April has been a particularly busy time in the federal grant and contract world for nonprofits. We continue to see a deluge of presidential activity, even as a potential government shutdown looms. In light of this activity, we devote the bulk of our newsletter to an issue close to the heart of most nonprofits—funding. In particular, whether a nonprofit can be specifically defunded. We also touch on some other notable activities, including the termination of the federal hiring freeze, and the Buy American, Hire American Executive Order, as well as some thoughts on the potential government shutdown.
Implications of Executive Action on Nonprofit Recipients of Federal Funds
Following President Trump's issuance of Executive Order 13768 on January 25, 2017 (see 82 FR 8799), there has been considerable media coverage of and concern over the possibility that the White House will "defund" municipal governments that have policies prohibiting certain forms of cooperation with federal immigration law enforcement agencies (frequently referred to as "sanctuary" cities). News agencies reported that more than $2 billion in annual funds was threatened, multiple lawsuits were filed, and numerous bills were introduced in both houses of the U.S. Congress to either support or punish sanctuary cities. Earlier this week, a federal court also issued a nationwide preliminary injunction enjoining enforcement of the portions of the order that affect sanctuary city funding. Amid all this activity and chaos, nonprofit grant recipients may well have important questions on their mind: If the White House can defund sanctuary cities, what else can it defund? If my organization does something the White House dislikes, can an Executive Order revoke our federal grant funds?
Executive Orders and Federal Grant Requirements
As a preliminary matter, it is always important to bear in mind that not all Executive Orders are created equal. As we have written before, many Executive Orders by their terms are addressed to the heads of federal agencies, and so are only "politically enforceable" by the President against his appointees. Thus, the fact that the White House has issued an Executive Order stating that the U.S. Attorney General "to the extent consistent with law, shall ensure that jurisdictions that willfully refuse to comply with 8 U.S.C. 1373 are not eligible to receive federal grants," means little without knowing what the existing law actually is. See E.O. 13768, 82 FR 8799, at 8801. Furthermore, while the White House may order executive agency heads to enforce lawful grant conditions against recipients of federal funds, it may not impose new requirements on federal grants. Only Congress can place conditions on the receipt of federal funds.
Lawfully Operating Recipients Cannot Be Defunded Unless They Violate Grant Requirements
When trying to assess whether federal grant funds may be in jeopardy, the first place any recipient should look is the grant's requirements. A single grant's requirements may flow from many sources, ranging from federal statutes to the federal government's "Uniform Guidance" (see 2 C.F.R. Part 200). In addition, a grant recipient's award of federal funds comes with a package of documents that typically includes a statement of work, agency policy, and other law that is incorporated into the terms of the grant agreement. The importance of checking the language of a grant's awarding documents when there is concern about loss of funding cannot be overstated. For example, if a federal grant recipient is not in compliance with the grant's requirements, there is a risk that the federal government will terminate the grant award, withhold further federal awards, and even seek to recoup funds already distributed.
Constitutional Limits on Grant Conditions
While knowing a grant's requirements is critical, nonprofits also should understand the constitutional limits that Congress has to impose on conditions on the receipt of federal grant funds. In particular, the Spending Clause of the U.S. Constitution (see U.S. Const. art. I, § 8, cl. 1) has been interpreted to require that conditions imposed on the funds be unambiguous; that the conditions be reasonably related to the purpose of the expenditure; and that the conditions imposed not violate any independent constitutional prohibition or induce the recipient to engage in unconstitutional activities. Additionally, where the recipient is a state government, courts have found Congress's conduct impermissible under the Tenth Amendment if the financial inducement is so coercive as to pass the point at which pressure turns into compulsion. Unless a grant condition that the federal government is attempting to enforce is ambiguous, or the condition poses a constitutional issue, it is unlikely that these limitations will protect private grant recipients such as nonprofits. In a recent report to Congress, however, the Congressional Research Service indicated that it had found no case in which a federal spending condition was invalidated on the basis that it was insufficiently related to the purpose of the expenditure.
Takeaways for Nonprofits
Grant awards may be terminated or funding revoked if a recipient violates the law, or, as we noted in our last newsletter, if the federal government terminates the award for convenience. But an executive agency cannot impose conditions on recipients that are unconstitutional or not in their grant requirements, or use such conditions as a basis for defunding. Therefore, nonprofit grant recipients seeking to avoid or challenge a threat to "defund" them should (1) look to their grant requirements and see whether the threat is based on a condition found there, (2) determine whether the condition was unambiguous, and (3) assess whether the condition may involve a constitutional violation.
