The Federal Government’s Authority to Impose Conditions on Grant Funds
Released: 2017-03-23T00:00:00

A January 2017 executive order that could render certain state and local governments ineligible to receive federal grants has generated interest in the federal government's power to condition funding on recipients taking or refraining from certain actions. This particular executive order raises the prospect of withholding federal grant money from "sanctuary jurisdictions" —or state or local governments that have adopted laws, policies, or practices intended to limit their involvement in federal immigration enforcement activities—in an effort to encourage the jurisdictions to change their behavior. However, the question of whether specific conditions attached to federal funds is permissible has been a recurring topic of litigation and congressional interest over the years. Such litigation has resulted in the U.S. Supreme Court articulating several limitations on the federal government's authority to distribute funds to nonfederal entities contingent on their compliance with specific conditions. In particular, the Court has held that, for funding conditions to be permissible, they must (1) be "unambiguous[]" as to the "consequences of ... participation" in the federal spending program; (2) germane "to the federal interest in particular national projects or programs;" (3) not be barred by a separate constitutional provision; and (4) not go so far as functionally to coerce funding recipients, leaving them with no choice but to comply with a federal directive.

This report provides a brief overview of the federal government's authority to impose conditions on federal grant funding. It explains the constitutional basis of the federal government's power to condition funds, as well as the limits on this power that have been recognized in a long line of U.S. Supreme Court cases. The report also briefly discusses recently filed litigation challenging the executive order targeting federal funding for "sanctuary" jurisdictions and, in particular, how this litigation could further shape the jurisprudence regarding the spending power.

Powers of the Federal Government Generally10

The U.S. Constitution confers upon the federal government only specific, enumerated powers. As the Supreme Court has explained, "rather than granting general authority to perform all the conceivable functions of government, the Constitution lists, or enumerates, the Federal Government's powers." These specific powers encompass a variety of activities, including the power to regulate foreign and interstate commerce, to declare war, and to impose taxes and spend the money collected from taxation to "provide for the ... general Welfare of the United States." This "spending power" is the focus of this report.

The reach of the federal government's enumerated powers is further supplemented by the final clause of Article I, Section 8, commonly known as the Necessary and Proper Clause, which provides the legislative branch with the power to adopt measures that assist in the achievement of ends contemplated by other provisions in the Constitution. The Necessary and Proper Clause expressly grants Congress the power "to make all laws which shall be necessary and proper for carrying into Execution the foregoing Powers [listed in Article I, Section 8], and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof." The "broad" scope of Congress's power under the Necessary and Proper Clause has been held to leave "Congress a large discretion as to the means that may be employed in executing a given power." In so holding, the Supreme Court has described the clause as providing the "broad power to enact laws that are 'convenient, or useful' or 'conducive' to" a more specific authority's "beneficial exercise." However, the Necessary and Proper Clause is not itself an independent grant of legislative power to Congress; rather, the clause is "a caveat that the Congress possesses all the means necessary to carry out the specifically granted 'foregoing' powers of § 8 'and all other Powers vested by this Constitution.... '"

On the other hand, the Supreme Court has identified federalism-based constraints on the Congress's legislative power to influence state and local activity, in particular, that stem from the Tenth Amendment —a provision of the Bill of Rights that reserves to the states and the people those powers not expressly granted to the federal government. Among the powers generally seen to have been reserved to the states are traditional "police powers" concerning the promotion and regulation of safety, health, welfare, and economic activity within the state's jurisdiction. The Supreme Court has interpreted the Tenth Amendment to prevent the federal government from "commandeering" state governments, either by requiring them to enact laws that address particular problems or by compelling "the States' officers, or those of their political subdivisions, to administer or enforce a federal regulatory program." The "anti-commandeering doctrine" was most prominently articulated by the Supreme Court in New York v. United States and Printz v. United States . Both cases were premised on the view that under the federalist system, the states are sovereign entities distinct from the federal government, and Congress cannot blur this distinction by commandeering the state political branches to perform functions on the federal government's behalf.

While the federal government may, however, be constitutionally barred from conscripting state executive officers or state legislators into assisting in the administration of a federal program, other means may be available to influence states to adopt favored federal policies. Perhaps most notably, Congress may condition the receipt of federal funds on state compliance with federal directives, as is discussed in more detail in the following section.

