Podcast recorded January 31, 2017

Sanctuary Cities: Understanding the Street Noise

Podcast Transcript

Hello this is Natalie Baker, vice president of marketing here at Breckinridge and welcome to our special topic Breckinridge podcast, “Sanctuary Cities: Understanding the Street Noise.” Today, I am joined by our head of municipal research, Adam Stern. Adam is also a member of our Investment Committee and we will be talking about some of the major issues to think about with sanctuary cities. So, Adam, we have heard a lot of buzz in the news today about potential defunding of sanctuary cities. Could you give us an explanation of what exactly those are and what all the news is about?

So, in terms of the grants that are at risk, it is mostly community development block grants, some economic development assistance grants, and then some SCAAP grants. SCAAP stands for State Criminal Alien Assistance Program and it is just the federal government helps states and local governments fund additional costs associated with any sort of incarceration of undocumented immigrants and, you know, obviously the reason this is in the news is because President Trump has threatened to deny grant funding to so-called sanctuary cities and these are the grants involved. It is also true, a little less reported on, but that Republicans in Congress over the last few years have proposed a couple different bills to get at the same issue, and then the likely incoming Attorney General, Jeff Sessions, has been an advocate for these bills and sponsored a bill known as the Clear Act a few years ago, which would get at these sanctuary cities as well.

Okay, so can we take a step back and just what exactly are sanctuary cities?

Yes, so that is a great question. So, a sanctuary city really runs the gamut in terms of its definition. The broadest definition is these are cities that are complying with all federal laws, but they are choosing not to do any more than what federal law requires. And when I say ‘any more,’ it could be a little more or a lot more but not exactly perfectly aligned with what federal immigration authorities might want. So, what are the variety of policies? One form is if police officers, if they encounter a person who is or may be undocumented, they just do not ask. They do not ask any questions about it and that may be the policy of the local government or the state government. Another form of the policy would be the state or local government does not require the police officer to ask but they do not prohibit it either. So, if a police officer wants to, they could ask about it. A third type of policy is the officers of the local police department does not honor what is called a detainer request from ICE, the Immigration and Customs Enforcement. And a detainer request is a request from the federal government, “Hey can you hold this person” and it’s for up to an additional 48 hours past whatever time they are supposed to be held so that we can get somebody out there and pick them up and possibly start the deportation process. Depending on the detainer request and how long the person is held, there are some questionable 4th amendment concerns with detainer requests apart from a bunch of other issues, but the big picture is, there are all sorts of different types of sanctuary cities and it sort of refers to this broad brush of policies.

I see. So why are sanctuary cities even allowed not to comply, though. It seems weird that a city can tell the federal government that it will not help to deport people when they are not here legally in the first place?

I mean it is sort of one of these commonsensical things. I think that is a great question. So, apart from the humanitarian arguments, associated with immigration policy and deportations breaking up families, that sort of thing, the crux of the problem comes down, at least legally, to the Constitution's design and Congress’ inability over the last really two decades to craft a durable immigration law. So, the Constitution gives the federal government control over who gets to be here - immigration law. But the 10th amendment reserves the power to the states, nothing specifically delegated in the Constitution to the federal government and that includes importantly police powers, the power to protect public health and safety. So, in the absence of some clarifying law, a number states have made the determination, and given local governments the authority to make their own determination, that not asking about immigration status or not cooperating with these detainer requests is the best way to protect public safety. Other states think differently. In fact, when you do the research there is a wide variety of policies. Some states and local governments think cooperating with federal enforcement is the right way to go. Others think it is not, and even across the law enforcement association groups, you get a wide variety of opinions. It is really, at this point, a local issue but the important constitutional point is that the states are empowered to choose what they think is best for their citizens and residents.

Now having said that, the federal government can certainly try and place some incentives on states to cooperate by tinkering with grant funding, but it cannot conscript local officers into doing its bidding. Again, this is all 10th amendment stuff. The only thing I would add here is the more you get into the details the more confusing the arguments get. So, for example, those who think 10th amendment issues are overblown and say, you are really just asking a city to notify the federal government that they know someone is here illegally so that is not conscription, and just the general commonsensical point, somebody commits a crime and they are not supposed to be here and they are let out, can’t the police do something to help them. And then you have got the counterargument, though, is that, hey look, if there is really public safety emergency caused by illegal immigration, the state and local officials are going to have a strong incentive to crack down and cooperate with the federal government. So, that is a lot, but it is a complicated issue and it is certainly something that we expect to be around and we are thinking about. To be clear, we are not taking any sides in this debate by the way, we are just interested in trying to understand what the credit impact is, but it is certainly interesting stuff from a policy perspective.

