Agency enforcement of spending clause statutes: a defense of the funding cut-off.

• Author: Pasachoff, Eloise
• Position: Introduction through II. Deconstructing the Case Against Funding Cut-offs B. Undercutting Federalism 1. Protecting Sovereignty and Autonomy, p. 248-297

ARTICLE CONTENTS INTRODUCTION I. DISAGGREGATING THE INTERGOVERNMENTAL GRANT SYSTEM A. The Scope of Grant-Making in the Federal Regulatory State B. Types of Grants, Grant Conditions, and Grantee Noncompliance 1. Types of Grants 2. Types of Grant Conditions 3. Types of Grantee Noncompliance C. The Agency Role in Grant Oversight 1. Application 2. Monitoring and Oversight 3. Enforcement II. DECONSTRUCTING THE CASE AGAINST FUNDING CUT-OFFS A. Hurting Grant Beneficiaries 1. The Variety of Limitations on Withholding 2. The Variety of Types of Grants 3. The Baseline 4. Comparisons to Other Compliance Mechanisms 5. Other Consequences of Program Noncompliance B. Undercutting Federalism 1. Protecting Sovereignty and Autonomy 2. Preventing Coercion 3. Promoting Diversity 4. Enhancing Accountability C. The Limits of Agency Motivation and Capacity 1. Motivation 2. Capacity 3. Motivation, Capacity, and the Special Case of Coercion D. The Limits of Politics 1. General Applicability of the Critique 2. Distinctions Among Grants and Grant Types 3. Complexities of Political Alignment III. RETHINKING FUNDING CUT-OFFS A. Circumstances Most (and Least) Inviting Funding Cut-Offs 1. Rationales for Grantee Noncompliance 2. Types of Conditions 3. Types of Grants B. Administrative Regime Design 1. OMB 2. Agency Grant Program Offices 3. Congress C. Judicial Review CONCLUSION INTRODUCTION

The Spending Clause authorizes the federal government to spend in support of the "general Welfare." (1) Such spending often comes in the form of statutes that authorize federal grants to state and local governments. (2) As a result of these statutes, grant relationships between federal agencies and their state and local counterparts are pervasive. In 2013, federal grants to state and local governments constituted almost 16% of the federal budget (3) and almost one-quarter of all state and local expenditures. (4) Every cabinet-level agency except the State Department made such grants. (5) Approximately 80% of federal grants each year go to state and local governments. (6) But what happens when states and localities fail to comply with the conditions placed on the funding?

This is not merely a theoretical question. In just the last few years, states have failed to comply with requirements of the food stamps grant program by improperly terminating benefits to tens of thousands of food stamp recipients and doing very little to attempt to correct the errors. (7) States have failed to comply with requirements of the Medicaid grant program by placing limits on the number of annual emergency room visits that Medicaid recipients can make. (8) States have failed to comply with the federal special education grant program, reducing state spending on special education below what the terms of the grant require. (9) States have failed to implement procedures that they agreed to take on when they accepted federal education funds under Race to the Top and the State Fiscal Stabilization Fund. (10) Localities have failed to comply with the terms of federal housing grants by declining to put in place antidiscrimination measures in their housing programs. (11) What should the federal agencies in charge of the grant money do?

If agencies and their grantees cannot reach an agreement through persuasion and other informal means, agencies have a powerful formal tool at their disposal: they can cut off funds to the offending grantee until the grantee complies. (12) This tool can be very effective. For example, it is widely understood that the use (and threatened use) of funding cut-offs played a significant role in desegregating Southern schools in the late 1960s. (13) Notwithstanding this example, however, the funding cut-off is a controversial mechanism that is rarely employed. (14) Advocates periodically call for greater agency use of the funding cut-off, (15) and agencies do sometimes employ this mechanism; (16) however, the funding cut-off is generally disfavored, even by those who wish for greater enforcement overall. (17)

