WASHINGTON – Some sanctuary cities and other jurisdictions are putting disclosures in their bond offering documents about President Trump’s threat to pull federal funds from them and whether that might impact their finances.
The issuers include Philadelphia, New York City, Boston and the Santa Monica Community College District in Los Angeles County, Calif.
They made their disclosures before Friday when the Justice Department sent letters to nine states and cities, including Philadelphia and New York City, as a first step toward withholding law enforcement grants as a sanction for acting as a sanctuary jurisdiction.
Under an executive order signed by President Trump on Jan. 25 -- “Enhancing Public Safety in the Interior of the United States” -- the U.S. attorney general and the secretary of the Department of Homeland Security can withhold federal grants from jurisdictions that refuse to comply with federal immigration authorities. The order says these so-called sanctuary jurisdictions “are not eligible to receive federal grants, except as deemed necessary for law enforcement purposes by the attorney general or secretary.”
The order does not define “sanctuary city," leaving that up to the Department of Homeland Security, but is aimed at jurisdictions that “willfully violate federal law in an attempt to shield aliens from removal from the United States” and thus “have caused immeasurable harm to the American people and to the very fabric of our Republic."
The DOJ said it sent the letters to these nine states and cities because they were identified in a May 2016 report by its Inspector General as having laws that potentially violate federal law provisions that prohibit state and local law enforcement authorities from restricting the sharing of immigration status information with federal authorities. The letter does not say DOJ is withholding any funds, but rather is a warning and says the states and cities have until June 30 to submit documentation to DOJ showing they are in compliance with these provisions.
Philadelphia appears to have been the first to add disclosure language abut the order in offering documents for bonds it issued just days after the order was released. The city was on a lengthy list that the Department of Homeland Security released naming jurisdictions that had not complied with U.S. Immigration and Customs Enforcement requests. The “Declined Detainer Outcome Report” compiled by DHS has since been discontinued because certain jurisdictions said the report was inaccurate.
Philadelphia put the disclosure in the official statement for $263 million of general obligation refunding bonds issued in January. In the “Recent Developments” section on page 17 of the OS, the city explained the details and main thrust of the order, but concluded “the practical import of this order is unclear.” The OS further explained that certain federal funds may be found to be excluded from the order and that the city does not have sufficient information on the potential impact, if any, the order may have on its federal funding.
New York City, which was also on the DHS list, followed suit in early February by adding disclosure language to an OS for its fiscal 2017 series C and D general obligation bonds. In the "Recent Financial Developments" section on page 5 of the OS, the city explained that while Trump signed the executive order New York City’s position is that legally, the funding reductions can only be made to grants that are directly related to federal immigration law enforcement. The city made clear that those grants only make up a small percentage of the city’s total budget and that the grants could be classified as related to local law enforcement and thus exempt from the order.
New York also disclosed that it would likely mount “a vigorous legal challenge” if the order results in the reduction of federal aid to the city, but couldn't say how significant the reduction might be or how long the aid would be delayed.
Boston, on DHS’s list before it was discontinued, disclosed in its OS for $150 million of general obligation bonds it sold on March 1, that the "Boston Trust Act," adopted in 2014 governs how city law enforcement officials respond to federal civil immigration detainer requests and therefore appears to make it a sanctuary city.
“This ordinance could possibly subject the city to the loss of federal funds following implementation of the order,” the city said in a section of the OS on grants on page A-31, adding that it currently receives “significant amounts of annual federal grants.”
Boston also said it couldn't predict how the federal government would implement the order or what impact it might have on the city.
The Santa Monica Community College District in Los Angeles County, Calif., included language in an official statement dated April 6 for $95 million of general obligation refunding bonds even though it wasn't on the list of sanctuary jurisdictions.
“Although the district has neither adopted, nor plans to adopt, a resolution declaring itself a sanctuary jurisdiction, it could, nevertheless, be deemed to be a sanctuary jurisdiction if an agent of the federal government determines the district willfully refuses to comply” with the federal law, the district said in a section of the OS called "Sanctuary Jurisdictions and Federal Funding" on page A-32. “For example, if the district or an official of the district were to restrict the sending to or receipt from the United State Citizenship and Immigration Services of any information regarding the citizenship or immigration status of a student or employee.”
The district further noted that federal funding comprises a portion of its revenue and that it could not predict how the order would be enforced or how it would respond to enforcement action if it occurs.
The executive order is currently facing legal challenges from San Francisco and Santa Clara County, Calif., which are jointly seeking a preliminary injunction on grounds it is unconstitutional.
The extent of the order’s reach, if it were to be enforced, is also still unclear because while its language could be read to include all federal funding, the U.S. Department of Justice defended it from the San Francisco and Santa Clara County challenges by saying it would only extend to a narrow number of DOJ and DHS grants.
White House budget director Mick Mulvaney has been trying to codify the order in the upcoming spending bill that Congress must pass to avert a government shutdown, but the possibility of that happening seems slim, some sources have said.
Lawyers who have looked into the disclosure issues with regard to the executive order, but asked to remain anonymous, noted that the unknowns about the executive order and its possible enforcement have made it one of a variety of things issuers should consider when looking at whether to put disclosures in offering documents. They made their remarks before DOJ sent its letters on Friday to the nine states and cities about complying with immigration laws. Some lawyers said they are aware of the order but have not worked with clients on it at this point.
Jurisdictions' decisions about whether to disclose anything will likely depend on their analyses of their dependence on federal funding, the nature of the federal funding, and whether the federal funding is discretionary or more formulaic, said one lawyer.
Another said it is easy to understand an issuer viewing the order as a possible threat and deciding it needs to be disclosed, but added, “There are so many different things that Trump has said he is going to do that could have an adverse effect on the financial operations of local governments, where do you stop?”
The order hasn’t risen to the level of materiality but is at “the level of 'We better at least think about it,'” the attorney said.
“I think that where things are and are evolving to is a standard sentence or two of the possibility of this and the fact that it could have an effect,” the attorney said. “I don’t think we’re going to see the next step – how much federal money do we get, what do we use it for, and what happens if we don’t get part of it. The first time there actually is a withholding of money from an actual city, that will change the equation.”
The issue of sanctuary cities and funding could get even more complicated moving forward because roughly 33 states have legislation that is pending or passed that, like the federal government, would withhold state funding from sanctuary jurisdictions.
Philadelphia addressed that possibility in Pennsylvania by including information in its OS about Pennsylvania Senate Bill 10, which would prohibit municipalities from adopting rules or policies that would create sanctuary jurisdictions. The city said that in fiscal year 2016, it received about $1.7 billion from the commonwealth of Pennsylvania but added it did not have enough information to determine the potential impact the bill could have on funding at the time the OS was published.
The bill is currently in Pennsylvania’s House of Representatives Judiciary Committee and the OS said there is no indication of when that body may take action on the legislation.
