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.