Other Important Developments
Buy American, Hire American Executive Order
Earlier this month, President Trump signed Executive Order 13788 (see 82 FR 18837), which aims to usher in a "new, more muscular Buy American policy based on the twin pillars of maximizing Made in America content and minimizing waiver and exceptions to Buy American laws." The Executive Order directs every federal agency to "scrupulously monitor, enforce, and comply with Buy American laws" as they apply to both federal contracts and grants. The order further tasks the U.S. Secretary of Commerce to review all agency findings and submit a report to the President within 220 days. The new Order seeks to minimize grants of waivers, and in particular will "more narrowly construe" public-interest waivers. The Order also requires federal agency heads to consider whether the cost advantage of a foreign-sourced product is the result of the use of dumped or subsidized goods. Additionally, the Order focuses on the role of Buy American laws in free trade agreements and, specifically, on whether the United States is getting its "fair share" of global government procurement when it treats foreign suppliers like American companies.
The Executive Order does not actually rescind any trade agreements or call for their renegotiation, but it does call for more information to determine which deals are working for America and which ones are not. Finally, the Order strongly reaffirms the "melted and poured" standard for U.S. steel production, without which semi-finished steel would be imported from countries like China and Russia. The Executive Order does not contemplate any immediate action; instead, it is an information-gathering exercise that may or may not result in changes in enforcement, legislation, or trade agreements. It is also a signal to countries that the United States wants a larger piece of the global government procurement pie. While we await the eventual outcome of the Executive Order, the various and often complicated compliance issues associated with Buy American laws remain intact, and should be broached with legal counsel, since—even with a greater articulation from the Trump administration about the government's approach to buying American—there is still no "one size fits all" Buy American test.
Note: All quotes were taken from the Office of the Press Secretary's "Background Briefing on Buy American, Hire American Executive Order" (April 17, 2017).
Trump Administration Lifts Federal Hiring Freeze
In our January newsletter, we discussed the Trump administration's imposition of a hiring freeze and noted potential complications it could create:
Practically speaking, the hiring freeze will likely increase government officials' workload, potentially lower morale, and likely result in elongated response time for all actions. In this environment, it is critical that nonprofit organizations properly and completely prepare and submit all submissions, including invoices or claims for reimbursement the first time, to avoid delays in processing.
On April 12, 2017, White House Budget Director Mick Mulvaney announced, however, that the administration was lifting the freeze. Mulvaney explained that the freeze was being replaced with a "smarter plan, a more strategic plan, a more surgical plan." The administration has not provided specific details on what this "more surgical plan" might entail, but certainly it is potentially good news that federal agencies may be able to add resources to assist in their ability to get the work done.
Potential Federal Government Shutdown
Unfortunately, we close this month's newsletter with the reality that we may all be facing a federal government shutdown by week's end. Various sources report that the Trump administration is looking to avoid a shutdown, but it is prudent for nonprofits to hope for the best and plan for the worst. In that vein, nonprofit grant recipients and contractors should heed the following:
- To the extent possible, reach out to your grant and contracting officers to clarify what will be expected should there be a shutdown. Will the federal agency be issuing stop-work orders? The last time the federal government shut down, many stop-work orders were issued; however, many federal agencies and contracting officials ran out of time.
- If a stop-work order is issued, what does that mean to any applicable delivery or program schedule? Is it expected that the schedule will be moved back by the same amount of time as the shutdown? Is that appropriate or fair to your organization?
- Of course, in the chaos that will inevitably ensue should a shutdown look imminent at the end of this week, you may have a difficult time reaching your contract or grant official. In that case, memorialize in an email your understanding of what you should be doing (based on whatever guidance you may have available) and/or your planned response to a shutdown and request their input prior to the shutdown. While the federal agency may ultimately disagree with the approach taken, it will be difficult for them to fault you for a reasonable course of action that you put in writing before taking such action.
- Track all costs associated with the shutdown. This of course includes any normal costs of labor or costs incurred in the performance of the effort, but also costs that result only from the shutdown, such as wind-down and ramp-up costs, which were not originally contemplated or factored into a budget. Tracking and recording these costs will better position a nonprofit to seek reimbursement for them.
Again, we hope the worst does not occur, but we hope that these simple tips will assist and protect your organization should we be faced with another federal government shutdown.