WIFIA’s current FCRA Criteria for financing non-federal cost shares in federally involved projects are seriously and fundamentally flawed. A radical fix is needed. But what should it look like?
A New Approach
Attempting to revise the current Criteria would amount to rearranging teacups in a rabbit hole. But the simple amendment language approach in HR 8127 and HR 2671, though clear and indisputably correct with regard to FCRA law, has its own theoretical and practical problems. I think a new approach is necessary.
Any approach to a solution at this point will certainly require amendments to WIFIA’s statute, but this is not necessarily bad. In the amendment process, Congress should also effectively be confirming its intent that WIFIA loans are meant to support water infrastructure sectors outside of state and municipal water agency projects. Such a general confirmation is important, I think, not only for CWIFP but other potential classes of WIFIA borrowers, as well. However, the amendments themselves should be narrowly focused on addressing the specific FCRA issue faced by non-federal cost-shares in federally involved projects, an area that realistically concerns only CWIFP and perhaps a few other federal infrastructure loan programs. A minimalist solution is all that’s needed in this case and has a better chance of getting through the process.
A Cost-Share is a Non-Federal Asset, not a Donation
The specific problem for non-federal cost shares in federally involved projects is that FCRA law does not define a ‘non-federal borrower’. The law’s drafters probably didn’t think it was necessary. The absence of a precise definition is not a problem for the vast majority of federal credit programs where the borrower is clearly using the loan proceeds solely for its own, manifestly non-federal purposes, and for which it agrees to be on the hook for repayment from its own, non-federal resources.
Things are inevitably more complicated in an infrastructure project cost-share situation where federal and non-federal interests are mixed. However, I think it still can be presumed that the non-federal partner is acting in its own interest and will only agree to undertake project obligations (e.g., the repayment of a WIFIA loan) to the extent they’re confident that they’ll receive, in commensurate amount, their own, non-federal value. That value, no matter how intangible or undivided within the project, will be an identifiable, measurable and contractually enforceable non-federal asset. The non-federal partner is not financing a patriotic donation, after all.
But No Funny Business
Nevertheless, the presumption of a borrower’s true and unadulterated non-federal self-interest should be validated in the application process. Large-scale infrastructure finance involves big money, complex arrangements and a lot of politics. Shocking, I know, but in the real world, budgeting games are sometimes played, undue pressure may be applied, participants are not always above-board, costs and assets may be incorrectly valued, etc. Such shenanigans can conceivably taint the character of the borrower with respect to FCRA’s implicit assumptions about non-federal self-interest being the pure motivation behind non-federal repayment. For example, an unethical federal participant might decide to ‘persuade’ a reluctant local community to pay for a share in its project with some sort of veiled threat. The intimidated locals cave to the shakedown and finance the extorted amount. Assuming the federal participant is not crooked in other ways, the resulting cost-share asset may well have value equal to the loan, but not for the local community, who can’t use it and didn’t want it. The share is, in effect, an ill-gotten federal asset. The loan’s source of repayment is nominally non-federal, but substantively federal, as a type of taxation made possible by the misuse of federal sovereign power. Obviously, this is not an arms-length deal, unless twisted arms count. And it’s not at all what FCRA law and principles were assuming.
In our imperfect world, it is therefore simply common sense to require that a WIFIA applicant for a loan to finance a cost share in a federally involved project be asked, in addition to all the other due diligence questions, to demonstrate that (1) the value of the non-federal asset it expects to receive is commensurate with the loan, and (2) that its decisions are being made independently, on an arms-length basis in accordance with its normal procedures. Honestly dealing and freely deciding applicants shouldn’t have a problem with that.
Two Low-Impact Amendments
A focused and commonsense validation process, as opposed to an amendment of eligibility, for non-federal cost-shares is what WIFIA’s FCRA Criteria should have been designed to do, and probably what Congress intended in the 2020 Directive. The current Criteria are far too deep in the rabbit hole to be salvaged, but in any case, amending WIFIA’s statutory eligibility is a more transparent path to definitively resolving what has effectively become an issue of fundamental WIFIA eligibility.
The necessary modifications will take the form of two short, low-impact amendments. The first goes to the heart of the issue and adds a specific definition for “non-Federal borrower” to WIFIA’s Section 3902 list of defined terms. The definition will start by essentially restating FCRA law and principles (i.e., a non-federal borrower using non-federal resources for loan repayment) but goes on to add the special validation provisions required for non-federal cost shares.