The Spending Clause

While Congress would generally not be permitted to compel state legislators or executive officials to enforce or administer a federal regulatory program, it could provide federal grants to encourage states to participate in a federal program. Providing federal funds to nonfederal entities has been seen to constitute an exercise of one of Congress's enumerated powers, namely, its power under the Spending Clause of the Constitution (Article I, Section 8, Clause 1). The Spending Clause expressly empowers Congress "to lay and collect Taxes, ... to ... provide for the ... general Welfare of the United States." When Congress uses its Spending Clause authority, it may generally prescribe the terms and conditions under which the federal funds are accepted and used by recipients. These conditions may generally specify that the funds be used for particular purposes or, alternatively, prohibit their use for certain purposes.

Recipients of federal financial assistance in the form of grants may also be required, as a condition of accepting the grant, to perform or refrain from certain actions. Through the attachment of such conditions to federal funding, Congress may attain federal policy objectives in areas that it lacks the power to regulate directly (that is, the objectives do not fall within "the enumerated legislative fields committed to the Congress" by the Constitution). As the Supreme Court has explained, legislation enacted pursuant to the Spending Clause is one significant way that Congress may influence state behavior without "commandeering" state officials in violation of the Tenth Amendment:

Congress has frequently employed the Spending Power to further broad policy objectives by conditioning receipt of federal moneys upon compliance by the recipient with federal statutory and administrative directives. This Court has repeatedly upheld against constitutional challenge the use of this technique to induce governments and private parties to cooperate voluntarily with federal policy.

Federal Grants40

In many (although not all) cases, the specific federal financial assistance to which Congress attaches conditions involves grant funds. The federal government may offer grants to nonfederal entities in furtherance of national priorities. Federal grant programs must be authorized by legislation, which establishes the terms and conditions for individual grant programs. Federal agencies award grants by executing a grant agreement with the recipient that incorporates the statutory requirements for the grant, as well as any administrative requirements specified in agency regulations, executive orders, or guidance issued by the Office of Management and Budget (OMB).

The degree of agency discretion in implementing the grant program varies depending on the type of grant program and the terms of the authorizing legislation. Federal grant funds are allocated to recipients based on a statutory formula, agency discretion, or some combination of the two. In some cases, Congress may establish a specific statutory formula for distributing federal funds to eligible grant recipients. In other cases, Congress may allow federal agencies to exercise their discretion in distributing grant funds to eligible entities that affirmatively apply for them; such grants are often referred to as "competitive grants." Agency discretion over the allocation of federal grant funds may be considerable; for example, the statutory language authorizing the discretionary grant program may permit the federal agency, when evaluating and selecting grant applications, to use any criteria that the head of the agency considers to be appropriate.

Under current OMB guidance, federal agencies are required to review the eligibility of potential grant recipients prior to making an award. This evaluation includes a review of the risks posed by the grant applicant, including, "the applicant's ability to effectively implement statutory, regulatory, or other requirements imposed on non-federal entities." However, it may not always be clear what the reference to "statutory, regulatory, or other requirements" means, and a federal awarding agency may seek to identify such requirements under its discretionary authority to administer the grant program.

If recipients fail to comply with federal grant conditions that they have voluntarily accepted and agreed to follow, they could be subject to a range of consequences. Such consequences include administrative actions to terminate and recover the grant funds, or suspension from eligibility for future grant awards.

Limitations on the Spending Power

Although Congress's power under the Spending Clause is expansive, the Supreme Court articulated certain limitations on the use of federal grant conditions in its 1987 decision in South Dakota v. Dole —which arguably remains the leading decision regarding the use of the federal government's conditional spending power—and in subsequent cases. In particular, these limitations require that any conditions attached to the receipt of federal funds must:

1. be unambiguously established so that recipients can knowingly accept or reject them; 2. be germane to the federal interest in the particular national projects or programs to which the money is directed; 3. not violate a separate constitutional provision, such as the First Amendment or the Due Process or Takings Clauses of the Fifth Amendment; and 4. not cross the line from enticement to coercion, such that states have no real choice but to accept the funding and enact or administer a federal program.

Each of these limitations on the exercise of the spending power is discussed in more detail below.

