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Municipal Market Update: Sanctuary Cities

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Soon after taking office, President Trump signed an Executive Order to cut federal funding from so-called sanctuary jurisdictions. Earlier this week, Attorney General Jeff Sessions said that approximately 200 localities have refused to honor federal requests to turn over undocumented immigrants and threatened to cut police money and claw back previous Justice Department grants. While it’s still unclear the exact amount of funds that may be withheld from sanctuary cities, due to legal precedent and politics, it is clear that this is a growing negative credit risk for some of the larger local issuers, and yet another reason we remain underweight the local sector.

The term ‘sanctuary city’ generally has no legal definition, although it is generally understood to mean any government jurisdiction (city, county, etc.) that is welcoming to undocumented immigrants and has laws or policies that limit the cooperation of local law enforcement with federal immigration officials. According to Immigration and Customs Enforcement Data there are 300 jurisdictions that could be characterized as sanctuary regions given policy or immigration enforce practices. As you can see in the list below, many of the largest cities in the U.S. are sanctuary governments and have reaffirmed their sanctuary status since the election.

Cities that reaffirmed their sanctuary status

Appleton, WI Detroit, MI New York, NY San Fransisco, CA
Ashland, OR Evanston, IL Newark, NJ Santa Fe, NM
Aurora, CO Hartford, CT Newton, MA Seattle, WA
Austin, TX Jersey City, NJ Oakland, CA Somerville, MA
Berkeley, CA Los Angeles, CA Philadelphia, PA St. Paul, MN
Boston, MA Madison, WI Phoenix, AZ Syracuse, NY
Cambridge, MA Minneapolis, MN Portland, OR Takoma Park, MD
Chicago, IL Nashville, TN Providence, RI Tuscon, AZ
Denver, CO New Haven, CT Richmond, CA Washington, DC

Cities that have no plans to change policies

Aberdeen, WA Las Vegas, NV New Orleans, LA Springfield, OR
Baltimore, MD Long Beach, CA Northampton, MA
Fresno, CA Mesa, AZ Princeton, NJ

Cities that formally declared sanctuary status since election

Santa Ana, CA Burlinton, VT Montpelier, VT Winooski, VT

Source: 12/12/16

Over $27bn in annual federal grants and direct payments flowed into America's 106 larger sanctuary cities in FY2016, according to the organization American Transparency. On average, these cities receive approximately 9.6% of their revenues from federal grants. While highly unlikely the cities would lose all of their funding, any revenue cuts would have a negative impact on these cities, which are still in recovery mode from the recession and are also dealing with significant and growing pension and entitlement expenditures. There will also likely be legal costs associated with defending sanctuary status and fighting the executive order. The city of San Francisco has already filed a federal lawsuit against the Trump administration arguing that the executive order violates states rights’ provisions of the Constitution. The threat of losing some federal funding has had a few reverse their sanctuary policy: Miami-Dade County voted to end its status last month and Texas passed a statewide bill to ban sanctuary cities in January.

Federal General Government Grant Funding By City

City State Federal Funding in $MMS Federal Funding Per Capita % of Governmental Funds Revenue
New York NY $7,665 $896 9.4%
Los Angeles CA $347 $87 5.0%
Chicago IL $765 $281 12.3%
Philadelphia PA $247 $158 4.1%
Phoenix AZ $222 $142 10.7%
San Diego CA $77 $55 4.1%
Dallas TX $225 $173 13.6%
San Jose CA $48 $46 3.3%
Austin TX $46 $49 4.3%
San Francisco CA $428 $495 8.0%
Columbus OH $243 $285 18.6%
Fort Worth TX $81 $97 9.1%
Charlotte NC $47 $57 5.3%
Seattle WA $98 $143 5.4%
Denver CO $257 $376 13.9%
Detroit MI $106 $157 8.1%
Washiginton DC $2,113 $3,144 18.2%
Boston MA $904 $1,356 27.6%
Nashville TN $190 $290 8.6%
Portland OR $23 $36 1.9%

Source: Openthebooks and Loop Capital Markets

Ultimately, the federal courts will likely rule on the constitutionality of the President’s ‘sanctuary cities’ order. Until then, the increased policy and fiscal uncertainty surrounding sanctuary cities and federal grants is likely to lead to greater negative headline risk and possible underperformance of the local sector. We continue to favor revenue bonds over local GOs because of the local sector’s high political risk, growing unfunded pension liabilities, and tight credit spreads.

The assertions in this perspective are Seix Investment Advisors’ opinion.

Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally, a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful.

This information and general market-related projections are based on information available at the time, are subject to change without notice, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their specific financial needs and goals before making any investment decisions.

Past performance is not indicative of future results.

©2017 Seix Investment Advisors LLC. Seix Investment Advisors is a registered investment adviser with the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms.