The Executive Orders (EOs) signed by President Trump have garnered plenty of national and international attention for all the right – and the wrong – reasons. While the majority of his Executive Orders, such as the travel ban on Muslim-majority nations, came under severe criticism, others aligned perfectly to fulfill President Trump’s campaign promises.
In January President Trump signed the Executive Order to potentially cut federal funding for “sanctuary cities” in various U.S. states. This had the municipal investors scrambling for answers regarding the financial impact of these sanctions on the financial health and debt obligations of these cities.
In this article, we’ll take a closer look at federal funding cuts for “sanctuary cities,” and the potential challenges posed by these provisions.
What Is a Sanctuary City?
“Sanctuary cities” are jurisdictions within a state that limit the local law enforcement’s cooperation with the federal immigration officers to detain an illegal person, solely for immigration status, which could lead to deportation. However, these policies may vary from city to city. Unlike in “sanctuary cities,” if an illegal immigrant is arrested for any given crime in another jurisdiction, federal agents can require local law enforcement officials to detain that person and officiate the deportation proceedings.
According to the statistics of the Immigration and Customs Enforcement, there are about 30 cities and over 300 counties in the United States that are considered “sanctuary jurisdictions.” These jurisdictions are spread throughout both red and blue states. Trump’s Executive Order contains the main provision to cut federal funding for sanctuary cities, except where mandated by law, unless they comply with the federal immigration orders and completely adhere to the Executive Order. Now, here arises the dilemma: Are these cities really dependent on federal funding for their operation? There is also confusion over the type of federal funding likely to be eliminated and the potential impact of the municipal budget.
Much of the federal funding for any given U.S. city is mandated by the laws passed by Congress. These revenue streams provide mandatory funding for certain sectors like transportation, housing (HUD funding), health and safety. These revenue streams can’t be taken by a unilateral decision by the President and would not be affected by the Executive Order.
In addition to federal funding, cities receive additional revenue streams from their respective counties and states. The total of state, county and federal funds allocated to the city is denoted as “intergovernmental revenue” in financial statements. Besides, the primary operations of any U.S. city are funded by its internal revenue sources like property taxes, sales taxes and fees, etc.
Keep our glossary of municipal bond terminologies handy to familiarize yourself with different concepts commonly used by municipal investors.
Financial Dependency of Sanctuary Cities on Federal Aid
Let’s take a closer look at the revenues of five major “sanctuary cities” in the United States based on population. The list ranks cities in terms of their dependency on intergovernmental revenue.
|Cities||Total Intergovernmental Revenue ($)||Total Governmental Revenue ($)||Intergovernmental Percentage Share of Total Revenue|
New York, NY
Los Angeles, CA
The data above shows the reliance of the five largest cities in the U.S. which also happen to be “sanctuary cities,” on intergovernmental revenues. The total governmental revenues entail revenue streams generated within the local government territories: property taxes, sales taxes, etc. The intergovernmental revenues entail, for the most part, mandated federal and state funding to the cities. The average across all five cities is 20.3%. As mentioned above, a major portion of intergovernmental fundings are mandated by Congress, which means that a city’s reliance on federal funding may be very small and, thus, potentially unaffected by the Executive Order to cut federal funding.
This goes to show that President Trump’s ability to affect a “sanctuary city’s” overall budget might be very minimal.
Click here to find out if you should invest in out-of-state munis.
Impact on Municipal Investors
All the “sanctuary cities/jurisdictions” represent a huge number of issuers of municipal debt and have seen significant growth over the years. Given the minimal reliance of “sanctuary cities” on federal funding, their ability to borrow money by issuing debt should largely remain unaffected. Here are a few more things to consider:
- A significant amount of federal money to cities also flows through the state, counties and school districts and can be very hard to take away.
- The majority of direct federal funding to cities is mandated by law and dedicated to particular areas like transportation, health and safety.
- State legislature can put pressure on “sanctuary cities” within their jurisdiction to comply with the federal immigration laws or potentially cut down state funding. For example, some of the “sanctuary cities” are located within a red state, where both the governorship and the state legislature are held by Republicans. As a result, these cities/municipalities can face added financial strain depending on their reliance on federal funding.
- There are sectors and programs that may face some impact within “sanctuary cities.” For example, local governments in Los Angeles county received over $550 million in federal funds to support programs like Head Start preschool programs, airport improvements and community development of funds. Unless these funds were mandated for these programs, these programs can see severe cuts.
Check out the different ways to invest in muni bonds to stay up to date with the current investment strategies.
The Bottom Line
The federal funding for local governments is mainly mandated by the previous laws enacted by Congress. Thus, the Executive Branch doesn’t hold much power over cutting these funding streams for “sanctuary cities.” Furthermore, any additional federal funding holds a very small weight in a city’s overall revenue and budget. Consequently, President Trump’s Executive Order is unlikely to affect the bond covenants, bond ratings or its ability to meet debt service. It’s also highly unlikely to threaten any municipality’s ability to borrow debt.
Be sure to visit our Market Activity Section to explore recent muni bond trades.
By becoming a premium member, you can get immediate access to all the latest Moody’s credit reports for municipal bonds across the US and enhance your analysis for a specific security.