Scholars tend to provide four arguments to either justify or explain the relative infrequency of funding cut-offs. First, the argument goes, the funding cut-off is a blunt tool that hurts the intended beneficiaries of the grant in question. (18) Second, the argument continues, federalism concerns justifiably limit agencies' willingness to take money away from state and local grantees. (19) Federalism concerns received enhanced attention after the Supreme Court held in 2012 that the Affordable Care Act's expansion of Medicaid represented an unconstitutional coercion of state governments because it threatened to cut off funds for the entire Medicaid program in states that declined to participate in the expansion. (20) Scholars have generally suggested that NFIB v. Sebelius shifted power to states and away from agencies in the grant relationship. (21)

The third argument posits that agencies have little motivation or capacity to cut off funds from their grantees; this argument seeks to explain (more than justify) the paucity of such enforcement actions. Grant program offices are designed to give out money, not to take it away, and in any event they are too cash-strapped to be effective enforcers. (22) The final argument, again more descriptive than normative, further asserts that the political dynamics among states, Congress, agencies, and the White House do not support robust cut-off efforts. (23)

In this Article, I contend that these arguments are deeply flawed. Moreover, even if they accurately describe what agency officials believe to be the case, they rest on unsupportable premises. As I demonstrate below, funding cut-offs will not always hurt a grant's beneficiaries. (24) The point of the mechanism is to encourage the noncompliant grantee to comply. Beneficiaries may at times be better off if a cut-off induces greater compliance in the future, as may beneficiaries in other jurisdictions where grantees increase their compliance, having observed that the agency is serious about cutting off funds. Second, the federalism concerns about the funding cut-off are misguided. (25) It is more respectful of state sovereignty, not less, to hold states to their agreements. Many violations of grant conditions have nothing to do with state policy choices and more to do with poor administration. Several objectives promoted by federalism--protecting sovereignty, preventing coercion, and promoting diversity--are more relevant to the front end of grant design and initial bargaining than to back-end grant enforcement. Furthermore, the objective that is relevant to the back end of grant enforcement--promoting accountability--is actually supported, not undermined, by a funding cut-off.

As to the third argument--that agencies have little motivation or capacity to cut off funds from their grantees--some agency officials have an enforcement mindset due to their perception of their core professional obligations, so claims about limited agency motivation are overstated. Relatedly, agency officials might appreciate the increased leverage that comes from a threatened funding cut-off, benefit from future job opportunities as a result of taking a hard line on enforcement, or value acting in collusion with state or local grantees against other recalcitrant players in the system. (26) Claims about limited agency capacity to cut off funds insufficiently acknowledge that the alternative--private litigation against non-compliant grantees--also faces serious practical constraints. (27) NFIB does little to change the analysis. (28) Most grant conditions are unlikely to be found coercive, even under the new doctrine set forth in that case, (29) and, in any event, other forms of intergovernmental negotiation that scholars have predicted in the wake of NFIB are similarly time-intensive. Finally, political dynamics are complicated; multiple alignments of shifting political coalitions are possible. (30) The suggestion that states will always or even usually prevail in a battle with agency enforcers misses multiple layers of complexity in the relationships at issue.

In debunking these standard critiques and in suggesting the potential value of the funding cut-off, I have two goals. The first goal is to clear the brush away from the mechanism so that analysts, advocates, and agency officials may evaluate its potential use on the merits of each case rather than with doubt about or distaste for the mechanism itself. The rehabilitation of this agency enforcement mechanism is an important task, especially as the scope of intergovernmental grants is vast and has only increased over time. (31) Although the extent of noncompliance is unknown, it is fair to say that state and local government grantees have not always complied with the conditions they agreed to when accepting federal money. (32) Agency enforcement of these programs is particularly important in light of the various restrictions the Supreme Court has placed on private enforcement of federal grant regimes over the last two decades. The Court has interpreted particular grant statutes and their associated conditions narrowly, making it more difficult for private parties to establish violations or bring suit at all. (33) The Court has constrained lower courts' ability to read private rights of action into grant programs. (34) It has limited the circumstances under which attorneys' fees may be available. (35) It has made civil litigation generally more difficult by, among other things, tightening pleading standards (36) and class action requirements. (37) Together, these doctrinal developments have left a significant enforcement gap surrounding the use of hundreds of billions of dollars in federal grant money each year. The other potential players in the enforcement regime are the agencies. As of yet, however, insufficient attention has been paid to the potential upsides of agency enforcement of grant programs, much less ways to...