Imprudent and illegal?

The Minneapolis Federal Reserve’s lobbying for the Page Amendment undermines the bank’s independence and might just break the law.

In the Fall of 2019, Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, published a commentary in the Star Tribune with retired Minnesota Supreme Court Justice Alan Page announcing their partnership to “develop a fundamentally different approach to closing Minnesota’s [education] achievement gaps.” Since then, potentially in violation of the federal law, Kashkari has brazenly used federal dollars to lead a grassroots lobbying campaign to persuade state lawmakers to amend the education clause of Minnesota’s state constitution.

Center of the American Experiment is working to stop the Federal Reserve Bank of Minneapolis from continuing this illegal lobbying campaign. In a letter to members of the Federal Reserve Board who supervise the bank and the bank’s board of directors, American Experiment explained how this misuse of federal funds potentially violates the Anti-Lobbying Act, which would subject bank officials involved to a minimum civil penalty of $10,000. The letter further explains how the misuse of funds violates the Constitution’s separation of powers between the states and the federal government and undermines the independence and credibility of the bank.

The Page-Kashkari Amendment Debate

The proposed amendment has stirred up a passionate debate among Minnesotans. An informational hearing in the Minnesota House Education Policy Committee in March 2021 attracted written testimony from over 100 people and organizations.

Proponents of the Page-Kashkari Amendment argue the current constitutional framework does not provide strong enough guarantees to close the state’s widening achievement gap for low-income and minority children. The bank’s website states that Minnesota’s Supreme Court interprets the constitutional “language to mean that students have a fundamental right to an adequate education system,” and then argues: “No parent aspires for their child to have an adequate education.”

The proposed amendment, it says, would create “a fundamental right to a quality public education … as measured against uniform achievement standards.”

Opponents of the amendment cut across ideological and political lines. They argue it would jettison the current constitutional framework without providing a specific remedy or policy to close the achievement gap. Myron Orfield, a professor at the University of Minnesota Law School and former DFL state legislator, argued that “tying constitutionality to a qualitative academic achievement standard … creates the potential for chaotic litigation over minutiae of education policy.” Writing in the Star Tribune, Center of the American Experiment Senior Fellow Katherine Kersten likewise warned how, “rather than producing aca­demic gains, the Page-Kashkari amendment would open a Pandora’s box of lawsuits. Plaintiffs would sue to compel their own vision of ‘quality’ education, ranging from universal public-school preschool for the very youngest children, to comprehensive sex education, to racial quotas for students and teachers in every classroom.”

The Federal Reserve often provides research on policies related to the economy. However, in response to questions from the Wall Street Journal regarding Kashkari’s actions, former Federal Reserve Bank of Philadelphia President Charles Plosser explained, “Fed officials as a general rule avoid making political recommendations based on specific proposals, particularly ones unrelated to its scope of responsibilities.” In addition to a general rule, there is also a federal law that may restrict Federal Reserve officials.

Federal Law Bars Lobbying with Federal Funds

Congress enacted the Anti-Lobbying Act in 1919 to prohibit federal employees from using federal appropriations to lobby Congress. It amended the law in 2002 to substitute civil penalties, ranging from $10,000 to $100,000, in place of criminal penalties. Most pertinent to Kashkari and his staff, the prohibition now extends to lobbying with the purpose of influencing any government policy at every level of government, not just members of Congress. Therefore, federal law now prohibits lobbying to influence state legislators and citizen votes on a ballot measure.

Kashkari and his staff are potentially violating this law. For over two years, they have engaged in classic grass roots lobbying activities to persuade state legislators to put a constitutional amendment on the ballot and, ultimately, to influence Minnesota citizens to vote for it.

The bank maintains a regularly updated web page entirely devoted to promoting the adoption of the amendment which plainly states, “The Federal Reserve Bank of Minneapolis is proud to partner with a diverse, bipartisan coalition of people and organizations in support of the Page amendment.” They reinforce the message through regular email updates, tweets from the Bank, and commentaries by Kashkari published in local newspapers. Kashkari also enlisted Alene Tchourumoff, the bank’s Senior Vice President of Community Development and Engagement, to testify in favor of the amendment at the March policy committee hearing.