Conditions Unambiguous and Set Forth Prior to Acceptance

Under the relevant Supreme Court precedents, federal grant conditions must be set forth unambiguously before a recipient enters into a grant agreement with the federal government. In its 1981 decision in Pennhurst State School and Hospital v. Halderman , the Supreme Court explained that this restriction arises because a grant is "much in the nature of a contract" between the states and federal government. Accordingly, in the Court's view, the "legitimacy of Congress' power to legislate under the spending power ... rests on whether the State knowingly and voluntarily accepts" the federally imposed conditions. The Court concluded that "[t]hough Congress' power to legislate under the spending power is broad, it does not include surprising participating States with postacceptance or 'retroactive' conditions." As a result, the Court required that a funding condition be established "unambiguously" prior to acceptance of the grant in order to allow the recipient to make an informed decision abo ut the consequences of participating in the grant program.

The Pennhurst requirement was subsequently applied and clarified in the Supreme Court's 2012 decision, Natio nal Federation of Independent Businesses v. Sebelius , which invalidated provisions of the Patient Protection and Affordable Care Act of 2010 (ACA) that would have required the states to expand their Medicaid programs by 2014 to cover virtually all poor Americans under the age of 65, or risk losing all Medicaid funding that they receive from the federal government. In defense of these provisions, the federal government argued that "the Medicaid expansion is properly viewed merely as a modification of the existing program because the States agreed that Congress could change the terms of Medicaid when they signed on in the first place." However, the Court rejected the argument that the new conditions represented permissible modifications of the existing program because it viewed the Medicaid expansion as "accomplish[ing] a shift in kind, not merely degree." Citing Pennhurst , the Court opined that states could not be expected to anticipate the statutory provision which granted the federal government the power "to 'alter' or 'amend' the Medicaid program included the power to transform [Medicaid] so dramatically."

Relationship Between the Conditions and the Purpose of the Federal Funds

The Supreme Court has also suggested that grant conditions may be improper if they are unrelated "to the particular national projects or programs" to which the federal funds are being directed. The Court has not provided further elaboration on the nature of this "relationship" requirement, other than by noting that grant conditions must "bear some relationship" to the underlying purposes of the funds "otherwise ... the spending power could render academic the Constitution's other grants and limits of federal authority." The Court does not appear to have invalidated a federal spending condition on the basis that it fails this "relatedness" standard, nor has any lower court seemingly done so.

In its 1982 decision in South Dakota v. Dole, the Supreme Court engaged in what is arguably its most notable discussion of the "relatedness" standard to date. The Dole case concerned the National Minimum Drinking Age Amendment of 1984, which authorized the Secretary of Transportation to withhold 5% of federal highway funds from states which permitted persons below 21 years of age to purchase alcohol. The State of South Dakota, which allowed persons as young as 19 years old to purchase alcohol, did not argue that this federal highway funding condition violated the "germaneness" principle, instead conceding that it "ha[d] never contended that the congressional action was ... unrelated to a national concern in the absence of the Twenty-first Amendment." Nevertheless, a majority of the Court opined that although the grant "condition was not a restriction on how the highway funds—set aside for specific highway improvement and maintenance efforts—were to be used," conditioning a portion of a state's federal highway funds on its adoption of a minimum drinking age of 21 years was permissible because it was "directly related to one of the main purposes for which highway funds are expended—safe interstate travel." The dissenting opinion authored by Justice O'Connor, in contrast, would have found that this drinking age condition not to be sufficiently related to the expenditure of federal funds for highway construction. In particular, Justice O'Connor argued that Congress:

is not entitled to insist as a condition of the use of highway funds that the State impose or change regulations in other areas of the State's social and economic life because of an attenuated or tangential relationship to highway use or safety. Indeed, if the rule were otherwise, the Congress could effectively regulate almost any area of a State's social, political, or economic life on the theory that use of the interstate transportation system is somehow enhanced.

