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

The 1967 Report of the President’s Commission on Budget Concepts is surprisingly interesting.  It’s certainly limited in some ways by its historical context.  But the writing is clear, the concepts are carefully derived from fundamental principles, and the recommendations are direct and far-reaching.  The Report appears to have successfully defined the way the federal budget works today, especially with respect to the FCRA concepts I’m familiar with.  As I noted in the prior post in this series, the Congressional directive’s instruction to follow the Report in conjunction with interpreting current FCRA law was a good call.

Two chapters in the Report are relevant to the FCRA non-federal issue.  Chapter 3, Coverage of the Budget, describes what should be included in the overall federal budget.  Chapter 5, Federal Credit Programs, outlines a separate section within the budget for federal direct loans and guarantees.

Coverage of the Budget

Chapter 3 begins with the statement of a principle that appears to guide the Commission’s approach to budget coverage but also may be important to specific FCRA non-federal solutions: Any federal activity that allocates the government’s resources must be subject to the internal ‘discipline’ of the budget if it’s not subject to external discipline.  The paragraph goes on to say that however clear that might be in theory, in practice it’s not easy to draw the line:

The next paragraph describes two examples (one of which is definitely historical) to illustrate the extremes of what should and should not be included in the federal budget. In a list of more ambiguous situations, the Report specifically mentions enterprises jointly owned by federal and private-sector participants (the context implies that the latter would also include non-federal public-sector participants):

After describing some other areas of ambiguity, the Report sums up an approach for ‘borderline’ situations – “when in doubt, include it”:

In the main section of the chapter, the Commission admits that it’s easy to fall into a rabbit hole when defining the budget’s theoretical boundary lines and therefore the Report’s practical scope is limited to a ‘few key agencies and programs’.  The rest of the chapter discusses those, none of which seem especially relevant to the FCRA non-federal issue:

General Observations About Chapter 3:

• If there is some ambiguity about federal budgeting for the activities of federally involved projects as a type of ‘enterprise owned jointly’ by federal and non-federal entities, then the Report’s ‘borderline inclusion’ recommendation would presumably apply directly.  But that’s not the case for the FCRA non-federal budgeting issue, which relates only to loan classification within the budget.  The two areas are fundamentally different [1].

• In contrast, there is no ambiguity about federal budget inclusion for WIFIA and all its activities, including its loans.  None whatsoever – WIFIA is a wholly federal program within a major federal agency and everything about it must be (and is) included in the federal budget.  The FCRA non-federal issue is solely about whether a program loan belongs either in the FCRA subsection or the general cash-based budget — one way or another, it will be included [2].

• Although Chapter 3’s inclusion concepts don’t appear to apply directly, the ‘discipline’ principle stated in the chapter’s first sentence can provide some guidance about the way the Commission might have looked at the FCRA non-federal issue.  If a program loan is not subject to external discipline, then some special consideration is presumably required to ensure that it will be subject to the internal discipline of the budget, as discussed further below.

Federal Credit Programs

Chapter 5 covers federal credit programs as a specialized area.  I was struck how closely the principles outlined in this chapter seem to have determined in some detail what FCRA law looked like 23 years later.

The Report admits that federal credit is a difficult area within their conceptual framework and recommends that program loans be put in a separate section within the unified budget.  The main objective of the separate section is to provide better information about the true cost of program loans in connection with their economic impact.  The Commission expected that ‘most’ federal program loans would belong in the separate section:

The chapter’s next bullet provides an accurate summary of how FCRA methodology would eventually work. The grant-like element in federal program loans belongs in the cash-based budget, while (implicitly here) the loan’s reversing cash flows do not:

Some types of federal program loans, however, should stay in the cash-based budget, primarily because they are effectively grants for which no repayment is expected or definable [3]:

The main part of Chapter 5 starts with the observation that a separate budget section for program loans is important because federal loan programs were steadily expanding ($30 billion in those days was apparently considered ‘real money’). Note that loan programs for large-scale public infrastructure aren’t mentioned in their list. I don’t think there were any at the time. Even today, such programs are a very small segment of total federal credit. However, their future expansion, including in sectors where federal involvement is frequent, is the same rationale for solving the FCRA non-federal issue:

