It became clearer in the course of doing the FCRA Non-Federal Series that a lot of the apparent ambiguity of FCRA treatment for loans to federally involved projects appears to stem from imprecise language. This post will sketch out two definitions that will be useful going forward, a ‘federal project’ and a ‘non-federal interest’ in a federal project.

Federal Project

The term ‘federal project’ occurs throughout the FCRA issue. First, I think it’s important to clarify what the term does not refer to — a federal facility.

A federal facility is built to facilitate federal operations. It sometimes might look like public infrastructure, although the scale is usually smaller (e.g., office buildings, housing). But the primary end-user and direct beneficiary is federal government itself. The asset can be owned by a non-federal third party (like a real estate developer) and used by the government under some sort of contractual arrangement (like a lease). Most importantly, contractual payments will be federally sourced.

I can see that federal facilities owned by third parties would pose a problem for federal budget treatment and CBO legislative scoring. The same consolidation issue arises in private-sector FASB accounting, especially capital vs. operating lease classification. Most of the examples in the CBO Report involve lease-type contracts on federal facilities and CBO resolves their scoring treatment with what are effectively FASB 13 lease principles. If the third-party owner of a federal facility sought a federal loan to finance the asset, FCRA treatment for the loan would likely depend on the same factors.

But none of this should be relevant to FCRA treatment at federal infrastructure loan programs for the fundamental reason that federal facilities shouldn’t be eligible program borrowers in the first place. A federal facility will presumably help the government achieve beneficial public outcomes, but it’s not the end product, especially with respect to public infrastructure. Since statutory eligibility requirements at federal infrastructure loan programs focus on direct public benefit, it’s hard to imagine how a federal facility as defined above would ever comply. FCRA treatment is a moot question.

In contrast, a federal project can be defined as an infrastructure project with federal involvement but where the primary end-user and direct beneficiary is the non-federal community or region in which the infrastructure is located. Such projects will often be statutorily eligible for federal program loans — hence the importance of the FCRA non-federal issue.

But the leasing principles that apply to scoring and FCRA treatment for federal facilities do not apply for federal projects. As defined above, the primary beneficiaries of a ‘federal project’ are non-federal communities, and the relationship between the project and its non-federal beneficiaries should be the basis for FCRA classification. That requires defining another concept.

A Non-Federal Interest in a Federal Project

Imagine a federal infrastructure project that is completely built, owned, operated and paid for by a federal agency. Simple, yes? Every cash flow associated with this project will be included in the cash-based federal budget.

This project will of course benefit the local or regional community is some way. And no doubt they’re happy to see it paid for by national taxpayers. Completely rational.

But now let’s say that the federal agency won’t get enough federal funding to build the project, only a part. That agency could simply cancel the project. Or it could go the project’s beneficiaries and ask them to pony up some funding to get it done. The community could then decide, in its own self-interest and again with complete rationality, to the provide the balance. But they won’t simply write a check — they’ll want a long-term contractual agreement covering various aspects of the project to ensure they’re getting their money’s worth.

The project gets built with the community’s financial support. In one sense, it’s still a ‘federal project’, but now there’s a real and quantifiable ‘non-federal interest’ in the project. That interest may be large or small, it might involve some degree of operational control, it may or may not cover specific physical parts of the project. All those aspects will be determined (most likely in great detail) by the contract between the federal agency and the community. But one thing is certain — the project is no longer wholly federal, and federal budgeting should reflect that fact.

Let’s go further. Assume that the community can’t write a big check to pay for its share of the project’s construction cost in a lump sum upfront. But they’re willing to make payments over time under the long-term contract and their creditworthiness is good. With that contractual obligation for cash flow, the project can finance construction costs. The non-recourse lenders aren’t looking to the federal agency for repayment (there’s explicitly no recourse to the agency) or even to the collateral value of the project’s physical assets (there’s no resale market) but solely to the community’s ability, most usually through taxes or regulated user fees, to pay under the contractual obligations. What’s actually being financed here? The federal project? Not really, even though that’s where the money will be spent. Rather, it is the non-federal interest that is being financed — and the debt is non-federal.

The federal government provides various subsidies to non-federal debt for infrastructure projects that benefit the public. The biggest one by far is the tax-exemption on the debt’s interest — the basis for the tax-exempt municipal bond market, of course. Such tax-exempt debt can’t be directly or indirectly guaranteed by the federal government. If the community in our example were to seek tax-exempt financing for their non-federal interest in the federal project, they’d have to demonstrate that the source of repayment was exclusively non-federal. In most cases, that should be straightforward — the lenders will ensure that the contract is explicit about where’s the money is coming from, and the community’s taxpayers will probably have a say in approving it. Let’s assume that the non-federal interest in our example qualifies for tax-exempt financing.

There’s another way that the federal government subsidizes infrastructure with a public benefit — federal infrastructure loan programs. These programs are much smaller than the tax-exempt bond market and their interest rates aren’t generally much better. But the program loans offer various features (loan term, rate management, flexibility, etc.) that can’t be found in the bond market. The community in our example decides to seek a federal program loan in addition to their tax-exempt bonds to finance their interest in the project. The project — and therefore their interest in it — appears to be statutorily eligible for such a loan, and they make an application.

It is only at this point — not before, not with presumptions about ‘federal’ projects, not with respect to the project’s history or statutory eligibility — that FCRA treatment becomes relevant. Now FCRA criteria can be applied on the specific facts about the community’s non-federal interest. Questions and requests for additional information about that interest should be expected — just as they were for the tax-exempt qualification. And equally, the answer should be straightforward in most cases. A program loan to finance a genuinely non-federal interest in a federal project should receive FCRA treatment.

Going Forward

The more general point here is this: In the next few months. there’s likely to be a lot of discussion about the FCRA non-federal issue. Precisely defining these two concepts — a federal project and a non-federal interest in it — at the outset will make the issue and possible solutions much clearer.