This is the eighth and final post in the FCRA Non-Federal Series

FCRA treatment for federal infrastructure program loans to federally involved projects looks problematic on the surface.  But as I’ve focused on the issue over the course of the last seven posts in this series, it increasingly appeared to be straightforward. Going forward, it should not be difficult to implement efficient and effective FCRA screening procedures for loans to federally involved projects. Here are five basic conclusions that I think would be useful towards that goal:

1) The relevant principles are clear.

There are two from the 1967 Report. The first, and most fundamental, is that any federally connected economic activity not subject to external, non-federal discipline should be included in the federal budget. The second, central to FCRA, is that federal program loans require separate treatment in the budget because they include a repayment obligation and most of the loan’s cash flows will reverse over time. FCRA methodology essentially excludes the loan’s reversing cash flows and includes only the net amount as a subsidy in the cash-based budget. Implicit in this methodology is that the reversing cash flows can be properly excluded from the cash-based budget solely because they are subject to external, non-federal discipline. If they are not, the loan can’t be included in the budget’s separate FCRA section — in effect, the first principle prevails. I think this is precisely what FCRA law intended in its definition of a direct loan to a “non-Federal borrower under a contract that requires the repayment…” Not more, not less.

2) Criteria based on these principles can be simple and practical.

With these two principles, FCRA screening criteria can be narrowly focused on the substantive borrower and (more importantly) the substantive source of repayment. Who benefits from the loan and who is obligated to use their resources to repay it? In the real-world of infrastructure non-recourse project finance, the two are usually the same. The first and most fundamental criterion is very simple — loan repayment must come from a non-federal entity using non-federal resources for that repayment. Even in a complex project financing, the source of loan repayment will be explicit, thoroughly documented and extensively analyzed (e.g., by rating agencies). This criterion should produce an unambiguous result quickly and efficiently using easily accessible information. Secondary criteria focused on the independence of the repayment decision and the connection between loan benefits and repayment sources can be used to refine the evaluation in equally efficient ways. Optional criteria can confirm that a loan’s FCRA treatment will not interfere in other program eligibility standards or policy objectives and that the federal participant’s budget will be consistent with the results. These explicit, principle-based criteria should produce predictable and unambiguous results, allowing potential applicants to self-screen effectively.

3) These principle-based criteria can be used as guidance to answer WIFIA’s FCRA screening questions.

The ‘criteria’ published by EPA and OMB in 2020 are in fact questions that only imply the criteria being used. This approach is not transparent or efficient, but as questions they can — and should — be answered in accordance with explicit principle-based criteria. There is nothing wrong with asking applicants for more readily accessible information and OMB’s implied criteria should (in theory) be consistent with the explicit criteria because both are based on the same principles. OMB and EPA can develop or at least approve guidance for answering their questions with reference to explicit criteria that can be available in the program guide or website. This approach will not require any change to the published ‘criteria’ and should not be difficult to implement.

4) HR 8127’s proposed amendment is also consistent with the relevant principles.

The FCRA treatment amendment proposed in HR 8127 is completely consistent with the first fundamental principle described above and the criteria that flow from it. A statutory fix would be ideal, if possible. An alternative, lower-impact approach would change the amendment to a requirement that OMB, EPA and the Army Corps develop the guidance described in the prior conclusion.

5) Analogous principles apply to the prohibition of federal guarantees for tax-exempt bonds.

The fundamental principles of FCRA treatment appear to be substantively the same as those applied by the IRS in determining the tax-exempt status of bonds that might be considered federally guaranteed. As a result, a federally involved project that issues fully compliant tax-exempt bonds should be expected to receive FCRA treatment for a program loan that is basically equivalent (e.g., same borrower, security, repayment sources, etc.). Inconsistent treatment would be exceptional. Existing or planned tax-exempt bond issues (or lack thereof due to an adverse IRS decision) can be a useful indicator of FCRA treatment for program loans to federally involved projects.

This is the seventh post in the FCRA Non-Federal Series

FCRA is not the only federal law that needs to make a distinction between federal and non-federal debt repayment sources. Federal tax law has this at IRC § 149 (b):

(b) Federally guaranteed bond is not tax exempt

(1) In general Section 103(a) shall not apply to any State or local bond if such bond is federally guaranteed.

(2) Federally guaranteed defined. For purposes of paragraph (1), a bond is federally guaranteed if:

(A) the payment of principal or interest with respect to such bond is guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof) …..

(C) the payment of principal or interest on such bond is otherwise indirectly guaranteed (in whole or in part) by the United States (or an agency or instrumentality thereof).

The primary purpose of this prohibition is to prevent the creation of a class of ‘tax-exempt Treasury bonds’ that would compete with Treasury’s taxable issues.  It is another example of a rule that determines federal boundaries for certain debt-related activities.  Federal debt isn’t eligible for tax-exempt status (which would interfere with Treasury’s management of the nation’s debt) or for FCRA treatment (which would undermine the accuracy of the nation’s budget).    