Later in the main section, the Report provides an important insight into why the Commission considered federal program loans to be fundamentally different than other federal economic activities.  Unlike other cash transfers from the federal government, the borrower of a program loan has assumed an obligation to repay it:

General Observations About Chapter 5:

• The budget’s separate loan section (which eventually became FCRA) can be derived from two primary principles in the Report: (1) for overall inclusion, when an activity is not subject to external (that is, non-federal) discipline, and (2) for inclusion in the separate loan section, when there is a substantive and definable repayment obligation.

• Assuming that a program loan’s repayment obligation is subject to external discipline from a non-federal source, most of the loan’s cash flows should be excluded from a cash-based budget since they are not internally managed federal expenditures or revenues. The grant-like portions of the loan (the credit loss and funding subsidy amounts), however, are provided by the federal program and not subject to external discipline. Hence, that portion must be estimated and recorded as a net expenditure, as the Report described and as FCRA currently requires.

• If a loan’s repayment obligation, regardless of transactional form, is not substantive or definable, then it’s not subject to external discipline. In effect, all the loan’s cash flows then become internally managed federal expenditures and revenues, and the loan should be included only in the cash-based budget, not the separate loan section. This is consistent with the Report’s examples of loans that should be excluded from the separate section.

How Might the Commission Have Considered the FCRA Non-Federal Issue?

The above interpretation of how two of the Report’s fundamental principles define the separate budgetary treatments for loans is useful because it highlights one question that the Commission did not address but seems to be at the core of the FCRA non-federal issue: What if a program loan has substantive and definable repayment obligation that is not subject to external discipline — in other words, if the loan’s repayment obligation is from a federal source?

If this question was posed to the Commission in 1967, I think their response would have started with a description of two extremes, as they did at the beginning of Chapter 3. If the federal participant in a project is the direct recourse obligor or guarantor of a program loan, then obviously the loan completely lacks external discipline and should not be included in the separate section. At the opposite extreme, if the federal participant’s role in a project has no financial impact and the project loan’s sources of repayment are entirely outside the federal sphere (e.g., locally generated user-fees or taxes), then the loan is clearly fully subject to external discipline and ought to be included in the separate section.

The Commission would probably have continued by admitting that situations between the two extremes are ‘difficult’. And they likely would have supported the Congressional directive’s approach of developing budget classification criteria to be used by loan programs in these situations, at least until a FCRA statutory fix was available. But based on the Report’s emphasis on the budget’s unifying principles, and the successful application of their specific recommendations as the foundation of FCRA, I think they would have expected that any new criteria or statutory language for solving the FCRA non-federal issue would be narrowly focused and consistent with their concepts. It seems to me that this can be effectively accomplished by utilizing the two principles — external discipline and repayment obligation — that appear to determine the exclusion of certain loans from the separate loan section proposed by the Report.

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Notes

[1] A non-capital, cash-based accounting system doesn’t really include a FASB-like consolidation concept, and I assume that federal participants simply record their investments in a project as an ‘expenditure’ and any return of cash as a ‘revenue’.  Is it more complicated than that? If there is a budgeting issue here that doesn’t pertain solely to the project loan, doesn’t it require a solution regardless of whether the project has applied to a federal loan program? If the issue pertains solely to the budgetary treatment of the project’s loan by a loan program, then (as the next bullet above describes), it’s already within the budget.

[2] Interest rate re-estimates have an interesting treatment under FCRA law. They’re not included in the program’s discretionary budget but automatically receive budget authority for mandatory appropriations — in a separate account. This treatment might have its own issues, but in fact the cost of re-estimates is included, albeit a bit obscurely, in the federal budget, reflecting the comprehensive scope of FCRA.

[3] It’s worth noting that if such grant-like loans were subject to FCRA treatment, they’d almost certainly require a 100% subsidy rate. In effect, FCRA would automatically put them back in the cash-based budget.