[Note: This post is about the original 2020 Congressional Directive that initiated the WIFIA Criteria. A recent post about a possible new Congressional Directive to revise the current Criteria is here: FCRA Plan C: Directive to Update the Criteria]

This is the first post in the FCRA Non-Federal Series.

It is not clear from publicly available information what caused the FCRA non-federal issue to surface at WIFIA.  It may have started with a 2019 Letter of Interest for a $569 million loan to a major stormwater diversion project in which the Army Corps of Engineers is a participant.  A half-billion-dollar loan is large relative to WIFIA’s typical loan amounts, and the Corps’ involvement was financially and operationally significant.  This may also have been the first time that WIFIA received an LOI from a project with any material federal involvement. But other dynamics may have been setting the stage prior to the appearance of a specific case.

Regardless of origin, once the issue was identified, it was apparently decided at a high level that a fast-tracked solution was required, perhaps in the expectation that more federally involved projects would soon be applying to WIFIA if the first one was successful.  The Congressional directive to develop a solution was in the form of nine provisos in the WIFIA section of the Further Consolidated Appropriations Act of 2020, a large bill passed in December 2019.  Here are the three important ones for this post:

That the Administrator, together with the Director of the Office of Management and Budget and the Secretary of the Treasury, shall jointly develop criteria for project eligibility for direct loans and loan guarantees authorized by the Water Infrastructure Finance and Innovation Act of 2014 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 and based on the recommendations contained in the 1967 Report of the President’s Commission on Budget Concepts; and the Administrator, the Director, and the Secretary, shall, not later than 120 days after the date of enactment of this Act, publish such criteria in the Federal Register.

That, in developing the criteria to be used, the Administrator, the Director, and the Secretary, shall consult with the Director of the Congressional Budget Office.

That the requirements of section 553 of title 5, United States Code, shall not apply to the development and publication of such criteria. 

The other six provisos described various aspect of implementation and the consequences of a failure to publish the criteria by the deadline.  The latter were far from hypothetical, as later events proved.

On the surface, the Congressional directive is straightforward.  It simply instructs relevant parties to get to work on a specific budgeting issue at a loan program and deliver a solution within a specified time.  The directive was ultimately fulfilled according to its terms, and the solution, WIFIA’s FCRA non-federal loan criteria, is now operational.  If a more complex story was involved (which I think is likely), it might not really matter at this point.  But a careful look at the directive’s language as passed will provide some insights into why the solution took its current form and how it might be improved.

Project Eligibility

In its first sentence, the directive describes the sought-for solution in terms of ‘project eligibility’ for a WIFIA loan.  That seems innocuous, since the path towards the goal of excluding improperly budgeted loans from WIFIA’s portfolio would seem to start at the project level, where federal involvement occurs.

However, with respect to the specific FCRA issue and how an instruction’s words might shape its outcome, I think a more precise description of ‘eligibility’ was called for here. This is because the WIFIA Program has several layers of eligibility for different purposes, every one of which must be passed before executing a loan commitment for a project:

• Threshold Eligibility:  These sections in the WIFIA statute describe what sectoral categories of projects, borrowers and activities are fundamentally eligible for a Program loan [1].  This type of eligibility reflects core policy objectives – every other type of ‘eligibility’ primarily involves specific risk and operational aspects of the Program that are necessary to achieve its objectives.

• Transaction Criteria:  A proposed transaction with threshold eligibility is then evaluated with criteria in roughly two areas of focus.  The first area is about the project asset itself – size, public sponsorship, and O&M.  The second is financial, ultimately with respect to the quality of the specific loan being sought – creditworthiness, source of repayment and SRF alternatives.

• Selection Criteria:  After a proposed transaction passes the asset and financial tests, it is ranked relative to the other transactions that the Program is considering with respect geographic diversification, readiness to proceed, regional need, etc.  This process implicitly assumes WIFIA won’t have the resources to execute loan commitments with all the eligible WIFIA applications completed in a funding cycle, and prioritization is necessary.  So far, this has been the case, but only by a small margin.  A few projects each year have been put on a waiting list, some of which have then been done when higher ranked projects were delayed or dropped out.  Importantly for the FCRA issue, “the amount of budget authority required to fund the Federal credit instrument” is explicitly stated in this section.