The same issue arises in both cases – short of explicit federal guarantees or repayment obligations, when is the debt ‘federal’ or ‘non-federal’?  Just as in the FCRA non-federal issue, it can be complicated for the application of IRC 149 (b) (emphasis added):

The prohibition under section 149 applies not only to direct guarantees, but also in circumstances where an underlying arrangement may result in the federal government indirectly guaranteeing debt service on an obligation. Congress intended that the determination of whether a federal guarantee exists be based on the underlying economic substance of a transaction, taking into account all facts and circumstances. See H.R. Rep. No. 99-426, at 1013 (1985),1986-3 (Vol. 2) C.B. 538.

For both IRC 149 (b) and FCRA, the underlying economic substance of the transaction must be examined with respect to federal involvement, not the nominal forms. This is because the substance of the transaction is what matters for the rule’s objective — for the former, to avoid the creation of securities that the market would view as effectively tax-exempt Treasuries, and for the latter, to ensure that a FCRA loan’s repayment obligation is subject to external, non-federal discipline.

In 2003, the IRS released a Private Letter Ruling concerning a facility’s ability to issue tax-exempt bonds despite significant federal contractual involvement in various activities at the facility, some of which directly or indirectly created revenues which could be used for bond debt service. The question was whether such federal involvement was a de facto guarantee of the bonds. The decision focused on the facts related to the transfer of risk in the bonds’ repayment obligations (emphasis added):

Based on the facts and circumstances, the payments to the Organization under the Contracts will not cause the Bonds to be federally guaranteed within the meaning of section 149(b). Although the revenues from the Facility will consist primarily of amounts received from the Agencies, the mere fact that federal funds may be available to pay debt service on the Bonds does not result in an indirect federal guarantee. Rather, the question is whether the substance of the transaction (i.e., the contractual relationships between the Organization and the Agencies) results in a transfer of risk to the federal government to pay debt service on the Bonds.

Despite the federal revenues and other activities (which presumably enhanced the overall creditworthiness of the facility’s bonds), the IRS didn’t find that the federal government was at risk for the bonds’ repayment:

In the instant case, there has been no transfer of risk to the federal government to pay debt service on the Bonds.  There is no guaranteed stream of revenues from the Agencies that is available to pay debt service on the Bonds.  Unlike a guarantee, the Agencies have no obligation to make payments of debt service upon a default on the Bonds.  Rather, any payments from the Agencies are subject to the Organization’s fulfillment of its obligations under the Contracts.  Moreover, payments under the Contracts are subject to the Agencies’ receipt of funds pursuant to annual appropriations. Thus, there is no transfer of risk to the federal government to pay debt service on the Bonds in the event of a default and the Bonds will not be federally guaranteed within the meaning of section 149(b).

Although this is a federal tax ruling, the ‘risk transfer’ principle here is completely consistent with the federal budget’s external discipline principle described in the 1967 Report. If the federal participant in a project is, or could be, substantively obligated to repay the project’s debt, the project’s lenders won’t be looking to the project for repayment, but to the federal government. The debt effectively becomes subject only to internal federal discipline. This outcome is prohibited by IRS and Treasury (because their internal decision is to avoid creating tax-exempt Treasury bonds) and examined by infrastructure loan programs with respect to FCRA treatment (because FCRA requires external, non-federal discipline on repayment cash flows).

Because IRC 149 (b) and FCRA decisions for federally involved projects will involve looking at the same facts in basically the same way, I think that a decision in one can serve as an analogous precedent for, or at least provide guidance to, the other. An infrastructure loan program faced with an application from a federally involved project should ask whether the project intends to issue tax-exempt bonds with the same repayment sources as the proposed program loan (in a prior post, I noted this idea in the explanation of Criterion F and in the guidance for WIFIA’s question 11).

There’s no evidence I’ve found that that Treasury pointed out the possible relevance of IRC 149 (b) in developing the WIFIA ‘criteria’. I think this suggests that, despite the Congressional directive and their ultimate sign-off on the published criteria, Treasury wasn’t very involved in the criteria’s development.

IRC 149 (b) and FCRA at Amtrak and Fargo-Moorhead

There are at least two recent cases where federally involved entities issued tax-exempt debt and applied to a federal infrastructure loan program.

The first is Amtrak. As an independent federal agency, Amtrak doesn’t issue tax-exempt debt, presumably because their direct debt would be perceived to carry an implied federal guarantee. But in the agency’s 2021 financial statement, there’s a note describing an Amtrak maintenance facility, subject to a lease-leaseback with a local development authority, that did issue about $100 million of tax-exempt revenue bonds. Presumably, despite Amtrak’s substantial involvement in the facility, the tax opinion was based on factors similar to those in the 2003 PLR described above. Apparently, there wasn’t a risk of an Amtrak obligation to repay the bonds, so the IRC 149 (b) prohibition didn’t apply.

Later in that statement, there’s a note describing a $2.45 billion loan from the RRIF federal program in 2016. RRIF’s analysis of this loan for FCRA treatment was also mentioned in the GAO Report. Per the GAO, the program said that they “ensured the 2016 …loan provided to Amtrak was fully repayable by Northeast Corridor revenues. DOT officials assessed Amtrak’s available revenues and did not consider any federal assistance as a repayment source for the loan.”

