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.