In this more nuanced context of WIFIA ‘project eligibility’, where would a solution for the FCRA budgetary issue fit best?  Presumably not as a modification of the threshold eligibility sections or asset-focused criteria since only the project’s loan is subject to FCRA treatment.  That leaves the financial criteria or the selection process as ways to make a non-FCRA loan ineligible.  Either would seem to work.  Like creditworthiness criteria, FCRA criteria in the financial section would include looking at the physical and contractual aspects of the underlying project that are relevant to the specific loan’s ability to meet a certain minimum standard.  FCRA criteria applied to loans in the selection process wouldn’t be so determinative because it is theoretically possible that WIFIA might have the budget resources to fund a non-FCRA loan.  But as a practical matter, that’s effectively impossible [2].  For a minimalist approach to the solution, the selection process also helpfully includes a criterion for ‘budget resources’ – if the FCRA issue is a budget problem, that is a precise location for a budget solution [3].

The Congressional directive’s language about project eligibility could have been interpreted in a way that reflected the specific eligibility most relevant to the needed improvement.  But the problem with the language is that it can also be interpreted in a broader way.  Without the necessary depth of context, the directive could even be understood to ask for criteria that will determine project threshold eligibility based on FCRA budgeting concepts – an obvious category mistake [4].  Developing criteria for project asset eligibility is also a possible interpretation of the directive’s language – less obvious, but still the same category mistake.

Does any of this matter? As things turned out, I think it did. The lack of precision in the Congressional directive would seem to be a factor in the fundamental shortcomings of the eventual outcome.

Some Other Items

Although FCRA-based criteria for project eligibility is the core of the directive, a few other items should be noted:

• The 1967 Report: Apart from FCRA law, Congress directs the relevant experts to consult the 1967 Report of the President’s Commission on Budget Concepts. This makes sense because the fundamental ideas behind what eventually became the current methodology of federal budgeting — and its FCRA subsection for federal credit programs — are outlined in this report. Since FCRA is silent about how to determine whether a loan is federal or non-federal, it’s necessary to go back to the law’s origins to develop guidance consistent with its intent. The 1967 report will be the subject of the next post in this series — and it’s actually an interesting topic. But I wonder if Congress intended to limit the basic sources for the criteria to this report and FCRA law? There have been a few precedents and analogous situations for the non-federal loan budgeting issue in the relatively recent past– can they also be considered? If not, why not?

• Treasury and CBO: WIFIA and OMB are obviously the most involved parties in the FCRA issue and the best-positioned to develop the needed criteria. Why was Treasury also included in a headline role? Was some type of financial expertise expected to be required? That seems like overkill for most WIFIA project loans, but to the extent it seems to acknowledge that the financial aspects of the project are at the core of a loan budgeting issue, that might make sense. CBO’s consultative role is also a bit mysterious, but that might be standard operating procedure for anything that affects the budget, or validity thereof. And CBO does of course score WIFIA legislation, including at a granular level with respect to the Program’s tax revenue impact (I’m not sure that the JCT always gets it right — but that’s another topic).

• Section 553 Exclusion: The reason for this is not clear to me. Again, it might be SOP for fast-tracked directives or (apparently) minor technical matters. The important aspect of the exclusion was that there was no mechanism or time period for public comment on the criteria, which were simply published and became operational in June 2020. In retrospect, excluding formal input on the issue from the potential WIFIA stakeholders outside the Program’s current borrower base was probably not an optimal approach. This will be a topic for future posts in this series.

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Notes

[1] Interestingly, WIFIA’s Section 3904 about eligible borrowers explicitly includes federal entities. In contrast, the equivalent section in TIFIA includes ‘any’ governmental entities. In the newer, post-criteria CIFIA and the Corp’s CWIF programs, it’s limited to state entities. Does this reflect some evolution in policy direction that was curtailed by the budgeting issue?

[2] The typical WIFIA loan is about $150 million, and this is probably much lower than the amounts sought by the type of large-scale water management project that has federal involvement. WIFIA’s annual credit subsidy appropriations have been in the $50-60 million range. If a loan can’t receive FCRA treatment, it’ll require budgetary resources of 100% of the loan amount in the year made. Even if the non-FCRA loan was the only eligible application that year, it would need to be rejected at the selection stage.

[3] In a strict sense, the mechanism to exclude non-FCRA loans already exists at WIFIA. The statute’s boilerplate definition of ‘subsidy’ refers to FCRA as the methodology that must be followed to calculate the required amount. FCRA law defines a ‘direct loan’ solely as a ‘disbursement of funds by the Government to a non-Federal borrower under a contract that requires the repayment of such funds’ — in effect, a non-federal loan. If a WIFIA loan can’t fit that definition, the implication is that FCRA can’t be applied, and the subsidy calculation must default to the general cash-based budget. It strikes me that WIFIA and OMB could have quietly developed appropriate non-FCRA loan criteria in this context and informed potential borrowers in the usual way — e.g., Program guides, a notice in connection with a NOFA, etc.

[4] Perhaps such a modification of Program policy could only be done by amending the statute?