It appears that for both IRC 149 (b) and FCRA tests applied here with consistent outcomes, the non-federal source of repayment was the key factor, whereas Amtrak’s overall status as an independent federal agency was not.

The second case is the Fargo-Moorhead project, which received a $569 million WIFIA loan in 2021. The loan received FCRA treatment prior to the implementation of current WIFIA ‘criteria’, but “EPA officials told [the GAO] that if the criteria had been in place during the letter of interest review of the Fargo-Moorhead project, the project would have been deemed ineligible to receive the special budgetary treatment under FCRA.”

Yet later in 2021, the same project issued $280 million of tax-exempt private activity bonds through a state development authority. There isn’t much publicly available information about the details, but it seems that the bonds were part of the $2.75 billion P3 financing that included the WIFIA loan, so some basic terms (e.g., security, repayment sources, etc.) would presumably be similar. I think PABs get even more scrutiny regarding tax-exempt status than typical bonds, so it would appear that the project’s federal involvement was not an issue for IRC 149 (b).

If the project’s WIFIA loan and PABs were in fact essentially equivalent with respect to a non-federal source of repayment, how can the loan’s retrospective ineligibility for FCRA treatment under the new ‘criteria’ be consistent with the tax-exempt status of the PABs? I find it difficult to see how both can be a correct assessment of the project’s debt.

This is the sixth post in the FCRA Non-Federal Series

In June 2022, HR 8127, The Water Infrastructure Finance and Innovation Act Amendments of 2022, was introduced in Congress.  Section 7 of this bill proposes a simple statutory fix to WIFIA’s FCRA issue based on the non-federal sources of loan repayment:

SEC. 5037 BUDGETARY TREATMENT OF CERTAIN AMOUNTS OF FINANCIAL ASSISTANCE. If the recipient of financial assistance for a project under this subtitle is an eligible entity other than a Federal entity, agency, or instrumentality, and the dedicated sources of repayment of that financial assistance are non-Federal revenue sources, such financial assistance shall, for purposes of budgetary treatment under the Federal Credit Reform Act of 1990 (2 U.S.C. 661 et seq.) — (1) be deemed to be non-Federal; and (2) be treated as a direct loan or loan guarantee (as such terms are defined, respectively, in such Act).

This admirably lapidary language goes right the core of the FCRA non-federal issue and is consistent with everything I’ve reviewed so far.  It closely tracks the stated criteria outlined in the prior post in this series:

• The “recipient of financial assistance… other than a Federal entity, agency, or instrumentality” is essentially what I mean by a ‘non-federal entity’ in Criterion B, with the consistent implication that it is also the ‘primary beneficiary’ of such financial assistance in Criterion D.

• Criterion B’s requirement for non-federal repayment sources is then captured by the next condition: “…and the dedicated sources of repayment of that financial assistance are non-Federal revenue sources”.

• Criterion E’s requirement for a siloed approach to FCRA treatment is I think also subtly reflected by this part: “…for a project under this subtitle is an eligible entity…”.  In other words, a WIFIA-eligible project can be a federal entity, but it won’t pass the two conditionals (non-federal entity and non-federal repayment) and therefore won’t get the FCRA treatment specified in the (1) and (2) clauses.  The proposed amendment doesn’t mess with WIFIA’s statutory eligibility, it simply clarifies budgetary treatment.

Perhaps some parts could be expanded for the avoidance of doubt – a confirmation that the non-federal recipient’s decision was not federally coerced (Criterion C), an explicit connection between the use of the program loan for non-federal recipient’s part of project construction and non-federal repayment (Criterion D) and may even a requirement for budgetary consistency from the project’s federal participants (Criterion F). But these details are optional in a statutory approach and could be addressed separately elsewhere.

Resistance to a Statutory Fix

In an ideal world, a statutory fix for the FCRA non-federal issue is the optimal approach and I think HR 8127’s proposed amendment works very well for that purpose.  On the surface, FCRA law’s silence on program loans to federally involved projects looks like a difficult problem.  But as I’ve plowed through the primary sources in this series, I’ve seen that it really isn’t.  The budgetary principles behind the creation of FCRA are clear and consistent with those of the overall federal budget.  They can be applied to federally involved projects in a straightforward way, as the proposed amendment does effectively and efficiently.  If explained carefully, surely everyone will see this and agree that the amendment is a simple fix that allows WIFIA and especially CWIFP to get on with the critical mission of improving US water infrastructure?

Maybe not.  In the real world of political and bureaucratic processes, I foresee resistance to this statutory fix, regardless of its clarity and correctness:

• The biggest one is that HR 8127’s amendment for WIFIA’s FCRA treatment is in effect an amendment of FCRA itself.  How can the central definition in a law that is meant to determine the uniform budgetary treatment for all federal credit programs be effectively re-defined per a statutory requirement at a particular program?  That’s not to say that the amendment’s definition wouldn’t work for FCRA (it simply clarifies what I think is already implied by the language of FCRA’s direct loan definition) but as a matter of process, I don’t think it’s easy to change a big, well-established law in a piecemeal way.  This kind of objection can’t be answered by pointing out the substantive merits of the proposed amendment.  If it is raised, the likely outcome is only an agreement that, ‘yes, that’s a good idea for amending FCRA someday, but for now we can’t do it just for WIFIA’.