Conditions May Not Induce Recipients to Engage in Unconstitutional Activities

In addition, the Supreme Court has explained that conditions attached to grant programs "may not be used to induce the States to engage in activities that would themselves be unconstitutional." In its 1982 decision in Dole , previously discussed, the Court noted that, "for example, a grant of federal funds conditioned on invidiously discriminatory state action or the infliction of cruel and unusual punishment would be an illegitimate exercise of the Congress' broad spending power." The Supreme Court's 2013 decision in United States Agency for International Development v. Alliance for Open Society , further illustrated this principle. In this case, the Supreme Court considered whether a funding condition related to the U.S. Leadership against HIV/AIDS, Tuberculosis, and Malaria Act of 2003 ("Leadership Act") violated recipients' First Amendment rights. The Leadership Act authorized the appropriation of billions of dollars to fund efforts by nongovernmental organizations to assist in the fight against the global spread of HIV/AIDS. The funding condition at issue—commonly referred to as the "Policy Requirement"—prescribed that none of these funds "may be used by an organization 'that does not have a policy explicitly opposing prostitution and sex trafficking.'" In other words, unless an organization adopted a policy explicitly opposing prostitution and sex trafficking, it could not receive funds under the Leadership Act, not even if the group were to remain silent as to prostitution and sex trafficking. In holding this condition impermissible, the Court first observed that if an identical requirement were "enacted as a direct regulation of speech, the Policy Requirement would plainly violate the First Amendment. The question is whether the Government may nonetheless impose that requirement as a condition on the receipt of federal funds." Upon consideration of the later question, the Court ultimately concluded that the Policy Requirement was impermissible because it "compels as a condition of federal funding the affirmation of a belief that by its nature cannot be confined within the scope of the Government program. In so doing, it violates the First Amendment."

Coercive Conditions That Intrude on a State's Sovereignty

The fourth and final limitation that the Supreme Court has articulated as to the spending power is that any conditions imposed on the use of federal funds must comport with the basic principles of federalism as embodied in the Tenth Amendment. Specifically, the Supreme Court has suggested that, in certain situations, "the financial inducements offered by Congress might be so coercive as to pass the point at which 'pressure turns into compulsion,'" thereby rendering the funding condition impermissible. On the other hand, the Court has been reluctant to find compulsion where the federal funds involved can be seen to represent a relatively small amount of the states' budget. Perhaps most notably, in Dole , the Court focused on the fact that the funds to be withheld from a state with a drinking age below 21 represented less than 5% of the state's federal highway funds. Accordingly, the Supreme Court did not view the condition as impermissibly coercing states into complying with the federal program. Instead, the Court described the threat of losing 5% of a state's federal highway funds as "relatively mild encouragement."

The first and only time that the Supreme Court appears to have invalidated a federal grant condition on the grounds that the condition had "crosse[d] the line from enticement to coercion" was its 2012 opinion National Federation of Independent Business (NFIB) v. Sebelius regarding the constitutionality of the Patient Protection and Affordable Care Act (ACA). The ACA, among other things, required states to expand Medicaid eligibility to cover virtually all poor Americans under the age of 65. However, in the controlling opinion in this case, authored by Chief Justice Roberts, the Court held that the enforcement mechanism for this expansion of Medicaid violated the Tenth Amendment insofar as it involved the withdrawal of all existing Medicaid funds. In particular, Chief Justice Roberts's opinion held that, when funding for an existing program is conditioned on the adoption of a "new" program, the total amount of federal funds at issue cannot represent a significant portion of a state's budget, or withdrawal of the funding will be held to be unconstitutionally coercive.

Notably, Chief Justice Roberts's opinion in NFIB did not identify a specific standard for use in determining what amount of withholding would be coercive. Nor did it prescribe what specific factors or types of factors are necessary in such analysis. Chief Justice Roberts also declined to "fix the outermost line" where a federal financial inducement's "persuasion gives way to coercion." However, he did conclude that the threatened loss of federal program funds in the case at hand, which made up 10% of an average state's budget, represented a "gun to the head" and was a form of "economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion."

Executive Order 13768

The issuance of President Trump's January 25, 2017, executive order that could render "sanctuary jurisdictions" ineligible for federal grants has prompted renewed interest in the federal government's legal authority to impose conditions on federal funds. Lawsuits that have already been filed against the executive order (or similar legal challenges that may be brought in the future) could address some of the questions about the spending power that have been left unanswered by the Supreme Court. For example, the Dole Court expressly declined to "define the outer bounds of the 'germaneness' or 'relatedness' limitation on the imposition of conditions under the spending power." Similarly, neither the controlling opinion in NFIB nor the majority opinion in Dole identified precisely when a financial inducement offered to states by Congress crosses the line between "mild encouragement," which is permissible, and "impermissibl[e] coercion."

The remaining sections of this report briefly describe (1) the particular provisions of the executive order that relate to sanctuary jurisdictions and (2) the arguments advanced by the plaintiffs in the lawsuits filed to date challenging the order that could help to clarify Spending Clause jurisprudence.

