Author Archives: inrecap

OMB’s FCRA Criteria Didn’t Comply with the Directive

In prior posts, I’ve been generally critical of OMB’s WIFIA FCRA criteria. In this one, I’ll focus on a specific point — that the published criteria failed to comply with the requirements of their Congressional directive. Not by a little or in a few details — the non-compliance is fundamental and pervasive.

The Wrong Question

The Congressional directive is relatively clear. Congress wanted to clarify the FCRA issue for federally involved projects with criteria that “…limit Federal participation in a project consistent with the requirements for the budgetary treatment provided for in section 504 of the Federal Credit Reform Act of 1990.” Since FCRA law is solely about loans, this is obviously talking about WIFIA loans to projects, and the limitations on Federal participation in a project with respect to those loans. For example, the most basic limiting criterion here is that the Federal participant can’t directly or indirectly guarantee the loan since FCRA is limited to non-federal borrowers. See? It’s not that hard.

Additional, more nuanced criteria can be developed along these lines with the principles outlined in the 1967 Budget Report, as the directive required. It’s straightforward if you’re asking the right question — FCRA law and the relevant principles in Chapter 5 of the 1967 Report are grounded in the calm rationality of the Enlightenment, not impenetrable Medieval theology or ancient pagan mysteries. I think correct criteria would look something like this: Six Criteria for Federally Involved Projects. Read Chapter 5 and you can try it yourself.

But OMB asked the wrong question. From the Background section of the Federal Register publication:

The question of whether or not to include a project or asset in the budget hinges on whether the project or asset in question is Federal or non-Federal in nature.

How to interpret this statement? What is the ‘project or asset’ here? The specific issue the criteria are meant to address is about budgeting for WIFIA loans — nothing else. The only ‘asset’ involved is a WIFIA loan which is indisputably a federal asset and unquestionably will be included in WIFIA’s federal budget. The question that requires clarification is which bucket of the federal budget the loan belongs in — FCRA or cash-based.

But apparently that wasn’t the question that OMB wanted to answer. The above statement only makes sense if their criteria are focused on classifying the federally involved project itself, not a WIFIA loan to it. Perhaps that classification is relevant for some reporting purposes (CBO scoring or economic impact data?) but if so, that’s a matter for the federal participant’s budgeting, not the WIFIA loan program. More importantly, that classification is not what the Congressional directive asked for, which is criteria to “limit Federal participation in a project”. They didn’t ask for a way to “limit WIFIA participation in a project that OMB determines to be a ‘Federal Project'”.

Still, OMB’s singular determination to classify Federal Projects instead of loans did require some connection to FCRA law, at least nominally, to appear to comply with the directive. That was accomplished with confusing subtlety by this free-floating assertion further on in the Background section:

Regardless of the identity of the borrower, however, requiring that a Federal project
or asset be recorded in the budget on a net present value basis would be inconsistent with 31 U.S.C. 1501

Since the ‘identity of the borrower’ doesn’t matter (yet), a WIFIA loan to a project can only be classified with respect to the use of loan proceeds, right? If OMB has deemed the project as ‘Federal’, those proceeds are also ‘Federal’ and therefore the loan’s borrower can now be identified — as a ‘Federal’ borrower! And FCRA treatment is statutorily only available for non-federal borrowers! See what was done there? OMB is conflating the project assets created with WIFIA loan proceeds with the financial asset that WIFIA creates by making a loan, thereby dragging WIFIA’s FCRA asset budgeting into OMB’s project’s classification.

This legerdemain neatly sidesteps FCRA law’s actual definition of an eligible loan as one to a “non-federal borrower under a contract that requires the repayment of such funds” (where the repayment obligation is integral to the borrower’s identity) and substitutes for it a novel definition of ‘borrower’ that is determined by where the loan proceeds are spent. However, the same word, ‘borrower’, can be used in the phrase ‘non-federal borrower’ and OMB’s project classification approach can apparently be connected to FCRA law. This would be impressive in a twisted way if intentional — but I suspect, per Occam’s Law, it was largely the result of a combination of wishful thinking and genuine confusion.

Cutting through the confusion, it turns out that OMB’s criteria are not in fact based on FCRA law but — something else. That’s the first failure to comply with the Congressional directive.

Down the Rabbit Hole with OMB.

