Last week, the Supreme Court agreed to hear a case challenging the constitutionality of the Consumer Financial Protection Bureau’s (CFPB) funding mechanism. Unlike most agencies, the CFPB is funded outside the regular appropriations process—an arrangement that the Fifth Circuit found unconstitutional, as it insulates the agency from congressional oversight. If the Supreme Court agrees, other creatively funded agency initiatives may also be in jeopardy—including the Universal Service Fund, whose off-budget funding mechanism is far murkier and less accountable than that of the CFPB.

The Community Financial Services Association of America, a trade association representing nonbank lenders, brought the case to challenge the CFPB’s 2017 regulations governing the payday lending industry. As part of its attack, the association challenged the agency’s constitutionality on numerous grounds. The Fifth Circuit rejected most of these claims but agreed that the agency’s funding mechanism was unconstitutional.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB receives funding directly from the Federal Reserve up to a statutorily fixed percentage of the Fed’s total budget. The Federal Reserve, in turn, is funded not from Congress but by a surcharge on banks. The act explicitly states that the CFPB’s funds “shall not be construed to be Government funds or appropriated moneys,” while Federal Reserve funds are not to be “subject to review by the Committees on Appropriations.” The Fifth Circuit found this was an unconstitutional delegation of Congress’s power of the purse in violation of the Appropriations Clause.  

Of course, the fact that the Supreme Court took the case does not mean it will uphold the Fifth Circuit’s holding. Supreme Court review was widely expected because the lower court’s decision declared an act of Congress unconstitutional and it directly conflicts with a decision of the DC Circuit Court, which are the two most common reasons for the Court to review a case. But it is not the first time that the justices have considered the unique protections that the Dodd-Frank Act provided the CFPB. In 2020, the Court found the statute’s limit on the president’s ability to remove the CFPB director was unconstitutional. In that decision, the Court expressed concern that the agency’s “financial freedom” from the appropriations process made it more difficult to hold the agency accountable to the people.

But the ruling has significant implications for other programs funded outside the appropriations process. One of the most egregious examples is the Universal Service Fund. This program is funded by a quarterly surcharge on interstate and international telecommunications revenue. Each quarter, a private nonprofit known as the Universal Service Administrative Company (USAC) estimates how much money it needs to fund the Federal Communications Commission’s (FCC) myriad universal service initiatives. It also estimates the telecommunications revenue expected to be generated by industry, and from there it calculates the surcharge percentage necessary to cover program costs. USAC proposes this surcharge amount to the agency, and it is “deemed approved” if the agency takes no action to change it within 14 days of publication.

In other words, USAC determines its own budget to administer the program and then sets the tax rate it needs to cover that budget. At most, this process receives perfunctory FCC review but no congressional oversight. Like the CFPB, USAC operates off-budget and is insulated from the appropriations process. Unsurprisingly, this lack of accountability has deleterious effects. Since the fund’s inception in 1996, the political appetite for universal service initiatives has grown while the revenue base supporting the fund has contracted, causing the surcharge to skyrocket from 3 percent in 1998 to a whopping 32.6 percent today. And the fund’s history is littered with allegations of waste, fraud, and abuse. As I have discussed elsewhere, the constitutionality of this structure is currently being litigated in the Fifth Circuit, the same court that struck down the CFPB’s structure.

Ultimately, the Supreme Court may not uphold the Fifth Circuit’s decision. But the thrust of the lower court’s decision is correct. Whether unconstitutional or merely bad policy, these off-budget funding schemes are designed to shield agencies from democratic accountability. In Federalist 58, James Madison explained that “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, for obtaining a redress of every grievance.” Abdicating this power erodes transparency and accountability, closing an avenue by which the people may seek redress for the excesses of an increasingly undemocratic administrative state.

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