SCOTUS lets federal agency fund itself

In a 7-2 vote, with four conservatives joining three liberals, the U.S. Supreme Court last week rejected a challenge to the Consumer Finance Protection Bureau’s funding mechanism, which largely allows the federal consumer protection agency to fund itself with only a limited monetary cap and no congressional oversight.

Conservative justice Clarence Thomas wrote the decision and was joined by chief justice John Roberts and justices Brett Kavanaugh, Amy Coney Barrett, Sonia Sotomayor, Elena Kagan, and Ketanji Brown Jackson.

Justice Samuel Alito wrote a blistering dissent, joined by justice Neil Gorsuch.

In the case, the court overturned a court of appeals decision that found that the Consumer Finance Protection Bureau’s (CFPB) funding violated the constitution because it derives from the Federal Reserve rather than through Congress and its appropriations process.

The challengers pointed to the constitution’s mandate that  “[n]o money shall be withdrawn from the Treasury, but in Consequence of Appropriations made by Law.”

The appeals court found a double violation: Not only did the funding of the agency come from the Federal Reserve but the law allowed the agency to determine its own funding level by allowing the CFPB to request any amount the director deems “reasonably necessary to carry out” the bureau’s duties.

To say it another way, most federal agencies come before Congress every year to ask for their funding, but the CFPB does not; rather, Congress authorized the agency to draw from the Federal Reserve System the amount its director deems “reasonably necessary to carry out” the bureau’s duties, subject only to an inflation-adjusted cap.

There was no question from any side that the money is drawn from the federal treasury, given than the funds come from Federal Reserve profits, which are returned to the federal treasury. 

The question was whether the funding is a “Consequence of Appropriations made by Law.” Seven justices said yes.

Put simply, Thomas wrote, under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. And that’s exactly what Congress did in the law, Thomas wrote, it specified a source of public money — the Federal Reserve — for  a designated purpose — to fund the CFPB.

“The statute that provides the Bureau’s funding meets these requirements,” Thomas wrote. “We therefore conclude that the Bureau’s funding mechanism does not violate the Appropriations Clause.”

In making the decision, the majority read the text of the constitution narrowly. 

However, as Thomas recapped the arguments in his opinion, critics argued that appropriations must also “meet the Framers’ salutary aims of separating and checking powers and preserving accountability to the people.” 

That is to say, the challengers contended that the statute that provides the Bureau’s funding undermines those aims by allowing the agency to indefinitely choose its own level of annual funding, subject only to an illusory cap. 

“That is, the [challengers] contend that the Bureau’s funding mechanism is too open-ended in duration and amount to satisfy the requirement that there be an ‘Appropriatio[n] made by Law,’” Thomas wrote.

But, after drilling down into the history of the appropriations clause, Thomas and his colleagues rejected the latter argument.

“Based on the Constitution’s text, the history against which that text was enacted, and congressional practice immediately following ratification, we conclude that appropriations need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause,” he wrote.

To cite just one example, Thomas observed that many early appropriations laws made annual lump-sum grants for the government’s expenses, authorizing expenditures up to certain amounts for those purposes.

And sometimes the funding mirrored the CFPB funding mechanism, Thomas wrote.

“Congress took even more flexible approaches to appropriations for several early executive agencies and allowed the agencies to indefinitely fund themselves directly from revenue collected,” he wrote. “Soon after convening, Congress enacted laws that imposed a detailed schedule of duties on imported goods and tonnage. It then divided the nation into customs districts and established a vast federal bureaucracy to oversee the collection of those duties.”

Rather than fund those customs officials through annual appropriations, Thomas wrote, Congress opted for a fee-based model. 

“Customs collectors were compensated through tonnage- and transaction-based fees specified by law, and through a commission on the amount of duties raised within their districts,” he wrote.

Thus, by practice and by text, Thomas concluded, nothing was amiss.

Alito begs to differ

In his dissent, Alito disputed Thomas’s history and textual interpretation.

“Since the earliest days of our Republic, Congress’s ‘power over the purse’ has been its ‘most complete and effectual weapon’ to ensure that the other branches do not exceed or abuse their authority,” Alito wrote. “The Appropriations Clause protects this power by providing that ‘[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.’”

That provision, Alito continued, has a rich history extending back centuries before the founding of the country. 

“Its aim is to ensure that the people’s elected representatives monitor and control the expenditure of public funds and the projects they finance, and it imposes on Congress an important duty that it cannot sign away,” he wrote, quoting an earlier high court decision reiterating that “any other course” would give the executive branch “a most dangerous discretion.” 

Unfortunately, Alito concluded, the majority’s decision turned the appropriations clause into a minor vestige. What’s more, the justice argued, the majority view leads to an absurd conclusion.

“Under this interpretation, the Clause imposes no temporal limit that would prevent Congress from authorizing the executive to spend public funds in perpetuity,” he wrote. “Nor does the Court’s interpretation require Congress to set an upper limit on the amount of money that the executive may take. Today’s decision does not even demand that an agency’s funds come from the Treasury.”

Indeed, Alito continued, the majority’s interpretation permits an agency to be funded entirely by private sources. 

“In short, there is apparently nothing wrong with a law that empowers the executive to draw as much money as it wants from any identified source for any permissible purpose until the end of time,” he wrote. 

And that is not what the appropriations clause was understood to mean when it was adopted, Alito asserted. 

“In England, Parliament had won the power over the purse only after centuries of struggle with the Crown,” he wrote. “Steeped in English constitutional history, the Framers placed the Appropriations Clause in the Constitution to protect this hard-won legislative power.”