• I expect OMB will defend their work. HR 8127’s amendment will not only replace OMB’s published ‘criteria’ for WIFIA, explaining why the amendment is correct will expose their ‘criteria’ as hopelessly wrong.  As criteria they are in fact hopeless but trying to prove that will be difficult precisely because they are only implied, never clearly stated.  Even basic definitions of ‘borrower’, ‘project’, ‘beneficiaries’, etc. can slip and slide all over the place.  And OMB, as the agency responsible for federal budget accuracy, will have the high ground at every turn.   Their real motives might be closer to saving face and maintaining bureaucratic authority in all technical budget matters, but does that ever matter? If you can’t prove why WIFIA’s current ‘criteria’ are inadequate in the elevated context of budget theory, you can’t show why the amendment is necessary without some appeal to real-world expediency. The optics of that aren’t great.

• OMB won’t be the only one defending the status quo.  As noted in the introductory post of this series, it’s hard to tell why a technical clarification of FCRA for federally involved projects became such a heated issue.  But it did, and the parties involved will have a stake in maintaining that their solution, however imperfect in reality, is the right one.

An Alternative Approach

A statutory fix for WIFIA’s FCRA non-federal issue is likely to be a tough fight.  Again, it won’t have much to do with the merits of HR 8127’s amendment but with other factors that are irrelevant to the objective, which is to permit the full and efficient implementation of WIFIA’s and CWIFP’s policy mission.  Is this a fight worth having now?  Perhaps it is – I don’t know the complete story.

But if a multi-factor fight is not in fact useful to HR 8127’s stakeholders, I think there may be another approach that avoids unnecessary confrontation and focuses instead on ensuring that the essence of the amendment becomes the de facto interpretation of FCRA at WIFIA and CWIFP.

In the prior post in this series, I showed that WIFIA’s eighteen questions posing as ‘criteria’ could be interpreted and answered in the context of guidance for six stated criteria solidly based on the primary sources mandated in the Congressional directive.  Although some of the guidance had to work around the implied (but erroneous) intent of the questions, I think the answers would lead to the right conclusion for federal involved projects with genuinely non-federal entities and repayment sources.  It was not a difficult exercise – primarily because, as mentioned above, FCRA treatment for federally involved projects is not a difficult issue. In this approach, the fact that the published ‘criteria’ are questions is useful because guidance for potential WIFIA applicants to answer them is justified — and that’s where the real criteria can be placed.

The HR 8127 amendment is completely consistent with the six criteria I was using, so the same guidance exercise will work as well.  Why not make it official?  As opposed to an amendment with the criteria, HR 8127 could include an instruction that requires WIFIA and CWIFP to develop guidance for applicants in answering the questions in OMB’s published ‘criteria’.  The need for such guidance in a technical area can be demonstrated without any reference to budget principles or even criticism of the current ‘criteria’ – what might look like expediency in a budget context is now simply evidence of the necessity to improve the implementation of statutory policy objectives.  OMB’s approval of the guidance will be required one way or another, so their involvement should be mentioned in the instruction. That might mean a fight.  But it will be on a much smaller, quieter scale, without face-saving and authority factors being involved.  Or perhaps OMB will have little interest in dealing with this issue once again and tacitly agree with the guidance’s criteria, especially if there’s a possibility that a more public resolution will be necessary if the guidance approach doesn’t work.  

Maybe something like this, referencing back to the sources mandated by the Congressional directive:

SEC. [  ] WIFIA CRITERIA GUIDANCE  Not later than [90] days after the date of enactment of this Act, the Secretary of the Army, acting through the Chief of Engineers together with The Administrator of the Environmental Protection Agency and the Director of the Office of Management and Budget, shall jointly develop guidance for loan program applicants in answering the questions listed in WIFIA Criteria Pursuant to the Further Consolidated Appropriations Act, 2020 as published in the Federal Register June 30, 2020, such guidance being consistent with the requirements for the budgetary treatment provided for in section 504 of the Federal Credit Reform Act of 1990 and based on the recommendations contained in the 1967 Report of the President’s Commission on Budget Concepts.

The problem with the WIFIA ‘criteria’ published in June 2020 is that they are not criteria, they’re questions that imply criteria being used by OMB off stage. Not a very transparent approach. This is discussed in detail in a prior post.

Well, why not fill in the blanks with explicit criteria developed from the sources specified by the Congressional directive — FCRA law and the 1967 Report? I came up with six based on the language & principles stated in those sources, and consistent with the CBO Report as well.

Using these six criteria as a guide, answers to WIFIA’s questions about federally involved projects can be much more straightforward — and informative. Which is the point, right?

• (A) There must be a substantive obligation to repay the program loan.

• (B) The substantive obligation to repay the loan must be from a non-federal entity using non-federal resources.

• (C) The substantive obligation to repay the loan must be the result of an independent decision by a non-federal entity and not directly or indirectly compelled by the federal government.

• (D) The non-federal entity obligated to repay the loan should also be the primary beneficiary of the capital improvements financed by the loan’s proceeds.  