The directive has another hurdle for OMB’s project classification approach to clear — using the 1967 Report’s principles and recommendations. Fortunately for the approach, it’s easy to find one if you only read Chapter 3, ‘Coverage of the Budget’, which is largely about inclusion in ambiguous situations. The Report’s authors admit that this area is a rabbit hole. And OMB enthusiastically jumps right in — a perfect context to keep things vague and mysterious. The sole principle cited for the criteria from the 1967 Report basically says, ‘when in doubt about an activity with some federal involvement, include the whole thing’. How handy for the classification of a complex, multi-party project with a federal participant and practically guaranteed to get the desired result — an entirely Federal Project!

Still, the rabbit hole is not all fun and games. It’s inherently difficult to develop clear criteria in such a context and, after all, that’s what Congress asked for. I imagine it could be done with some creative effort, but the inadequacy of the result for an intrinsically unrelated FCRA issue might be obvious and, in any case explicit criteria for Federal project classification would take away large parts of OMB’s ‘eye of the beholder’ option — where’s the fun in that?

Well, in the rabbit hole all challenges of logic or even the meaning of words can be overcome! Perhaps the Congressional directive should have added this source:

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

‘Criteria’ are ‘questions’ and vice versa, ok? The Red Queen can therefore decide that the requirements of the Congressional directive are fully satisfied.

In the Real World

Of course, back in the real world, all of this is nonsense. Questions, which OMB is entitled to ask anytime, are not criteria. They don’t clarify the FCRA issue for the applicant, who is left guessing as to what the result will be when OMB applies its own undisclosed criteria. Congress specifically asked for criteria to be published in the Federal Register — a public document meant to inform the relevant stakeholders. That’s the second, and perhaps most obvious even to a casual observer, failure of OMB to comply with the directive.

More substantively, if OMB had read (or didn’t willfully ignore) Chapter 5 of the 1967 Report, unambiguously titled ‘Federal Credit Programs’, they’d have seen the principles of what later became FCRA law outlined in great detail and with clarity. There are no rabbit holes there. The primary principle outlined is that federal loans require special budgeting treatment due to a substantive obligation for repayment from non-federal sources – something that is echoed in FCRA law’s definition of a FCRA loan. An exercise in ‘Federal project classification’ doesn’t belong here — but budgeting for WIFIA loans, the explicit topic of the directive, clearly does.

OMB failed to utilize the obviously relevant principles of the 1967 Report in their criteria. That’s the third area of non-compliance with the requirements of the Congressional directive.

Footnote Diktats

Finally, the criteria’s two footnotes should be mentioned briefly. This is where OMB’s desire to classify projects as ‘Federal’ and thereby render them (using OMB’s own special logic) ineligible for WIFIA loans is most unambiguously expressed. For projects with Army Corps or Bureau of Land Management involvement, OMB skips the weak sauce of ‘criteria’ and cuts to the chase with diktats. They’re all Federal! WIFIA loans to such projects are never eligible for FCRA treatment! Don’t even think about applying!

I have to think that after trudging through all the tortuous language of the rest of publication, they enjoyed writing these clear statements of reference-free bureaucratic power. However, the footnote diktats are of a piece with the rest of the work — not based on statute, relevant principles, or the requirements and purpose of the Congressional directive. Nothing — just more free-floating assertions. Compliance failure number four? Yes, if going far beyond the scope and intention of the directive counts.

Junk the Lot

I was more optimistic about OMB’s criteria when I started the FCRA Non-Federal Series late last year. I thought that they would probably require some important clarifications and refinements but had to be at least roughly compliant with the Congressional directive to be published. I assumed OMB would defend their work on that basis. That’s why I thought it worth exploring alternatives to the heavy lift of actually amending the WIFIA statute.

I don’t see it that way anymore. The current criteria are irredeemably flawed, probably influenced by some hidden bureaucratic agenda, and entirely non-compliant with the directive. The current lot should simply be junked completely — rescinded, perhaps by another Congressional directive or re-instruction. Or more realistically, since Congress will be involved either way, get ready to battle it out with an amendment that, as law, will presumably supersede OMB’s nonsense. HR 8127 is soon to be re-introduced and will again contain FCRA amendment language for WIFIA.

Doing nothing and simply living with the current criteria is not an option, even though relatively few infrastructure projects have direct federal involvement. There’ll be plenty of other FCRA-type budgeting and oversight issues that need correct and workable interpretations going forward as federal infrastructure loan programs develop — as they must. OMB’s current criteria for this issue set a harmful precedent for that critical process. They’ve got to go.

Non-Federal Interest Illustration

Imagine an infrastructure project for large-scale water management, like flood control or dam rehabilitation.  The optimal scale of the project for both national and regional benefit is about $1 billion.  For various reasons, a Federal Agency will be involved in overall project construction and management.  But the Agency can only allocate $600 million to the specific project.

