WASHINGTON — Congress has used a clause in the Constitution for more than two centuries to control how the federal government spends funds, but the Supreme Court is poised to decide whether that same language also limits what lawmakers can do.
The justices agreed last month to hear a case about the way Congress funded the Consumer Financial Protection Bureau when it created the independent agency in response to the 2008 financial crisis. The agency’s survival is at risk in the case, which the Supreme Court will likely decide in their next term starting in October.
At the core of the case is the Appropriations Clause, which prohibits government spending “but in Consequence of Appropriations made by Law.” Experts consider that exclusive “power of the purse” as a core part of the Constitution’s separation of powers because the legislature is a check on how a president can spend funds.
Last year, for the first time ever, the U.S. Court of Appeals for the 5th Circuit found that clause also limited Congress and ruled the CFPB’s structure violated the Constitution because its funding comes from outside the appropriations process.
Brian Frazelle, a senior appellate counsel at the Constitutional Accountability Center, said that if the justices uphold that novel twist, the case could mean a sea change in the understanding of what the Appropriations Clause was meant to do.
“It’s the first time in history that any court has ever ruled that Congress itself could violate the Appropriations Clause of the Constitution,” Frazelle said.
New structure
Most federal agencies are funded through direct appropriations that Congress passes into law each year. A few agencies receive funding through a combination of appropriations and external fees, such as antitrust funding for the Department of Justice and Federal Trade Commission. A smaller number receive their funds entirely separate from the appropriations process, including the CFPB.
Congress, in the 2010 financial overhaul known as the Dodd-Frank law, allowed the CFPB to draw funding from a portion of the Federal Reserve’s annual funding. The Federal Reserve already is outside the appropriations process because it is funded through bank assessments.
The 5th Circuit panel, comprising three judges appointed by former President Donald Trump, criticized that CFPB’s structure as “double-insulated” from the normal funding process.
The panel ruled that meant Congress ran afoul of the separation of powers embodied in the Appropriations Clause because it abandoned its check on an executive branch agency that has expansive authority to oversee the consumer finance industry.
“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” the judges wrote.
The judges wrote that a law itself authorizing agency spending “does not suffice,” and any funds spent from the Treasury would require an appropriation. The opinion cites a part of the Dodd-Frank law that specifies how CFPB funds are not to be construed as “appropriated monies.”
“We take Congress at its word,” the 5th Circuit wrote. “But that is the rub.”
Similar arguments have been rejected by several federal courts. The 5th Circuit opinion cited a law review article from 1988 as well as a concurring opinion from 2022 in another 5th Circuit case, in which the appeals court declined to decide a similar challenge to the CFPB funding structure.
Government appeal
The Biden administration, in a brief urging the Supreme Court to review the 5th Circuit’s decision, said that new view of the Appropriations Clause could have wide-reaching consequences across federal spending. Congress has used nonappropriations spending since the 1790s when it created the U.S. Mint without controversy, the brief argued.
“This marks the first time in our nation’s history that any court has held that Congress violated the Appropriations Clause by enacting a law authorizing spending,” the government’s brief said.
The Biden administration pointed out many agencies critical to the economy, including the U.S. Postal Service, U.S. Mint, Federal Deposit Insurance Corporation and even U.S. Citizenship and Immigration Services receive their funding outside the appropriations process.
And the government pointed to a previous challenge to the CFPB structure, where the U.S. Court of Appeals for the District of Columbia Circuit in 2018 wrote that Congress “can, consistent with the Appropriations Clause, create governmental institutions reliant on fees, assessments, or investments rather than the ordinary appropriations process.”
The government told the Supreme Court justices in this latest case that the Appropriations Clause is satisfied when Congress has enacted a law that expressly authorizes the executive branch expenditures, as it did with the CFPB.
“And courts have no license to depart from the text and history of the constitutional provisions adopted by the Founders in pursuit of their own views about the proper structure and funding of administrative agencies,” the government brief states.
The Justices heard a different challenge to the CFPB’s structure in 2020, specifically about how Congress gave it a single director who can only be fired for cause. In that case, the majority found Congress unconstitutionally intruded on a president’s duty to execute the nation’s laws.
But while that Supreme Court opinion described the CFPB funding structure as being outside the appropriations process, the majority was only concerned with how that financial freedom might make the agency slip outside the control of the president — not outside the control of Congress.
“That wasn’t crazy. The 5th Circuit’s decision is crazy,” Frazelle said.
Potential fallout
The financial firms that challenged the structure of the CFPB called concerns over the breadth of the 5th Circuit decision overblown and said the agency represents the true problem.
The CFPB has authority over its own budget and no requirement to submit to Congress, a brief from the challengers argues, and “if this novel scheme were permissible, Congress could nullify the Appropriations Clause at will.”
Jack Fitzhenry, a legal fellow at the Heritage Foundation, said the 5th Circuit ruling could be important to keeping executive branch agencies accountable.
If reversed, Congress could create agencies that “set off on their own to manage their affairs without direct oversight from any political or elected branch,” Fitzhenry said. “And so, when you have an entity created in that sense, it raises some concerns.”
Fitzhenry reiterated that there were only a few agencies that receive funding outside of the normal appropriations process that could be affected by the decision. However, he acknowledged it would be difficult for the justices to rule against the CFPB without “implicating” the Federal Reserve as well.
Even a decision in the case that targets just the CFPB could inject chaos into financial regulation. Alan Kaplinsky, an attorney at Ballard Spahr specializing in consumer finance, said the agency’s rules are relied on by many in banking and other financial industries.
“This is a very dangerous case for the CFPB. I think they’re in a precarious position right now,” Kaplinsky said.
Kaplinsky pointed out the court now has one more conservative than the last time the agency went before the Supreme Court, and the Roberts court has been “very skeptical of too much power being vested in an administrative agency.”
A group of Republican-led states, including West Virginia, filed a brief arguing in favor of the 5th Circuit opinion and a narrower understanding of what Congress can do with its money.
Making agencies fight for funds each year would make them more open to feedback from state officials instead of insulated by collecting their money through fees.
“Attaching the spending power directly to Congress — including power over agencies’ budgets — makes the federal government more accountable to the States,” the brief said.
The states’ brief also minimized the breadth of any problems created by the 5th Circuit decision, saying the CFPB’s structure was “undeniably unique” for relying on funds from an already independently funded agency, the Federal Reserve.