• (E) FCRA treatment should be evaluated independently of the loan program’s other federal policy objectives, eligibility requirements or selection criteria. 

• (F) FCRA treatment for a specific loan should be consistent with the federal participant’s budgeting and tax treatment for the program loan and all equivalent non-federal debt of the project.

This is the fifth post in the FCRA Non-Federal Series

In June 2020, EPA, OMB and Treasury published WIFIA Criteria Pursuant to the Further Consolidated Appropriations Act, 2020 in the Federal Register.  At publication, these FCRA non-federal criteria became applicable to loans being considered by the WIFIA program, including the sections sharing WIFIA’s statutory framework, SWIFIA and CWIFP.

General Observations

Before getting into the specifics, here are a few general observations about the WIFIA criteria:

• Despite the Congressional directive language and the Federal Register title, these aren’t ‘criteria’, but 18 questions that imply criteria being applied by OMB offstage [1].  What was the reason for this somewhat non-transparent approach?  If I had to guess, I’d say it reflects some uncertainty at OMB and EPA about how the criteria are supposed to work, other than giving WIFIA the ability to reject a project application with practically any degree of federal involvement.  The GAO Report’s description of OMB’s thinking is consistent with this interpretation.  Perhaps the huge pressure to get something published by a deadline was also a factor?

• The only budget principle mentioned in the Federal Register publication is the ‘when in doubt, include it’ guidance from the 1967 Report.  As discussed in several prior posts, there’s no question that a loan from a federal loan program will be included in the federal budget – the loan’s FCRA treatment is the specific issue that the criteria should elucidate.  Yet many of the questions seem to be directed at determining whether the federal participant should be including more (all?) of the project’s non-federal cash flows in its federal budget.  If that’s an issue, it will exist regardless of a program loan and likely involve much larger cash flows (e.g., all the project’s non-recourse debt and equity capitalization, all the construction cash flows, all the O&M, etc.).  That seems to be a more fundamental budgeting problem – shouldn’t OMB address it directly with the federal participant?

• It’s hard to see how OMB’s questions fundamentally differ from the many questions and required information involved in any federal infrastructure loan application.  Much of the basic data sought will be the same for both.  And the program can always ask for more.  Information for a loan’s FCRA treatment is effectively statutorily required in a WIFIA application through the program’s mandated budgeting for credit subsidy allocation (§ 3901 (13)) and selection criteria (§ 3907 (b)(E)).  If more detail is required in the case of a federally involved project, this could have been accomplished with additional questions in the application materials and specific guidance in WIFIA’s program guide, just as it’s done for any other statutory standard.  Of course, the Congressional directive required publication of OMB’s criteria in the Federal Register, so the usual approach wasn’t possible in this case.  Still, there’s some dissonance here.  I can see why a statement of criteria and associated principles would belong in the Federal Register as a sort of ‘official pronouncement’.  But questions to elucidate the application of criteria in specific cases would seem to belong at the loan application process level.

Six Criteria for FCRA Treatment of a Program Loan to a Federally Involved Project

The FCRA non-federal issue is important and there’s nothing wrong with asking a federally involved project applicant to provide more information.  But in this series, we’re interested in how the FCRA non-federal issue can be efficiently resolved.  For that purpose, OMB’s questions don’t shed much light on how the information will be used to determine FCRA treatment in specific cases because the evaluation criteria are only implied, not stated.  Trying to guess the criteria OMB is using from the questions being asked is perhaps an interesting intellectual exercise, but I don’t see much practical value in it.

Instead, I’m going to approach OMB’s questions by providing the missing criteria myself, based on the reviews of the 1967 Report, the CBO Report, and the GAO Report in prior posts.  I think the budgeting principles that surfaced in those reviews are clear, consistent with each other, and precisely applicable to the FCRA non-federal issue.  The necessary criteria – I think there are six — seem to flow naturally from them.  If I’m wrong, at least this approach provides a more defined framework for future development than OMB’s questions alone.

Here they are, with reference to the principles behind them:

• (A) There must be a substantive obligation to repay the loan.  According to the 1967 Report, the distinguishing characteristic of a loan and the basis for its separate (i.e., eventually FCRA) treatment in the federal budget is the obligation to repay.  This obligation must be defined and substantial – if it’s not, the loan is effectively a grant and not eligible for FCRA treatment.

• (B) The substantive obligation to repay the program loan must be from a non-federal entity using non-federal resources.  In the 1967 Report, the core principle of budget inclusion for an activity is the fact that it is not ‘subject to economic disciplines of the marketplace’ and hence must be subject to the internal discipline of the federal budget.  For the FCRA non-federal issue, the term ‘marketplace’ is logically expanded to include non-federal economic actors like local or regional communities and their agencies.  The external discipline principle can be extrapolated to FCRA:  If a program loan’s repayment cash flows (net of subsidy) are not subject to the discipline of non-federal entities deciding to use their non-federal resources to pay them, then those cash flows are federal and must be subject to the internal discipline of the cash-based budget.  I think this is precisely what FCRA law meant in section 504 (1) in defining an eligible loan as “a disbursement of funds by the Government to a non-Federal borrower under a contract that requires the repayment of such funds”.  The substantive non-federal obligation to repay is the key factor, not the nominal characterization of the borrower.  The people drafting FCRA law would have had the 1967 Report right in front of them.  Perhaps they thought that the principles underlying their use of the term ‘non-Federal borrower’ in the definition were so clear that further explanation was not necessary.  If so, that would put FCRA’s ‘silence’ about program loans to federally involved projects in a different light.