A Regional Water Authority recognizes the importance of the project for the communities within their jurisdiction.  The Authority agrees to provide the $400 million balance so the project can be completed at the optimal scale, which is especially important for regional benefits.

The Authority can’t write a lump-sum check for the $400 million, and in any case, they want a long-term contractual agreement with the project that specifies all their rights and obligations in detail.  They will make periodic payments under this contract to cover their share of O&M and (most importantly here) provide cash flow for servicing $400 million of long-term debt to fund the construction cost balance.  All these arrangements are of course Project Finance 101.

The Authority will fund the contractual payments by a combination of general and special taxes, water rates, and other revenues from the regional communities that will benefit from the project.  This source of funding has a high level of creditworthiness, which gives the Authority several financing options.

First, they consider issuing tax-exempt bonds.  Bond credit rating will be based primarily on the Authority’s ability to make contractual payments from regional taxes.  An investment-grade rating is confidently expected.  However, bond tax counsel points out that due to the Federal Agency’s involvement in the project, they’ll need to confirm that the federal government is not providing a direct or indirect guarantee of bond debt service, per IRC Section 149 (b).  After an analysis of the economic substance of the transaction, especially with respect to the regionally based source of repayment, tax counsel signs off on an unqualified opinion that tax-exempt status is justified.

Next, the Authority looks at the WIFIA loan program.  The project is clearly statutorily eligible, and although the Treasury-based interest rate is not too different than tax-exempt bond yields, WIFIA loans offer various interest rate management and term features that are especially useful for large-scale, long-lived projects.  A WIFIA loan is, however, limited to 49% of “project” cost, which in this case means 49% of $400 million, or $196 million, since that represents the Authority share of the full project.  Fortunately, tax-exempt bonds and WIFIA loans are easy to combine and effectively complementary, so the Authority settles on a two-tranche financing plan for their share, $204 million of bonds and a $196 million WIFIA loan.

All good?  Not quite – the Authority’s application to the WIFIA program checks all the boxes with respect statutory eligibility, creditworthiness and other risk factors, public benefit and policy importance, and environmental reviews.  But there’s a problem – just as federal involvement in the project raised questions for the tax-exempt bonds, it requires special consideration for WIFIA’s FCRA budgeting of the loan. Without FCRA treatment, the loan would absorb far too much of the program’s budget and can’t proceed.

FCRA treatment is only available for a federal loan to a ‘non-federal borrower’. In one sense, the overall project is the ‘borrower’ because that’s where money will be spent, which prompts another question — is the overall project is federal or non-federal? But in another sense, the non-federal Authority is the ‘borrower’ because it is substantially obligated to repay the loan through contractual payments, which are ultimately sourced from non-federal communities. Which characterization of ‘borrower’ should prevail?

OMB’s Current Criteria

OMB’s 2020 FCRA criteria for federally involved projects appear to be directed towards the first characterization. The criteria, which are in fact a series of questions, apparently seek to determine if the overall project is a ‘federal project’, though the principles behind the determination are undisclosed. The only principle stated explicitly is that if there’s any ambiguity, the project is presumed to be federal. Well, isn’t that convenient?

In effect, OMB’s current criteria appear to be trying to determine whether the overall project is a ‘federal project’.  But even with a clearer statement of principles, not only is that approach inherently ambiguous, FCRA law and its underlying principles are narrowly focused only on specific substantive borrowers and the source of repayment.  I don’t see any basis for an overall characterization of some activity as ‘federal’ to disqualify every part of it for FCRA treatment, which is what OMB seemed to be aiming at. I get the prudential caution, but their approach doesn’t seem consistent with either current FCRA law or the 1967 Budget Report.

A Better Approach

There’s no question that FCRA criteria are required for a federal program loan to a project with federal involvement, just as tax counsel must carefully consider the tax-exemption of bonds issued by such a project.

But I think a sounder & more efficient approach would narrowly focus the criteria on a ‘non-federal interest’ in a project that has significant federal involvement. As the above illustration suggests, a WIFIA loan to a non-federal interest in the project might qualify for FCRA if the obligation and source of repayment were demonstrably non-federal, and the proceeds of the loan were roughly in line with the benefits the non-federal borrower expected to receive. That narrower approach is more consistent with FCRA’s sole threshold qualification of a “non-federal borrower under a contract that requires the repayment of such funds” and reflects the 1967 Report’s ‘market discipline’ requirement, too.

Maybe the issue just needs better, generally agreed definitions? I think simply defining ‘non-federal interest’ vs. ‘federal interest’ for federally involved projects in the context of FCRA law would result in more constructive discussions & efficient solutions for all the stakeholders.