On Tuesday, the Supreme Court takes up a rare constitutional test of one of Congress’s most basic powers: its control over government spending. Only once before in the nation’s history has the Court faced a case like this one; the outcome this time could affect much of the federal budget.
Tomorrow’s hearing: : Consumer Financial Protection Bureau v. Community Financial Services Association of America. The hearing begins at 10 a.m., and is scheduled for one hour.
The Court will broadcast “live” the audio (no video) of the hearing on its homepage, supremecourt.gov To listen, click on “Live Audio” and follow the prompt when the courtroom scene appears lower on the page. The audio also will be available, under the title of the case, on C-Span TV at this link: cspan.org/supremecourt
Background on Tuesday’s case: Because America has lived under the Constitution for well over two centuries, very little of that basic document has escaped repeated controversy over what a given clause means. There is one part, however, that has seldom been tested in court, even though it involves one of the vital functions of government.
That provision — in Article I — gives Congress ultimate authority over how government money is spent – that is, control over the federal budget. This is the “Appropriations Clause,” and here is what it says: “No money shall be drawn from the Treasury but in consequence of appropriations made by law.”
Historians say that the clause was phrased in that way to keep the President and associates in the Executive Branch from spending as they chose. After having lived under the sweeping powers of English royalty, the Founders were leery of concentrating power in the President as the embodiment of Executive authority.
Politicians in every era, of course, have debated how the power to spend should be used. They have done so again in recent days, with an intense and partisan budget fight that nearly shut down the federal government last weekend.
But only once, in 1937, has the Supreme Court interpreted what the “Appropriations Clause” actually means. Now, it has agreed to do so again, in a case of historic significance even though it involves the budget for a single agency of the national government – the Consumer Financial Protection Bureau.
The facts of this case: When Congress created that Bureau in 2010, as part of its response to the financial crisis of 2008-2009, it specified that the new agency would operate independently, as an adjunct of the Federal Reserve System, itself an independent agency. The Bureau’s job is to find ways to protect consumers from the kind of manipulative lending practices that contributed to that financial crisis 15 years ago.
Instead of approving a specific amount of spending by the Bureau, Congress chose to finance the new agency’s operations out of money that the Federal Reserve earns. The Fed, the manager of government monetary policy, earns money from several activities, including interest it earns on its investments, fees for services it provides to financial institutions, and interest payments on the loans it makes to such institutions.
Each year, instead of asking Congress for a direct appropriation, the head of the Bureau notifies the Fed of the funds that agency needs for its operations in the coming months. Congress specified that the Fed can transfer to the Bureau up to 12 percent of the Fed’s operating expenses. The actual amount is adjusted each year for inflation. For the past fiscal year, for example, that totaled about $784 million. Congress specified that the Fed transfer would remain available to the Bureau until it had been spent.
Congress and its committees do not have power to directly oversee the actual transfer, but the Bureau must report regularly to congressional committees and its budget is subject to a federal audit each year, with the results reported to Congress.
Back in 2017, operating with funds provided by that mechanism, the Bureau adopted proposed new rules to protect consumers from a kind of personal financing known as “payday loans.” Generally, those are loans for $500 or less, charged high interest rates, that typically must be paid off by the borrower’s next payday. Borrowers often are consumers with pressing financial strains. To repay the loan, the borrower gives the lender access to a personal bank account; if not paid off, the lender can move directly to take the funds out of that account, without further permission.
In the final form proposed by the Bureau to curb this practice, lenders were barred from making more than two attempts to withdraw funds from such an account. The reason for that restriction is that two failed attempts are deemed to be enough to show that the account does not have enough money to cover the withdrawal, so borrowers will be faced with repeated fees for overdrafts on their account.
Because of the challenge to the payday loan rules, they have never gone into effect.
Two groups of lenders of this kind — Consumer Financial Services Association of America and Consumer Service Alliance of Texas – sued the Bureau in federal court in 2018 to contest the new rules. Among several legal points, the two groups added – but only briefly – a claim that the payday loan restrictions were unconstitutional because they were made when the Bureau’s operations were funded by the transfers from the Fed, rather than by a direct and agency-specific appropriation bill passed by Congress.
A federal trial judge rejected all of the challenge, and ruled – among other points – that the Appropriations Clause of the Constitution was satisfied by the way Congress funded the Bureau with a cap on what it could use.