• (C) The substantive obligation to repay must be an independent decision by the non-federal entity and not compelled in some way by the federal government.  If the use of federal sovereign power is subverting the external discipline that non-federal entities would otherwise bring to bear on an activity, then the activity becomes federal and should be subject to the internal discipline of the federal budget.  If the activity in question is a program loan, it shouldn’t be eligible for FCRA treatment.  This is consistent with the CBO Report’s scoring criteria about the exercise of federal sovereign power.  But for FCRA, it should be interpreted precisely in connection with the non-federal entity’s decision to repay the program loan.  If a federal participant uses sovereign power to help create or even enable a very useful project, that does not necessarily determine that a non-federal entity will agree to repay financing associated with it.  

• (D) The non-federal entity obligated to repay the loan is also the primary beneficiary of the capital improvements financed by the loan’s proceeds.  Unless there is an explicit statement of philanthropic or patriotic intent, it probably can be safely assumed that a rational non-federal entity will only agree to repay the program loan for its own benefit.  But I think for federal infrastructure loan programs, which primarily finance specific capital expenditures, confirmation of this can (and should) be made more explicit, especially in the case of large multi-part projects.  There should be a more-or-less direct connection between the use of loan proceeds for construction of those parts of the project benefiting a non-federal entity and the same entity’s obligation to repay the loan.   Notwithstanding any eminent domain power, scale economies, or efficiencies that a federal participant might bring to the project, the benefit-cost metrics of a large basic infrastructure project are necessarily limited by physical reality and the cost of construction.  Connecting the use of program loan proceeds and the non-federal entity’s benefits will help ensure that there’s some rough parity between the two, and that the non-federal entity’s decision to repay is substantive in terms of the allocation of real resources. 

• (E) FCRA treatment should be evaluated independently of the loan program’s other federal policy objectives, eligibility requirements or selection criteria.  The 1967 Report makes it clear that FCRA is a unique section of the federal budget and intended for a very specific purpose.  Its only policy objective is to ensure that a loan’s non-federal repayment cash flows don’t distort the cash-based federal budget.    FCRA decisions shouldn’t influence, or be influenced by, other loan program factors.  FCRA treatment shouldn’t be used as an indirect way to insert new selection criteria about a project’s overall level of federal support, change the program’s statutory eligibility requirements, or reinforce unrelated federal budgeting objectives like legislative scoring.  The 1967 Budget Commission very consciously put this separate section for federal credit in a silo – it’s meant to stay there.

• (F) FCRA treatment for a specific loan must be consistent with the federal participant’s budgeting treatment for all equivalent project non-federal debt.  Notwithstanding a FCRA decision’s siloed position within the program for a specific loan, it should be consistent with the federal budgeting by the federal participant for other project debt with equivalent terms (e.g., purpose, security, seniority, source of repayment, recourse to the project, etc.).   If the federal participant is properly including such equivalent debt in its cash-based budget, that indicates that the debt’s repayment is not subject to external discipline.  The program loan should not be differentiated in this respect just because it comes from a federal loan program and FCRA treatment should be disallowed.  Likewise, if the federal participant is properly excluding the project’s equivalent debt in its cash-based budget, a program loan should receive FCRA treatment.  To put it more generally, to avoid double counting and budget gaming, all the federal agencies involved in a project should have the same position on whether the repayment of the project’s debt is subject to external discipline and therefore may be excluded from the federal cash budget.  FCRA treatment for a program loan to the project (if one is applied for) is just an extension of this position for a federal lender.  If the project is issuing tax-exempt bonds (which can’t have a direct or indirect federal guarantee, per IRC 149 (b)), the IRS’s position should also be consistent with federal budgeting because the same basic principles apply in this case.

Interpreting OMB’s Questions with Six Stated Criteria

With these six FCRA criteria, we can interpret OMB’s questions in a focused way that will guide a potential WIFIA applicant to provide the information necessary for determining correct FCRA treatment for the proposed loan — not more, not less, and consistent with the Congressional directive. I sketch out the guidance as if it were to be in a program user guide, with reference to the above criteria.

IV. Initial Federal Asset Screening Questions

A. Is the project, in whole or in part, a project currently authorized by Congress for the Army Corps of Engineers or Bureau of Reclamation to construct [2]?

• If this applies, the applicant should provide information that demonstrates for the relevant part of the project that such Congressional authorization did not (1) significantly alter the basic conditions that the applicant would expect to find for its typical infrastructure projects (e.g., required long-term agreements, normal benefit-cost metrics, elements of control, etc.), and (2) require or compel the use of non-federal for the repayment of the proposed program loan. (Criteria A, B, and C)

B. Is the project, in whole or in part, a local cost share requirement for an Army Corps of Engineers or Bureau of Reclamation project [3]?

