The CFPB’s funding mechanism: misguided but constitutional

Last week the Fifth Circuit held that the CFPB is unconstitutional because, by statute, it derives its revenue from the federal reserve rather than congressional appropriations. Professor Zach Price argues that the Fifth Circuit was mistaken:

The Fifth Circuit held last week that the Consumer Financial Protection Board (CFPB) cannot promulgate or enforce its regulations because, by law, it receives its operating funds each year from the Federal Reserve Board rather than time-limited appropriations statutes. The Fifth Circuit’s decision is incorrect, and especially so if one embraces the formalist approach to separation of powers that the Supreme Court currently favors.

The Constitution’s Appropriations Clause states: “No money shall be drawn from the treasury, but in consequence of appropriations made by law.” As I argued in a 2018 article, this clause properly means that Congress may control any resource-dependent authority of the government—any power that requires government resources beyond what constitutional officers like the President or Supreme Court could perform on their own.

Accordingly, it is not enough for an agency like the CFPB to have legal authority to take action. Because the power to promulgate and enforce rules is resource-dependent, Congress also must provide resources by law to carry out these functions. It likewise makes no difference whether the funds in question came from the “treasury” in some technical accounting sense. As long as the funds were under government control, and thus part of the public treasury in a more abstract sense, they could be spent only if Congress has approved doing so by statute.

Congress normally amplifies its power under the Appropriations Clause by limiting the amount and duration of agency funding, typically for periods of one year. The British Parliament developed this practice as a means of controlling the royal fiscal-military state, and the US Congress wisely adopted the same approach, beginning with the first Congress, as a way to maintain an ongoing check on government operations.

The key question in the CFPB case is whether this practice of annual appropriations is not only desirable, but also constitutionally required. When it established the CFPB in the wake of the 2008 financial crisis, Congress provided that the agency would not require annual appropriations, but could instead claim up to twelve percent of the Federal Reserve System’s funds, even though the Fed itself is funded primarily through fees and interest income rather than annual statutory appropriations. In a particular thumb in the eye of future Congresses, the CFPB statute even exempted the agency’s Fed-derived funds from “review by the Committees on Appropriations of the House of Representatives and the Senate.”

What should we make of this choice? Congress’s unusual arrangements seem to have been motivated by concerns that powerful financial actors would seek to capture and severe the CFPB’s functions. The choice to exempt such a powerful and important agency from the political constraints of ongoing appropriations was nevertheless unfortunate and short-sighted, but it was not unconstitutional.

Congress has provided authority by statute for the CFPB’s expenditures. That is all the text of the Constitution requires. Annual appropriations are generally a good idea, but there is no constitutional requirement that Congress employs them for this or any other civil agency. On the contrary, the Constitution negatively implies the opposite by specifying that “no appropriation of money to [raise and support armies] shall be for a longer term than two years.” In practice, furthermore, Congress has previously provided permanent appropriations for some programs like Social Security benefits and government debt service; it has allowed all agencies, like the Federal Reserve itself, to fund themselves with fees rather than annual appropriations; and it has authorized various other forms of “backdoor spending” that take place outside the normal annual appropriations process.

Concluding that the CFPB’s funding through the Federal Reserve is unconstitutional, as the Fifth Circuit did, requires reading into the text some amorphous, functional limit on how Congress exercises its power over government expenditure. It requires, in other words, inferring that a law counts as an “appropriation” for constitutional purposes only if it carries features such as time limits that the Constitution itself does not require and that have not always been reflected in past practice.

In an important 1988 article cited by the Fifth Circuit, Kate Stith advocated such a limit, arguing that “[w]Here Congress fails to provide a clear statement of the activity or object being funded and fails to impose effective limitations on the amount and the duration of the appropriation, it has abdicated one of its principal constitutional responsibilities.” constitutional norm” with hazy outer boundaries, and she acknowledged that it might not be appropriately enforced by courts.” “There are strong prudential considerations,” she wrote, “for abstaining from addressing the adequacy of appropriations legislation absent conflict between the President and Congress. “

In fact, the Fifth Circuit’s opinion all but demonstrates the absence of judicially manageable standards for enforcing a functional limit on how Congress exercises its appropriations power. Rather than articulate any administrable rule for when Congress goes too far, the court simply characterized the CFPB’s funding arrangement as “so egregious that it clearly runs afoul of the Appropriations Clause’s requirements.”

Although much of the CFPB’s work strikes me as important, exempting the agency from the political constraint of ongoing appropriations was misguided. But the remedy is for Congress to change the law and claw back its power. It is not for courts to invent new, judicially unmanageable limits that are absent from the constitutional text.

Seems right to me.

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