Terms of the Executive Order

Among other things, Executive Order 13768 (EO) raises the prospect of withholding federal grant money to state or local government entities that have adopted so-called "sanctuary" laws, policies, or practices that limit their cooperation with federal immigration authorities in identifying and apprehending "unauthorized aliens" within the state or locality's jurisdiction. Entitled "Enhancing Public Safety in the Interior of the United States," the EO declares that "[i]t is a policy of the executive branch to ensure, to the fullest extent of the law, that a State, or a political subdivision of a State, shall comply with 8 U.S.C. 1373." This federal immigration statute, enacted in 1996, bars state and local governments and officials from adopting any restriction on the sharing of information regarding "immigration or citizenship status."

Section 9(a) of the EO directs the Secretary of Homeland Security (Secretary) to designate, "in his discretion and to the extent consistent with law," jurisdictions that willfully refuse to comply with 8 U.S.C. § 1373 as "sanctuary jurisdictions." This section further provides that the U.S. Attorney General and the Secretary must "ensure," "in their discretion and to the extent consistent with law," that these "sanctuary" jurisdictions are ineligible to receive federal grants funds, with the exception of grants that are deemed "necessary for law enforcement purposes." The Attorney General is also ordered to "take appropriate enforcement action against any entity that violates 8 U.S.C. 1373, or which has in effect a statute, policy, or practice that prevents or hinders the enforcement of Federal law." Finally, Section 9(c) of the EO instructs the Director of OMB "to obtain and provide relevant and responsive information on all Federal grant money that currently is received by any sanctuary jurisdiction."

Pending Litigation Over the Executive Order

Because the language of the EO is open to some interpretation, and repeatedly refers to the EO being implemented "to the extent consistent with law," questions have arisen about what constitutes a sanctuary jurisdiction for purposes of the order; what federal funds may be denied to such jurisdictions; and how the executive branch may implement the order. Some of these questions may be considered by the federal courts, as several jurisdictions have already filed lawsuits against the President and his senior officials, challenging the EO's constitutionality and seeking an injunction barring its implementation. These jurisdictions include the City of San Francisco, CA; the County of Santa Clara, CA; and the Massachusetts cities of Chelsea and Lawrence. Collectively, these lawsuits argue, among other things, that the EO violates: (1) the Spending Clause of the U.S. Constitution by imposing funding conditions that are unduly coercive or that are not related to the federal interest furthered by the funds; and (2) the Tenth Amendment prohibition against the federal government "commandeering" state and local governments by compelling them to enforce federal immigration law. For example, the City of San Francisco argues that the EO violates the Spending Clause because it "imposes funding conditions that are not germane to the purpose of the funds insofar as it reaches funds that are unrelated to law enforcement or immigration." In addition, San Francisco claims that the EO is impermissibly coercive, in violation of the NFIB opinion:

[The withholding of federal funds pursuant to the EO] threatens a substantial percentage of San Francisco's overall budget—approximately 13% of its total annual operating budget, even without considering federal multi-year grants. Threatened funds include the entire funding stream for programs, such as Medicaid, that are critical to the lives of San Francisco's residents. Threats of this magnitude, and to such critical programs, constitute "economic dragooning that leaves the States with no real option but to acquiesce" to federal dictates.

Similarly, as to the Tenth Amendment, the Massachusetts cities assert that:

[t]he Tenth Amendment, and the federalist system under which state and federal governments coexist, protect state and local governments from federal intrusion on powers reserved to the states, and prohibit the federal government from forcing state and local governments to implement legislation according to federal directives or to regulate in a particular field or a particular way. The Executive Order purports to grant federal officers and agencies unfettered discretion to determine whether a governmental entity has in effect statutes, policies, or practices that "prevent[] or hinder[] the enforcement of Federal law," and grants the Federal Executive power to "take appropriate enforcement action" against such entities. On its face, this provision of the Executive Order is an unconstitutional attempt to force state and local governments to fall in line with—or regulate under the directive of—the federal government.

In a court filing opposing Santa Clara's request for a nationwide preliminary injunction against implementation of the executive order, the Department of Justice (DOJ) has argued that Santa Clara's claims are premature and therefore nonjusticiable, given that the Trump Administration has not attempted to withhold federal grant funds from any jurisdiction over a "sanctuary" policies, nor has the DOJ, DHS, or OMB issued any formal guidance to the public describing how federal agencies will implement the executive order. At the time of the publication of this report, the litigation is in its preliminary stages.