Budget policy

In two weeks, the Supreme Court will begin its term by asking whether an agency may set its
own budget outside the congressional appropriations process. The case raises fundamental
questions about the separation of powers and the legitimacy of agency action divorced from
democratic oversight. The decision could also have implications for a lively corner of tech
policy facing similar legal challenges: the Federal Communications Commission’s Universal
Service Fund.

The Supreme Court case focuses on the Consumer Financial Protection Bureau (CFPB).
The brainchild of then-Professor Elizabeth Warren (D-MA), the CFPB was created after the
2008 subprime crisis to regulate consumer financial products and services. In 2017, the
agency adopted the Payday Lending Rule, which imposed significant regulations on certain
short-term loans primarily marketed to lower-income borrowers. Two trade associations
challenged the rule, arguing among other allegations that it was invalid because the CFPB
violated several constitutional prohibitions. telephone bills to raise that amount. Like the
CFPB, the USF’s funding structure has been challenged in myriad ways, including a case
being argued this week in the Fifth Circuit.

Regardless of the legal outcome to these challenges, our elected officials’ policy judgments
should reflect the Framers’ wisdom about the power of the purse. I’ve long argued that
Congress should solve the USF’s unsustainable financial structure by funding the program
directly through appropriations, as a way to rein in an inefficient and unaccountable program
with a runaway surcharge rate. The same, of course, is true of the CFPB. As James
McHenry stated during the Constitutional Convention, “there can be no regulation more
consistent with the Spirit of Economy and free Government” than that revenue “shall only be
drawn forth under appropriation by Law…as the People who give their Money ought to know
in what manner it is expended.”
these challenges, our elected officials’ policy judgments should reflect the Framers’ wisdom
about the power of the purse. I’ve long argued that Congress should solve the USF’s
unsustainable financial structure by funding the program directly through appropriations, as a
way to rein in an inefficient and unaccountable program with a runaway surcharge rate. The
same, of course, is true of the CFPB. As James McHenry stated during the Constitutional
Convention, “there can be no regulation more consistent with the Spirit of Economy and free
Government” than that revenue “shall only be drawn forth under appropriation by Law…as
the People who give their Money ought to know in what manner it is expended.”
The Fifth Circuit rejected all of the plaintiffs’ arguments save one: the challenge to the
agency’s funding mechanism. Unlike most federal agencies, which receive annual budgets
through congressional appropriations, CFPB was designed to be fiscally independent. Each
year, the CFPB Director requests from the Federal Reserve whatever amount the Director
deems reasonably necessary to carry out the agency’s functions. The Federal Reserve,
which is funded by a surcharge on banks, must grant CFPB’s request up to 12 percent of the
Fed’s total operating expenses. Importantly, the Federal Reserve must remit any surplus
funds to the Treasury. This means the CFPB effectively operates as an agency version of
Robin Hood: siphoning a discretionary amount of money each year from Treasury-bound
collections in the name of helping the masses.
As the Fifth Circuit correctly recognized, this unusual funding structure raises fundamental
concerns about the separation of powers. When drafting the Constitution, the Framers
carefully separated the power of the sword from the power of the purse to safeguard against
the risk of a tyrannical presidency. Alexander Hamilton said that it is this “division of powers
on which political liberty is founded” and that vesting both powers in one branch would
“furnish one body with all the means of tyranny.” He continued, “But when the purse is
lodged in one branch, and the sword in another, there can be no danger.”

Moreover, the Framers specifically vested Congress with control over fiscal matters, as a
means to achieve transparency and accountability. The Constitution provides that “all Bills
for raising Revenue must originate in the House of Representatives” and that “no money
shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The
people, through their elected representatives, can use the appropriations process to
investigate executive branch activity, and if necessary curtail abuses by reducing the funding
necessary for the executive to operate. Thus, James Madison wrote, “the power over the
purse may, in fact, be regarded as the most complete and effectual weapon with which any
constitution can arm the immediate representatives of the people.”
The Fifth Circuit held that the CFPB’s self-funding mechanism violates this important
precept, and therefore the agency’s structure is unconstitutional. It is unclear whether the
Supreme Court will agree, although in recent years it has not been shy about exposing
unconstitutional agency structures, including within the CFPB itself in the 2020 Seila Law
decision (which mentioned the funding issue in passing but was decided on other grounds).
A victory for plaintiffs would vindicate the Framers’ view that agencies should not be able to
sidestep democratic oversight by funding their own operations.
A victory would also have implications for another self-funded entity, the Universal Service
Fund (USF). As I’ve written elsewhere, the USF is a similarly off-budget program. The
Federal Communications Commission, through a private entity called the Universal Service
Administrative Company, calculates the amount it needs each quarter for operations and
then imposes a surcharge on telephone bills to raise that amount. Like the CFPB, the USF’s
funding structure has been challenged in myriad ways, including a case being argued this
week in the Fifth Circuit.
Regardless of the legal outcome to these challenges, our elected officials’ policy judgments
should reflect the Framers’ wisdom about the power of the purse. I’ve long argued that
Congress should solve the USF’s unsustainable financial structure by funding the program
directly through appropriations, as a way to rein in an inefficient and unaccountable program
with a runaway surcharge rate. The same, of course, is true of the CFPB. As James
McHenry stated during the Constitutional Convention, “there can be no regulation more
consistent with the Spirit of Economy and free Government” than that revenue “shall only be
drawn forth under appropriation by Law…as the People who give their Money ought to know
in what manner it is expended.”