The Obama administration is considering whether North Carolina’s new law on gay and transgender rights makes the state ineligible for billions of dollars in federal aid for schools, highways and housing, officials said Friday.
Cutting off any federal money – or even simply threatening to do so – would put major new pressure on North Carolina to repeal the law, which eliminated local protections for gay and transgender people and restricted which bathrooms transgender people can use. A loss of federal money could send the state into a budget crisis and jeopardize services that are central to daily life.
Although experts said such a drastic step was unlikely, at least immediately, the administration’s review puts North Carolina on notice that the new law could have financial consequences. Gov. Pat McCrory had assured residents that the law would not jeopardize federal money for education.
But the law also represents a test for the Obama administration, which has declared that the fight for gay and transgender rights is a continuation of the civil rights era. The North Carolina dispute forces the administration to decide how aggressively to fight on that principle.
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The North Carolina law created a mandatory statewide anti-discrimination policy, but it did not include specific protections based on sexual orientation or gender identity. The law prohibits transgender people from using public bathrooms that do not match the sexes on their birth certificates.
Anthony Foxx, the U.S. secretary of transportation and a former Charlotte mayor, first raised the prospect of a review of federal funding in public remarks Tuesday in North Carolina. The Department of Transportation provides roughly $1 billion a year to North Carolina. The New York Times then asked other federal agencies whether they were conducting similar reviews.
A Department of Education spokeswoman, Dorie Nolt, said Friday that her agency was also reviewing the North Carolina law “to determine any potential impact on the state’s federal education funding.”
She added, “We will not hesitate to act if students’ civil rights are being violated.”
The agency said it provided $4.3 billion to North Carolina last year for kindergarten through 12th grade as well as colleges.
The Department of Housing and Urban Development said it was doing a similar evaluation.
“We’re reviewing the effects of the law on HUD funding allocated for North Carolina,” said Cameron French, a department spokesman.
White House officials had no comment.
Any decision on federal aid would take time, experts said. Federal agencies have successfully used the threat of lost money to pressure a handful of municipal governments in California and Illinois to change their policies and allow transgender students to use the restrooms of the gender with which they identify. There is no recent precedent for the federal government applying similar pressure to address a state law that it sees as discriminatory.
“It would be a long process of negotiation,” said Jane Wettach, an education law specialist at the Duke University School of Law in Durham. “I think the federal government would be loath to do it and would give North Carolina every possibility, every chance to change their position, to change the law, to negotiate, to make some exceptions. I think they’d go back and forth for a while and try to come to a negotiated settlement.”
McCrory, a Republican who is seeking re-election, and other supporters of the law have been aware, but dismissive, of suggestions that the measure might endanger the state’s federal largesse. McCrory’s office did not respond to messages Friday.
Dan Forest, the Republican lieutenant governor and the president of the state Senate, said he expected that federal aid would continue to flow. He noted that many states do not explicitly provide gay and transgender people with anti-discrimination protection. Neither does federal law.
“It would be wrong – even illegal – to single out North Carolina for unfavorable treatment,” Forest said in an emailed statement. He said the state complied with the Constitution and federal laws. “I’m confident that we will continue to receive this federal money despite the threats from a few in Washington, D.C.”
Forest is correct that federal anti-discrimination laws do not explicitly mention gay and transgender people: The Obama administration has repeatedly called on Congress to pass a law banning discrimination against them in employment decisions. On several occasions, however, the administration has also said that gay, lesbian and transgender people are already covered by laws banning sex discrimination.
Last year, a federal judge in Virginia rejected that notion, ruling that restricting the bathroom choices for transgender students did not violate federal law. The Obama administration had argued otherwise, and the case is on appeal.
The Obama administration would not need to go to court to withhold grant money, but doing so would surely lead to a court fight, especially since the law is unsettled.
Advocacy groups have praised the Obama administration for its broad view of civil rights laws. During the past seven years, “the fight for lesbian, gay, bisexual and transgender equality has reached an incredible crescendo,” Attorney General Loretta Lynch said last year.
James Esseks, who works on gender and sexual orientation issues for the American Civil Liberties Union, said the North Carolina law represented a chance for the Obama administration to stand behind those views.
He called on the federal government to say, “Hey folks, we’re serious here. We’re not going to give you all this federal money if you’re requiring discrimination in every corner of the state.”
North Carolina has faced criticism from businesses including Bank of America, which has its headquarters in Charlotte, Apple and Facebook. The NBA suggested that it might move the 2017 All-Star Game from Charlotte. The White House called the law “mean-spirited.”
In a video message Tuesday, McCrory complained about “a vicious, nationwide smear campaign,” and he lashed out at critics in his state, including Attorney General Roy Cooper, and beyond North Carolina. Lawmakers had said that they were trying to prevent men from dressing as women to enter bathrooms and commit assaults.
Critics said there was no evidence that had happened.
“Disregarding the facts, other politicians – from the White House to mayors to state capitals and City Council members and even our attorney general – have initiated and promoted conflict to advance their political agenda and tear down our state, even if it means defying the Constitution and their oath of office,” McCrory said.