LOS ANGELES -- California escalated its turf war with the Trump administration over immigration policies that may add to fiscal strains for the state and its municipalities.

The California attorney general and San Francisco district attorney filed dual lawsuits Monday aimed at challenging the Trump administration's sanctuary city policies.

"The current administration, under Mr. Trump, is going way, way over the deep end," California Governor Jerry Brown told Meet The Press in an Aug. 7 interview. The governor, a Democrat said the legal challenges were an "appropriate" response, and that Republicans brought court challenges "by the carload against Obama on the environment, on healthcare, and all the rest."

State officials are anticipating that the threatened loss of federal grants for policing and county jails may affect localities to the tune of $28 million, which analyst say is a small piece of the pie for most issuers.

Attorney General Xavier Becerra sued on the grounds that it was unconstitutional for Trump to attempt to force California law enforcement officials to engage in federal immigration enforcement, rather than allow them to use their discretion to determine how best to keep their communities safe.

Last month, the U.S. Department of Justice "placed unlawful and inappropriate immigration enforcement conditions on certain public safety grants for law enforcement jeopardizing $28 million in critical crime fighting resources provided through federal grants," the AG's office said in a release.

California Attorney General Xavier Becerra filed a lawsuit Monday against the Trump Administration's immigration policies.
Xavier Becerra, right, filed a lawsuit Monday against the Trump Administration's immigration policies. He is shown being sworn in as California Attorney General in January by Gov. Jerry Brown, as his wife, Dr. Carolina Reyes, looks on.

“The Trump Administration cannot manipulate federal grant fund requirements to pressure states, counties or municipalities to enforce federal immigration laws,” Becerra said. "This is pure intimidation intended to force our law enforcement into changing the policies and practices that they have determined promote public safety."

S&P Global Ratings analysts didn't find Trump's move to be particularly threatening to the budgets of California cities and counties.

"We don't expect at this point expect any adverse credit impacts, based on global analysis, but we haven't looked specifically at individual credits," said Benjamin Geare, associate director of U.S. Public Finance for S&P.

There is not enough revenue coming in through those sources that it would likely have an impact, said Jane Ridley, an S&P senior director and sector leader for local governments.

The analysts comments were not substantially different from those in a report released in March.

"If the law is ambiguous, we can often clarify it by litigation," Brown told Meet the Press. "This is perhaps a rather small test, because the money at stake is not very much -- but it might be very helpful to get into court and resolve this in a judicial forum, rather than in the rhetoric of politicians talking past one another."

Brown also emphasized that while California wants to protect hard-working immigrants that "sanctuary" philosophy does not extend to people who have come to the U.S. and committed crimes. Like the Obama administration, he said. the state doesn't intend to provide protections for people who have committed crimes here.

The S&P analysis did not anticipate anything beyond the Homeland Security and Department of Justice impacts, Geare said. So they couldn't opine on whether the state's and major cities' battles with the Trump Administration over the sanctuary cities issue might cause problems for unrelated areas, such as transportation projects, that are dependent on federal funding.

"We don't view the impact as being anything beyond those grants," Geare said. "Our view has not changed from March in that we do not believe that any additional funding [beyond public safety or county jails] would be impacted."

According to Becerra, Congress has appropriated $28.3 million in law enforcement funding grants to California through the Edward Byrnes Memorial Justice Assistance Grant program (JAG). Every state is entitled by law to a share of these formula JAG funds.

For the first time, Becerra said, the U.S. Department of Justice is imposing two so-called “special conditions” on receipt of JAG funds to force state and local law enforcement to engage in federal immigration enforcement.

President Trump signed an Executive Order on Jan. 25 seeking to withhold federal funding for so-called “sanctuary jurisdictions.” This Executive Order has been the subject of legal challenges. Pursuant to a court order, the Executive Order is subject to a nationwide injunction at this time.

San Francisco City Attorney Dennis Herrera filed a lawsuit in U.S. District Court for the Northern of District of California in a coordinated effort with the AG's office. The lawsuit was the second one filed by Herrera.

“This president is bent on trying to vilify immigrants and punish cities that prioritize real, effective public safety over splitting up hard-working families,” Herrera said. “Trump attacked sanctuary cities in January with his unlawful executive order. We stopped him in court. Then he tried to sneak through a change in the law by burying it deep in his budget. Now he’s trying to have one of his departments rewrite the rules. So we’re back in court once again, with allies by our side, to compel him to follow the law.”

Some cities and counties are already strained budget-wise, because of a program to shift non-violent offenders to county jails, the loss of Redevelopment Agency Money, and pension liabilities.

"This could have an impact on weaker credits that are already struggling with minimal flexibility, but the loss of federal grant money is unlikely to be the prime catalyst of credit distress -- it would merely be another complicating factor," said Tom Schuette, partner and co-head of portfolio management at Gurtin Fixed Income Management LLC.

Legislators have been scrambling ever since to create economic development tools to replace the former RDA system that dated back to the 1980s. The system had come under criticism, however; after it came to light that some projects were providing pork to developers instead of helping communities in need of economic development.

California Department of Finance spokesman H.D. Palmer said state officials are taking localities into account in efforts to resist changes at the federal level that the state's Democtratic leadership opposes.

"While I certainly would not want to downplay or minimize the potential impact that the loss of these federal grant funds could have, particularly on smaller localities, the issues that you brought up -- public safety realignment and redevelopment -- have no relevance to this issue," Palmer said.

"First, public safety realignment provides an ongoing -- and growing -- source of funds for local public safety," Palmer said. "Second, as for redevelopment, once all of the enforceable obligations [debt service] are addressed, any remaining property tax that had gone to redeveloment is reallocated to cities, counties, special districts and schools -- and the money to cities and counties is new general purpose revenue that they can use at their discretion."

For cities, not counties, that amount grew from a total of $355 million last year to $393 million this year, Palmer said.

"We would not anticipate the loss of federal grant money to have a wide impact on local government credit quality," Schuette said.

"High quality obligors have ample cushion and flexibility to handle any lost federal grant funding tied to law enforcement, and many of them have spent 2017 identifying the at-risk dollars and planning for potential fallout from Washington. Ultimately we believe that the amount of grant money that is at risk for most local governments is a manageable amount that can either be back-filled with other resources or resolved with cuts," he said.

The state's efforts are not likely to be a credit positive for the state either.

"I would just say it's a wash at this point," Geare said.

In its March report S&P said: "Our analysis shows credit ratings are not likely to change (at least in the near term) solely as a result of the executive order."

For one thing, they said, federal budget laws and legal precedent limit the president's administrative authority to withhold funding by executive order, absent congressional approval. And even assuming congressional approval, the funding most likely at risk appears not to constitute a significant share of municipal revenues, limiting the risk of adverse credit impacts.

Some states are taking their own actions that could result in a credit impact to local governments due to either reduced funding from the federal government to the state or reduced state funding to the relevant sanctuary local government issuer, the S&P analysts said.

States like Texas that have taken action at the state level to restrict funds to sanctuary cities and counties could affect the municipalities, but S&P has not seen that at a credit level, Ridley said.

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