• The applicant should be aware that although WIFIA loans to support federal cost-sharing are authorized, and the reduction of federal resources for a project is a positive factor in WIFIA’s statutory selection process, FCRA treatment of the proposed loan is a completely separate decision based on the facts relevant to the specific FCRA criteria stated above. (Criterion E)

V. Federal Asset Screening Criteria

Structure of the Project

1. To what degree does the Federal Government comprise the WIFIA project’s user base?

• The applicant should provide information demonstrating that the applicant (including related parties) is the primary beneficiary of the completed construction and operations of that part of project proposed to be financed by the program loan. (Criterion D)

2. Does the project involve the use of the Federal Government’s sovereign power (excluding, e.g., National Environmental Policy Act (NEPA) review)?

• The applicant should provide information demonstrating that its obligation to repay the program loan and other related project financing will not be directly or indirectly compelled by the specific exercise of federal sovereign power by the project’s federal participant or any other federal agency. Note that compliance with existing, non-specific federal law (e.g., environmental regulations, Clean Water Act, NEPA, etc.) does not constitute compulsion for this purpose. Evidence includes confirmation that the decision will follow the participant’s standard processes and will be subject to voter referenda, public debate and comment, local council voting, positive benefit-cost review, etc. as normally applicable. (Criterion C)

3. Does the WIFIA project require the construction or acquisition of an asset for the special purpose of or use by the Federal Government?

• The applicant should provide information demonstrating that if the relevant part of the project has scale, design or construction features that appear to primarily serve a federal purpose, (1) the applicant’s primary project benefits are not significantly impacted, and (2) the features will not be a material use of program loan proceeds. (Criterion D)

4. To what degree does the Federal Government direct the contracting process for the WIFIA project?

• The applicant should provide information demonstrating that federal involvement in the contracting process and related agreements for the relevant part of the project did not materially influence its decision to seek and be obligated to repay a program loan for the project. Evidence would include a benefit-cost analysis or a standard project finance engineering review showing that the contracting was within normal industry parameters. (Criterion C)

5. Is there a specific authority provided to the WIFIA project by an Act of Congress without which the WIFIA project could not proceed?

• The applicant should provide information demonstrating that any specific authority granted to the relevant part of the project by Congress (1) was consistent with the implementation of non-specific federal policy objectives (e.g., for a region or infrastructure sector) and (2) did not compel the applicant to seek and be obligated to repay a program loan for the project. (Criterion C)

6. What is the Federal Government’s role in the governance of the project?  In other words, what is the role of the Federal Government in selecting management or overseeing the project (including, but not limited to, approval of contract scope and step-in rights, or as a member of a board of directors), both during construction as well as in terms of operations and ongoing maintenance?

• This question is similar to No. 4 above but applies to the post-completion, operational phase of the project. The applicant should provide information demonstrating that federal involvement in the future operations and management for the relevant part of the project did not materially influence the nature of the long-term agreements between the participant and the project with respect to control and redress in matters concerning end-user benefits, relative to the participant’s normal agreements for large-scale infrastructure projects. (Criteria C and D)

7. Is this project part of a larger Federally authorized project (not limited to but consistent with the initial screening criteria) and if so, does the project under consideration for a loan or loan guarantee constitute a useful segment—either a planning segment or a useful asset—as defined in the Capital Programming Guide (supplement to OMB Circular A–11)?

• If both factors are applicable, the applicant should provide information demonstrating that the relevant part of the project (1) will provide direct benefits to the applicant that are not significantly impacted by the project’s other uses or utility, and (2) that program loan proceeds are primarily used in connection with those direct benefits. (Criterion D)

Financing of the Project

8. Does the Federal Government provide resources for the WIFIA Federal loan repayment?

• The applicant should confirm that the program loan repayment will (1) come from entirely non-federal sources and (2) not directly or indirectly utilize federal resources specifically dedicated to the purpose of program loan repayment or a guarantee thereof. (Criteria A and B)

9. Will the WIFIA project meet the non-subordination requirement provided in 33 U.S.C. 3908(b)(6)?

• The applicant should provide information confirming that the federal participant and related federal agencies will not have any specific or extraordinary rights for seniority of claims over the secured debt obligations (including the program loan) of the relevant part of the project. Federal seniority of claims that arise in the normal course of the enforcement of non-specific laws (e.g., federal tax liens) and not in connection with any project-specific legislation for authorization or funding can be excluded for this purpose. The applicant should be aware that the program loan’s seniority with respect to other secured debt of the relevant part of the project is subject to WIFIA’s non-subordination requirement without regard to any federal involvement in the project. (Criteria C, E and F)

10. Does the WIFIA project depend on the Federal Government making other in-kind contributions (land, real estate, right-of-way, etc.)?

