to immigration policies, it could be overturned.

President Trump has stated his political position, but the law of the land remains unchanged. As mandated by statute, sanctuary cities will continue to receive federal funding, just like other jurisdictions across the nation.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Are Sanctuary Cities Truly at Risk?
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