Moreover, the bank continues to hold a series of “community conversations” across the state that provide a public platform for school board members, teachers, and legislators to rally support for the amendment. They direct people to the Our Children website, the 501(c)(4) advocacy organization devoted “to build support to pass the Page Amendment.” In the clearest example of grass roots lobbying, they often call on attendees to contact their legislators.

The substantial nature of the Minneapolis Fed’s lobbying shows how egregiously the bank’s employees have misused public resources and breached the public trust, and helps inform the amount the offending Fed employees should be fined.

Statute Should Apply, Despite Fed’s Unique Character

While the Minneapolis Fed’s actions are clearly lobbying, Kashkari and the Fed’s lawyers will certainly argue the statute does not apply to the bank because it is a self-sustaining private banking corporation funded largely by the issuance of stock and interest.

The statute bans the use of congressional appropriations for lobbying. Also, one federal court suggests the ban only applies to “federal employees and agencies,” even after the 2002 amendment broadened the law’s application. Thus, if either of these factors don’t apply to the Minneapolis Fed’s actions, then the bank’s lawyers may be right.

The unique public and private structure of the Fed has long challenged courts when assessing whether various federal laws apply to the Fed Banks. Cases are mixed on whether the banks are agencies or instrumentalities of the federal government for the purposes of various federal laws. When courts do apply federal law to the banks, it’s usually regarding laws more in line with the Anti-Lobbying Act, which suggests the lobbying ban applies.

For instance, the Ninth Circuit held that the Federal Bribery Statute—located in the same chapter of the U.S. Code as the Anti-Lobbying Act—applies to an employee of the San Francisco Fed.

Some courts have concluded the banks are not funded by a federal appropriation for the purposes of other laws. However, those cases reference direct Congressional appropriations, and do not consider the full nature of what constitutes an appropriation. In one opinion, the Comptroller General of the United States explained that it, “has consistently held that the term ‘appropriated funds’ includes not only funds appropriated by Congress out of the Treasury, but also other funds specifically made available by statute for obligation and expenditure by a government entity.”

Funding for the Fed fits this Comptroller characterization of an appropriation. Congress authorizes the banks to earn income through issuing stock and charging interest, and Congress authorizes them to use this income to pay their expenses. Notably, Congress requires the banks to return earnings to the Treasury, after the expenses of the bank and other legally required payments are made. This powerfully demonstrates how Congress maintains its constitutional power of the purse over the Minneapolis Fed’s earnings.

While it’s not clear how a court would rule, this is a case where strong facts—a Fed Bank clearly abusing its independence—will weigh in favor of a court finding a violation.

Grave Constitutional Concerns

Beyond this potential violation of the Anti-Lobbying Act, Kashkari’s lobbying activities raise grave constitutional concerns. Under the U.S. Constitution, states hold dual sovereignty with the federal government. Justice Sandra Day O’Connor noted in Gregory v. Ashcroft that this is a fundamental principle of federalism “every schoolchild learns.” She further instructed, “[p]erhaps the principal benefit of the federalist system is a check on abuses of government power,” explaining that “a healthy balance of power between the States and the Federal Government will reduce the risk of tyranny and abuse from either front.”

Even modest steps taken by the Minneapolis Fed to directly influence state law upend this healthy balance. By using the Fed’s budget and clout, Kashkari directly interferes with the state of Minnesota’s sovereign right and responsibility to operate independently from the federal government. Indeed, the Fed is trying to influence an education policy that is entirely reserved to state lawmakers.

Meddling in state affairs is not among the limited powers the Constitution grants to the federal government. State sovereignty could lose all meaning if the federal government is empowered to freely wage campaigns to align states with federal policy.

Fed’s Independence Compounds the Problem

The Minneapolis Fed compounds these constitutional concerns because, by design, it operates independently. Because Congress authorizes the bank to collect revenue by issuing stock and charging interest independent from a direct Congressional appropriation, it operates largely outside the checks and balances that limit other federal agencies.

