Sanctuary Jurisdictions and Municipal Bond Disclosure

April 17, 2017
Publications

Following his inauguration on January 20th, President Trump issued several Executive Orders, one of which was issued on January 25, 2017 and titled, “Enhancing Public Safety in the Interior of the United States” (referred to herein as the “Order”). Among other things, this Order punishes so-called “sanctuary jurisdictions” by stripping them of federal grants. As justification for this punitive measure, the Order states that “sanctuary jurisdictions … willfully violate Federal law in an attempt to shield aliens from removal…. These jurisdictions have caused immeasurable harm to the American people and to the very fabric of our Republic.”

In the months since the Order, many state and local entities have parsed the Order to determine whether they would be considered a “sanctuary jurisdiction,” what funding may be in jeopardy, and whether they can modify their policies to limit or eliminate application of the Order. In the midst of these uncertainties, many municipalities also have been faced with the issue of how to address the potential consequences of “sanctuary jurisdiction” status in their public offering documents when they are considering issuing municipal bonds for sale to the investor public.

Section 9(a) of the Order sets forth the Trump Administration’s position regarding “sanctuary jurisdictions.” It provides that the “Attorney General and the Secretary, in their discretion and to the extent consistent with law, shall ensure that jurisdictions that willfully refuse to comply with 8 U.S.C. §1373 (sanctuary jurisdictions) are not eligible to receive Federal grants, except as deemed necessary for law enforcement purposes.” Under section 9(a) of the Order the Secretary is authorized to designate, “in his discretion and to the extent consistent with law,” a jurisdiction as a sanctuary jurisdiction, and the Attorney General shall take “appropriate enforcement action against an entity that violates Section 1373, or which “has in effect a statute, policy, or practice that prevents or hinders the enforcement of Federal law.”

Section 1373 provides in pertinent part that a “Federal, State, or local government entity or official may not prohibit, or in any way restrict, any government entity or official from sending to, or receiving from, [ICE] information regarding the citizenship or immigration status, lawful or unlawful, of any individual.”

Section 1373 further provides that “No person or agency may prohibit, or in any way restrict, a Federal, State, or local government entity” from taking certain actions in connection with an individual’s immigration status, whether lawful or unlawful. Those actions consist of: (1) sending information to, or requesting or receiving information from, ICE; (2) maintaining information; (3) exchanging information with any other Federal, State, or local government entity. Entities that violate Section 1373, or who are otherwise determined by the Secretary to be a “sanctuary jurisdiction” consistent with law, are at risk of losing federal grants under the Order.

Section 9(b) of the Order instructs ICE to issue, on a weekly basis, a public list, known as the Weekly Declined Detainer Outcome Report, describing all “criminal actions committed by aliens and any jurisdiction that ignored or otherwise failed to honor any detainers with respect to such aliens.” The first such list under the Order was recently published, and identifies approximately 100 jurisdictions that the Trump Administration considers to be “non-cooperative jurisdictions.” Although several Pennsylvania municipalities have disputed the accuracy of that report – challenging the reported number of detainers they received, detailing their actual cooperation with ICE, and contending that they in fact transferred custody of certain individuals to ICE – the publication of these reports now and in the future will likely have profound consequences for these and many other municipalities.

For state and local governmental entities branded as “sanctuary jurisdictions,” or “non-cooperative jurisdictions” as per the Weekly Declined Detainer Outcome Report, if they choose not to change their policies, this designation, and the potential consequences that come with it, should be disclosed in public offering documents prepared in connection with the sale of municipal bonds. Recently, the City of Philadelphia, a “sanctuary jurisdiction,” issued its General Obligation Refunding Bonds, Series 2017, and in an Official Statement dated January 25, 2017, addressed the issue as follows:

The practical import of [the Order] is unclear. To the extent that any federal grant mandated by Congress may be found to fall within the order’s exception for funds “mandated by law,” federal funds under particular statutes may be found to be excluded from the order altogether and therefore not subject to the withholding of funds. Accordingly, at this time, the City does not have sufficient information on the potential impact, if any, on any federal funding that may be withheld as a result of this order.

In light of the uncertainty surrounding the Order at the time this Official Statement was prepared, the City of Philadelphia’s disclosure of the risk associated with the Order should be sufficient.

Since then, with additional time to consider the potential impact of the Order, other issuers have provided more robust disclosures regarding it. For instance, New York City, in an Official Statement dated February 8, 2017, gave us a glimpse of what its position would be in the event the Administration attempted to enforce the Order. Specifically, New York City’s disclosure language provides as follows:

It is the City’s position that controlling legal authority limits funding reductions to grants directly related to federal immigration law enforcement. Federal grants to the City arguably related to federal immigration law enforcement comprise a small percentage of the City’s total budget. Moreover, most if not all of such grants support local law enforcement functions which the executive order expressly authorizes the Attorney General or Secretary of Homeland Security to exempt from reduction. If implementation of the executive order results in the reduction of federal aid to the City, the City expects that it would mount a vigorous legal challenge. However, there can be no guarantee that implementation of the executive order will not result in a significant reduction or delay in receiving such aid.

We expect that these types of disclosures will continue to evolve as additional guidance becomes available regarding the implementation of the Order. Since the publication of the New York Official Statement, for instance, Attorney General Jeff Sessions has announced that the Department of Justice would seek to disqualify from consideration for some $4 billion of Department grants certain sanctuary jurisdictions determined to willfully violate section 1373, as well as seek to claw back prior federal grants awarded to such jurisdictions.

For “sanctuary jurisdictions” that are considering issuing municipal bonds in the near term, the disclosures made by the cities of Philadelphia and New York are good starting points in crafting similar disclosure language. Issuers should carefully monitor the status of the Order and await further guidance from ICE, the Department of Homeland Security, the Department of Justice and the White House, among others, as to how it will be enforced. Any court decision interpreting the Order should be noted in the disclosures, and the impact of such decision noted.

Timothy J. Horstmann is a public finance and tax attorney with the law firm of McNees Wallace & Nurick LLC and practices in the Firm’s Public Sector Group. Tim represents governmental issuers, school districts and nonprofits in connection with bond financings. He can be reached at thorstmann@mcneeslaw.com.