• The applicant should confirm that no federal in-kind contributions to the project will be utilized in, or available for, program loan repayment via sale of such contributions or other conversion of their value to money, including indebtedness. (Criteria A, B and D)

11. Is non-federal financing available for the project?

• The applicant should be aware that since a WIFIA program loan amount is limited to 49% of the cost of the relevant part of the project benefitting the applicant, the absence of other financing for the same purpose with essentially equivalent terms (e.g., security, repayment source, etc.) for a significant part of the 51% balance of cost will be considered unusual. If this is the case, the applicant should provide explanatory information. If the applicant is expecting to access other non-federal financing, details with respect to its relationship to the federal participant or other federal agencies should be provided, if known. For example, if the project is planning to issue tax-exempt bonds, the participant should provide information regarding the bonds’ compliance with IRC 149 (b), which prohibits a federal guarantee of tax-exempt debt. (Criteria B and F)

12. If the project is required to obtain an investment-grade rating opinion letter, per 33 U.S.C. 3901(4) and 3908(a)(3), to what extent does the rating opinion letter consider Federal support as a credit enhancement?

• Credit rating agencies primarily review a borrower’s ability to repay, and generally assume that a project will perform as designed. If the project relies on variable revenues (e.g., sale of output, non-monopoly user fees) the agencies will assess revenue risk. Most public infrastructure will rely on non-variable, contractual revenues (e.g., taxes, covenanted user rates) where the primary risk is the ability to pay. If the relevant part of the project is subject to revenue risk, the applicant should provide information demonstrating that the federal government is not providing any specific support for those revenues on a long-term basis (i.e., a fixed purchase agreement at a minimum price and volume). If project revenues are primarily sourced from taxes or user rates, the applicant should provide information confirming that the federal government is not specifically supporting or supplementing those revenues in connection with financing for the project, including the program loan. The analysis underlying rating agency opinion letters and/or formal ratings should be consistent with this information. (Criteria A and B)

Project Liabilities

13. To what degree will the Federal Government bear funding liabilities associated with the WIFIA project not otherwise appropriated by Congress or captured in the loan subsidy?

• The applicant should provide information demonstrating that any federal funding for the project that arises from the federal participant’s operational and managerial obligations, but not contemplated in the participant’s original authorization or appropriations, will not be used, directly or indirectly, to provide resources to the applicant for the repayment of the program loan. (Criteria A and B)

14. Is the risk to the Federal Government low relative to the private sector for the financing of the WIFIA project?

• The risk profile of the program loan (as evidenced by expected credit rating, proposed loan coverage ratios, etc.) should not be significantly different than other equivalent project debt from non-federal sources. If it is significantly higher or lower, this may indicate an insufficient degree of arms-length interaction between the federal participant and the federal lender. The applicant should provide (1) information demonstrating the similarity between the risk profiles of the program loan and equivalent project debt from non-federal sources, or (2) explanatory information about any significant dissimilarities. (Criteria A, B and C)

15. To what degree does the Federal Government own or is the Federal Government contractually obligated to complete, maintain, or repair damage to the WIFIA project?

• The applicant should provide information confirming that any such federal ownership or obligations will not result in federal resources being used for program loan repayment through the direct or indirect monetization of ownership equity (e.g., by sale) or the fulfillment of contractual obligations (e.g., by the payment of liquidated damages). (Criterion B)

16. Is the Federal Government liable for unforeseen costs (e.g., environmental impacts, damage from natural disasters, or cost overruns) either before, during or after completion of the WIFIA project?

• The applicant should provide information confirming that any such federal liability for unforeseen project costs (1) will not result in federal resources being used for program loan repayment and (2) does not significantly change the benefit-cost relationship between the expected benefits of, and payment for, the relevant part of the project, relative to industry norms for similar infrastructure project financings. (Criteria B and D)

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Notes

[1] The Background section of the publication does say: “The 1967 Report notes the inherent difficulty in making a Federal or non-Federal determination in many cases and suggests a series of questions, which guide the criteria below…” Yes, that report does suggest asking questions — but it also provides an extensive discussion and clear statements of principles (especially in the Federal Credit Program chapter) to guide the right questions and interpret answers. General questions about an issue are of course necessary to develop criteria for decisions in specific cases. But specific questions directed towards specific cases don’t ‘guide the criteria’ that apply — the criteria should be developed and stated beforehand.

[2] The footnote attached to this question states flatly: ‘A project authorized by an Act of Congress to be built by the Army Corps of Engineers or Bureau of Reclamation is ineligible for WIFIA financing.’ I assume (perhaps incorrectly) that the ineligibility is not part of the WIFIA statute or another, more broadly applicable law because otherwise there would be a reference to it. More importantly, if it existed, such statutory ineligibility would simply render any FCRA budgeting issue moot — the application would be rejected on the threshold review. I suspect that the ineligibility here is based on OMB’s presumption that the application will fail the FCRA test because a project authorized by an Act of Congress must be a ‘federal project’ and therefore all of its debt must be ‘federal debt’ which is not FCRA-eligible because there’s a ‘federal borrower’. This presumption is not valid, as discussed above and in prior posts. Why can’t a specific case be judged on its own merits, without such presumptions? What does the Congressional act precisely specify? How is ‘project’ being defined here? What are the actual terms and sources of program loan repayment? And so on.

[3] The footnote attached to this question ends: Project applicants are encouraged to review all applicable statutory requirements before seeking WIFIA financing. Good idea — please point out WIFIA’s explicit statutory ineligibility for Congressionally authorized projects.