So definitely important to think about all the politics in play here. So, you mention the federal government can cut grants and that is obviously what Trump has talked about. What does the potential defunding look like? Can this legally even happen?

Our view is we are not too worried about the defunding. The main reason is that the grants that are at risk are not too substantial. So for example, look at the city of New York. The controller of New York City put something out that said, hey, we have got upwards of $7 billion in federal funding that could be at risk, but that $7 billion if you look at it, it is a lot less than that that would actually be community development block grants that would likely be at risk or economic development or SCAAP grants, and New York City probably is the most at risk of anyone in the country. Other places, if you just look at their line item for all their federal funding may be 1% or less than 1% of the budget. It just depends. Big cities probably are more exposed than smaller ones or counties. So, that is sort of who is at risk. In terms of the extent of the cuts, the legal issues are, it cannot be overly coercive, so any cut or denial of federal funding has to be related to the purpose of the grant. So, you cannot threaten Medicaid funding which is unrelated to the immigration problem. These are specific grants that are at risk. And the other thing is the cut cannot be so substantial that it devolves into a form of coercion. It has to be reasonable and this used to actually be a theoretical legal argument. But actually in 2012 the Medicaid expansion case with the Affordable Care Act basically established these rules as precedent so we are pretty confident there is not going to be a huge cut of any sort.

Okay, definitely important to think about some of these limits. Well you mentioned big cities. We heard Boston Mayor Marty Walsh say that cities like Boston and New York are the economic engines for the country. Isn’t this something that could give pause to this defunding, the fact that the federal government could actually be cutting funding to some of the most important cities in the U.S. economy?

Yeah you know I think that is a risk. Again, we would feel more strongly if we thought the cuts were going to be pretty substantial. You know one thing we are actually more concerned about is a related issue, which is public shaming. So, President Trump has also said that he is going to weekly publish a list of all the crimes committed by illegal immigrants across the country every week. And what we are concerned about here is really two things. One is sort of the state/local problem that this could cause and the second is just general erosion in social cohesion and public trust which does have economic impacts. So the first one on state and local relations, immigration is a policy that causes a lot of passion in the public debate on both sides. And one thing we are concerned about is that in some of these suburban or more rural areas in certain states, publishing a list of criminal acts by undocumented immigrants will cause people to say this is ridiculous, we need to crackdown on our cities here. So we are actually seeing this in Texas where the Governor of Texas has said Austin is a sanctuary city and we do not want that anymore so we are going to crack down on them. And unlike the federal government, a state has broad authority to cut grants or do whatever it wants to local governments really for any reason, immigration or otherwise. So, to the extent that this riles up people's passions, this shaming issue, we are concerned this could disrupt otherwise stable state/local relations, especially with big cities. The other piece is that there is a good amount of data suggesting that reversing sanctuary city policies creates a feeling of un-welcomeness in immigrant communities. The data is a little bit more mixed in terms of whether or not there is a chilling effect in having enough folks in immigrant community report to the police, but certainly a feeling of, “I just don’t feel welcome here, I don’t feel like I belong here.” There is good data to show that reversing a sanctuary city policy does erode some level of social cohesion and social trust. Social trust, we are learning more and more from the economic literature, this plays a role in promoting economic health and growth. And so, as part of Breckinridge's environmental social governance analyses for munis we look at things like violent crime and we look at the extent of social associations in the community and this is why we do it, because it does, at least over time, it can have some credit impact. And so, those are some metrics that we are interested in exploring further, if this public shaming goes on for a long period of time or we have a real transformation in sanctuary city policy across the country. So, it is something we are watching and are interested in.

All right, well thanks so much, Adam. We hope that you in the field have found it informative to hear Adam Stern unpack one of the top issues on the minds of municipal investors. Please also consult our companion blog post located on our website titled, “Sanctuary Cities: Social Cohesion and Credit Fundamentals.” Thank you for joining us. We look forward to you joining us at our next podcast.


DISCLAIMER: The material in this transcript is prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors. Portions of this transcript may have been edited from the original podcast recording to improve clarity of message. Nothing in this transcript should be construed or relied upon as legal or financial advice. Any specific securities or portfolio characteristics listed above are for illustrative purposes and example only. They may not reflect actual investments in a client portfolio. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. This document may contain material directly taken from unaffiliated third party sources, including but not limited to federal and various state & local government documents, official financial reports, academic articles, and other public materials. If third party material is included, it is believed to be accurate, and reliable. However, none of the third party information should be relied upon without independent verification. All information contained in this document is current as of the date(s) indicated, and is subject to change without notice. No assurance can be given that any forward looking statements or estimates will prove accurate or profitable.