Alito underscored the unprecedented autonomy and power Congress gave to the agency.

“At every turn, the statute attempted to insulate the CFPB from control by any official answerable to the people,” he wrote. “First, ‘Congress provided that the CFPB would be led by a single director, who serves for a longer term than the President,’ and Congress attempted to protect the director from removal by the President ‘except for inefficiency, neglect, or malfeasance.’” 

Elected in the atmosphere that followed the financial crisis of 2008, the Congress that created the CFPB also sought to free the agency from supervision by subsequent Congresses that might wish to superintend the bureau’s exercise of its vast powers, Alito asserted. 

“To achieve that end, the CFPB was given an unprecedented way of obtaining funds that was expressly designed to make it totally ‘independent of the Congressional appropriations process,’” he wrote.  “Its earnings come from federally chartered corporations that are ‘not departments of the government.’”

Alito added that the CFPB, unlike most agencies, does not have to return any unspent funds to the Treasury. 

“Instead, the CFPB may invest or roll over any unspent money into a separate fund, which it may use in the future ‘to pay the expenses of the [CFPB] in carrying out its duties and responsibilities,’” he wrote. “As of September 30, 2022, the CFPB had built up an endowment worth nearly $340 million.”

Anticipation

In devising such a novel scheme, Alito offered that Congress appears to have anticipated that it might be challenged under the appropriations clause, and therefore attempted to shield its new creation by providing that “[f]unds obtained by or transferred to the [CFPB] shall not be construed to be Government funds or appropriated monies.”

“And to impede congressional oversight of the CFPB’s use of this money, the Act added that the Bureau’s funds are not ‘subject to review by the Committees on Appropriations,’” he wrote.

The bottom line was, Alito wrote, the Framers would be shocked and even horrified by the scheme. 

“Beginning with the First Congress, agencies were generally funded by annual appropriations from the Treasury,” he wrote. “While there have been departures from this dominant model, nothing like the CFPB’s funding scheme has previously been seen.”

Indeed, Alito wrote, there is no precedent for a funding mechanism that applies in perpetuity; that gives the agency discretion to select the amount of funding that it receives, up to a statutory cap; that comes from other entities that are self-funded corporations that obtain their funding from fees on private parties, “not departments of the Government”; and that does not require the return of unspent funds or transfer of those funds to the Treasury.

“At argument, the government was unable to cite any other agency with a funding scheme like this, and thus no other agency — old or new — has enjoyed so many layers of insulation from accountability to Congress,” he wrote.

To be sure, Alito continued, the government pointed to the Post Office and the Customs Service as founding-era precedents for the CFPB, but he argued that that analogy was flawed.

“As noted, funding government agencies with fees charged to the beneficiaries of their services has long been viewed as consistent with the appropriations requirement,” he wrote. “And both the Post Office and the Customs Service fell comfortably into that category.”

The CFPB, by contrast, is an entirely different creature, Alito argued.

“Its powers are broad and vast,” he wrote. “It enjoys substantial discretionary authority. It does not collect fees from persons and entities to which it provides services or persons and entities that are subject to its authority. And it is permitted to keep and invest surplus funds.”

In short, Alito wrote bluntly, the government’s “best” argument fails.

“For these reasons, it is undeniable that the combination of features in the CFPB funding scheme is unprecedented,” he wrote. “And it is likewise clear that this assemblage was no accident. Rather, it was carefully designed to give the Bureau maximum unaccountability.”

An earlier decision, Seila Law, did address part of the problem posed by that arrangement by making the CFPB accountable to the President, but Alito argued that that decision did nothing to protect Congress’s power of the purse.

“Indeed, standing alone, Seila Law worsens the appropriations problem,” he wrote. “The appropriations requirement developed to ensure that the Executive (in England, the monarch) would be accountable to the people’s elected representatives. Seila Law, however, increased the power of the executive over appropriations. By brandishing or wielding the threat of removal, a President may push the CFPB director to requisition the amount of money that the President thinks is appropriate and to spend that money as the President wishes.”

The Seila Law decision was a correct one, Alito wrote, but it solved only half the accountability problem that inheres in the CFPB’s structure.

Not without consequences

Such autonomy has real-world consequences, Alito wrote. 

“The CFPB is a powerful agency with the authority to impose ‘substantive rules [on] a wide swath of industries’ and ‘lev[y] knee-buckling penalties against private citizens,’” he wrote, quoting Seila Law. “In the last several months alone, the Bureau has announced plans to effectuate not one, but three major changes in consumer protection law. The CFPB has issued guidance cautioning financial institutions from ‘denying credit to individuals based on their [illegal] immigration status, regardless of their personal circumstances and demonstrated ability to repay.’”

It has also begun a rulemaking process to remove medical bills from Americans’ credit reports and to cap overdraft fees as low as $3, Alito observed.

“These may or may not be wise policies, but Congress did not specifically authorize any of them, and if the CFPB’s financing scheme is sustained, Congress cannot control or monitor the CFPB’s use of funds to implement such changes,” he wrote. “That is precisely what the appropriations clause was meant to prevent.”

In its majority decision, Alito opined, the court held that the appropriations Clause is satisfied by any law that authorizes the executive to take any amount of money from any source for any period of time for any lawful purpose. 

“That holding has the virtue of clarity, but such clarity comes at too high a price,” he wrote. “There are times when it is our duty to say simply that a law that blatantly attempts to circumvent the Constitution goes too far.”

This is such a case, Alito concluded.

“Today’s decision is not faithful to the original understanding of the Appropriations Clause and the centuries of history that gave birth to the appropriations requirement, and I therefore respectfully dissent,” he wrote.