A federal appeals court upheld the Bureau’s power to write the payday loan rules, saying that the policy would have been within the mandate Congress gave in creating the agency in 2010. However, that court went on to decide that the Bureau’s funding mechanism was unconstitutional because a specific appropriation law, enacted by Congress, was the only valid method of ordering spending. It added that the funding would be available beyond one year under the mechanism, since the Bureau was allowed to finance operations until it spent the amount transferred to it.
The problem is even worse, the court declared, when the agency getting the funds without direct authorization had such sweeping power as the Bureau does. It thus concluded that the only remedy was to nullify the payday loan rules, declaring that the rule was linked directly to the invalid budgeting approach.
This was the first time in U.S. history that a court had ruled this way under the Appropriations Clause.
Because that appeals court ruling conflicts directly with a decision by a different appeals court, lawyers for the Biden Administration Justice Department and for the Bureau appealed to the Supreme Court, raising the issue of the validity of the Bureau’s funding and the validity of the payday loan regulation. They moved quickly, and urged the Court to accept the case on a fast track so that it could be decided during this new term.
The questions before the Court: Did Congress act unconstitutionally in devising an indirect way to approve spending by a federal agency? If that mechanism was invalid, are actions by the agency when it received those funds also invalid?
Significance: The constitutional dispute in this case could come down to a choice between the view that the specific form of funding for the Bureau involved in this case is quite common in the federal budget process and does not deviate from past history, or, instead, the view that this is a highly dangerous mechanism for a powerful federal agency to write its own check and use the money without answering in any meaningful way to Congress.
This case appears to fall into a category that the Supreme Court is being asked to deal with increasingly: the conservative opposition to government regulation, of almost any kind, pursued through sweeping reinterpretations of the text of the Constitution.
The specific challenge here, to the Bureau’s proposed limits on payday loans, is a good illustration of this phenomenon. In its origin, and through much of its journey in lower courts, this case hardly mentioned the profound constitutional threat that the Bureau’s funding mechanism is now being described as the case unfolds in the Supreme Court. It is as if the Bureau’s budget has become, at least in the rhetorical flourishes of the Bureau’s opponents, another example of the over-bearing “deep state.”
The Court’s six-Justice conservative majority has itself seemed troubled by that, and is fashioning new constitutional doctrine to deal with it. Its response has appeared to be to strengthen Congress’s hand at the same time that it diminishes or curbs federal agency authority.
To illustrate the task before the Court, consider the two sides’ treatment of the one earlier case where the Justices ruled on a constitutional challenge to the appropriations process. That precedent, in the 1937 case of Cincinnati Soap Co. v. United States, is one of the main pillars of the argument of government lawyers as they try to show that there is no genuine uncertainty about what the Appropriations Clause means. The Bureau’s opponents give that precedent only brief and passing mention, and argue that it is beside the point today, especially when viewed against the background of the threat of the Bureau’s “self-funded” enforcement authority.
That 86-yearold case involved a tax on the processing of coconut oil imported from the Philippine Islands – then a U.S. territory. Congress created that tax, in order to raise funds to pay for governing that territory. Manufacturers of soap, using coconut oil in their products, contended that the tax, and the use of the revenue, were both beyond Congress’s power under the Constitution.
The core of the companies’ constitutional complaint was that Congress had improperly handed off its power to approve spending to a government project to govern the island nation – technically, an invalid “delegation of legislative authority.”
Rejecting the challenges unanimously, the Court declared: “That Congress has wide discretion in the matter of prescribing details of expenditures for which it appropriates must, of course, be plain. Appropriations and other acts of Congress are replete with instances of general appropriations of large amounts, to be allotted and expended as directed by designated government agencies.”
Will today’s Court feel bound by that precedent, as it weighs a modern claim that Congress has wrongly given away its power over spending to another branch of the government? That is the fundamental question the Justices will be exploring on Tuesday.
The ultimate fate of the payday loan rules is at stake, as are most of the actions the Bureau has taken since its creation in 2010. More significantly, the future of the federal budget could be at risk.
On Wednesday, the Court will hold one hearing, on a basic constitutional question of who has the right to go to federal court to help enforce a federal civil rights law.