Thought Leadership

Executive Order Threatening Sanctuary Cities: Potential Impact on Municipal Credit Ratings

February 16, 2017

Judy Wesalo Temel, Senior Vice President and Director of Credit Research, shares her comments on The Wall Street Journal‘s article entitled “Sanctuary Cities May Not See Borrowing Hit From Trump Order.”

“The article in The Wall Street Journal was timely and brought up a number of interesting points. We believe it is reasonable to conclude that municipal credit ratings will not suffer, at least in the short term, from the President’s executive order to cut Federal funding from sanctuary cities and counties that don’t cooperate with the federal enforcement policies on illegal immigration.  There is no universally accepted definition of sanctuary cities, but S&P cites external sources identifying more than 200 jurisdictions, of which they rate 130.  I have seen other estimates of over 300 jurisdictions, including entire states.

 

According to the S&P report published on February 1, sanctuary jurisdictions (along with other jurisdictions) receive federal grants from various federal departments. In this report, S&P states that ‘Federal budget laws limit the executive branch’s authority to withhold or defer funds that Congress has appropriated.  It is our understanding that, in order to withhold such funding, the executive branch must receive Congressional authorization to such effect.  Further, courts have ruled that the threat of withholding funding may not be used to coerce states.  Grants from the Department of Homeland Security and the Department of Justice are at highest risk of being defunded, since those grants are directly tied to immigration enforcement.  However, these grants make up only a small (less than 1%) of the municipal budgets we have analyzed to date.’  

 

The article quotes Linda Bilmes from Harvard, who said federal funds could only be stopped if the funds were not spent on the intended purpose.  Assuming this is correct, a wholesale withdrawal of federal funds from cities and counties due to not enforcing immigration policy seems unlikely.  It is instructive to look at an analysis that the New York City Comptroller wrote in November 2016, right after the election, about federal funding and the City budget, in response to questions about this issue.  Total federal aid of $7.2 billion is 8.7% of the City’s $82 billion 2017 budget.  Eleven agencies got 92% of the aid.  The agencies provide child care services, child protective services, youth programs, HIV/AIDS treatment, social services and Title 1 food services, among other services. Most cities have not yet put together this type of analysis, but it does seem unlikely that the President could really, or would really want to withhold needed funding from children and vulnerable citizens who do not have anything to do with immigration policy.”

 

 

Sources Referenced:

The Wall Street Journal article entitled “Sanctuary Cities May Not See Borrowing Hit From Trump Order” (February 15, 2017). https://www.wsj.com/articles/sanctuary-cities-may-not-see-borrowing-hit-from-trump-order-1487163601

S&P Global Ratings RatingsDirect Report entitled “Credit Ratings for Sanctuary Jurisdictions Unlikely To Be Affected In The Short Term, Preliminary Analysis Shows” (February 1, 2017).

The City of New York, Office of the Comptroller, Scott M. Stringer report entitled “Preliminary Comptroller Analysis: Federal Funding and New York City’s Budget (November 16, 2016). http://comptroller.nyc.gov/wp-content/uploads/2016/11/Federal_Budget_Vulnerabilities_Memo.pdf

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