The Fed received this independence to allow it to freely set monetary policy apart from short-term political influence. Yet, the Minneapolis Fed is using this independence to testify in St. Paul and organize citizens to call state legislators. If this is lawful, then there is virtually no limit on the Minneapolis Fed’s state lobbying activity given the agency’s lack of accountability and unlimited funding stream. If activists within the Fed can allocate $100,000 to its current grass roots campaign, nothing would prevent a $1 million campaign, or more.

Clearly, the U.S. Constitution does not allow Congress to establish an independent government entity to collect interest from private banks to fund campaigns to influence changes in state law.

Undermines Bank’s Credibility

When confronted with criticisms from former Fed officials, Kashkari strongly defends the bank’s lobbying efforts. He cites the bank’s congressionally mandated goal of full employment and argues the Page-Kashkari Amendment is a tool to accomplish that because education is the most important determinant to meet that goal. Yet nearly every state policy impacts employment, from corporate taxation to electricity regulation to public welfare programs. If the Fed banks can influence state lawmakers to achieve full employment, then there is no limit to their meddling in state politics.

In an interview with the Minnesota Reformer, Kashkari mocks critics of the bank’s lobbying efforts by claiming they can’t argue on the substance and so must “reach to arguments like this.” He further impugns his opposition by claiming “there are a lot of people who don’t care about the education disparities in Minnesota.” Ironically, this response reveals how it’s Kashkari who can’t argue the substance and defend the bank’s lobbying. Instead, he resorts to suggesting his critics don’t care. Incredibly, on his Minneapolis Fed letterhead, Kashkari also resorted to telling highly regarded law professor Myron Orfield, a critic of the amendment, that his views “appear to be grounded in racism.” It’s hard to read Kashkari’s words as anything but a smear to bully and undermine an opponent. Whether or not you agree with his policies, the racism label does not stick on someone who has written as expansively on racial inequities in housing and schools as Orfield.

Kashkari’s hostile response to critics reveals how he’s set the Minneapolis Fed squarely on one side of a highly controversial, politicized issue. As Plosser, the former president of the Philadelphia Fed warned, “A real danger is that such actions can indirectly insert the Fed into the political process, undermining its case for independence.”

Unfortunately, the public now has good cause to question whether the Minneapolis Fed is advancing a political agenda through its research and education arm. It’s one thing to produce research on a particular economic policy from an independent perspective as the Fed regularly provides—such as research on the minimum wage or the housing market—but that independence falls away when research turns to advocacy.

Sen. Toomey Launches Review of “Woke” Fed

The Minneapolis Fed’s recent foray into hosting events and sponsoring research on structural racism and Critical Race Theory prompt similar questions about the bank’s motives and its case for independence. For example, a Minneapolis Fed working paper posted last summer studied whether investment subsidies offer a better reparations policy to reduce the racial wealth gap than wealth transfers.

The Fed’s engagement on these politically and emotionally charged social policy topics led Sen. Pat Toomey, the ranking member on the U.S. Senate Banking Committee, to launch a review into “woke mission creep by regional federal reserve banks.” In a press release, Toomey specifically cautioned Kashkari and the presidents of the Boston Fed and Atlanta Fed “on the reputational damage being inflicted on the [Minneapolis/ Atlanta/Boston] Fed and the Federal Reserve as a whole by pursuing a highly politicized social agenda unrelated to monetary policy.”

Real Solutions

Contrary to Kashkari’s claim, virtually everyone cares about the achievement gap. For decades, Center of the American Experiment has advocated expanding school choice to give disadvantaged kids immediate access to a better education. Senior Fellow Katherine Kersten recently highlighted the success of Mississippi’s intense early reading policy as a proven alternative to the proposed amendment that includes no plan. These insights flow from her substantial body of writing and research on the achievement gap published by American Experiment for many years.

For one more alternative, Gerald O’Driscoll, the former president of the Federal Reserve Bank of Dallas, suggested that if Kashkari “truly wants to help the education system, perhaps he should examine the role of the unions.” That’s another area where American Experiment leads.