To avoid any ambiguity, the last part of the definition will deem a non-Federal borrower successfully complying with the rest of the definition to also be a ‘non-federal borrower’ under FCRA law, a characterization that will dovetail into WIFIA’s existing statutory budgeting procedures without further action. Note that the foregoing compliance steps (A) through (D) are substantive and certainly not deemed. Only this final step has an automatic consequence, as a way to confirm a direct connection to FCRA law, the sole goal of the definition.
Importantly, this definition is not meant to be used throughout WIFIA (where the existing term ‘obligor’ is sufficient) but only in Section 3908 (b)(8) where specific eligibility for non-federal cost shares is located. Eligibility there is already limited to an obligor with a non-federal source of repayment, which might be good enough for original policy intentions but is insufficient for FCRA purposes. The second amendment therefore replaces the qualification with the more expansive requirement that the borrower be a non-Federal borrower per the defined term, as determined by the Program.
That last item is important. Status as a non-Federal borrower shouldn’t be automatic, but subject to programmatic discretion, no matter how objectively clear that status might be in particular cases. This is not unusual. The same is true with respect to credit approval for very high-quality applications that obtain a AAA rating in their agency opinion letters. Broad lender discretion just goes with the territory in project finance. Of course, it also means that OMB will have to sign off on the program’s decision. That’s as it should be, and they doubtless will ask very hard questions. However, OMB’s FCRA grilling now will necessarily be guided and bounded by the requirements of a precisely relevant statutory definition. This won’t be a rabbit hole. There are rules.
What the Amendments Will Do
Operating together, the amendments outline a process to establish eligibility for a specific sub-set of applicants. Most EPA WIFIA and perhaps many CWIFP applicants can ignore it. But if you’re planning to finance a cost share, you’ll need to go through Section 3908 (b)(8), as before. Now, however, just showing that your source of repayment is non-federal isn’t sufficient. You must be a qualified non-Federal borrower to be an eligible obligor of a WIFIA or CWIFP loan. The definition shows what you’ll need to demonstrate for the program to consider approval.
I’m assuming that the typical non-federal cost share here involves a relatively big loan to pay for a substantial (though not majority) share of a major project, though I think the process established by the amendments should be workable for a range of possibilities. In a typical situation, the applicant should have the material necessary for the non-Federal borrower demonstration mostly in hand. The credit agency review for the opinion letters will naturally focus in-depth on the loan’s repayment sources. A thorough benefit-cost analysis of the cost share will almost certainly have been completed, either for private-sector investors or public-sector authorities representing local taxpayers. Those distinctly non-federal folks expect to see a convincing case for the value they’ll receive from the cost share relative to their money expended, which is the same case required under the definition.
It should also be straightforward for the applicant to show that its decisions were made independently on an arms-length basis, especially for a public-sector applicant that has had to obtain council approvals or successful voter referenda to proceed with the deal. If this isn’t straightforward for any reason — well, the applicant will need to expect more questions and possible rejection. An ‘above suspicion’ standard is not an unreasonable position for the program to take under the circumstances — there are likely plenty of honest and straightforward infrastructure cost-share situations out there that need financing. The program should prioritize these and let more marginal or complex situations find financing elsewhere.
What the Amendments Won’t Do
Perhaps as important is what the amendments won’t do. They won’t require an unnecessary and completely FCRA-unrelated determination of whether a federally involved project is a ‘federal project’ or something else — the amendments’ minimalist focus is solely on the non-federal share for which the non-federal applicant is seeking a loan, and specifically with respect only to the FCRA classification of the loan itself. They won’t alter WIFIA’s FCRA procedures or deny OMB the final word in this aspect of the program’s budgeting matters. They won’t establish a FCRA precedent for anything other than non-federal cost share situations in federally involved infrastructure projects, a very specialized area covered by only a few loan programs. And hopefully, enacting them won’t require a zero-sum fight in which someone must be publicly proved wrong, and where only one side can win, but both may lose. The amendments will occupy a small, commonsense-oriented place in the middle ground, which is where this issue belongs. Why make any solution a bigger deal than it has to be?
A Graceful Exit for the Current Criteria?
I may be missing something about the way laws work here, but I think that even if these amendments (or the ones in HR 8127 and HR 2671) are enacted, the current Criteria will still be out there and in force. Recent ‘until expended’ appropriations for WIFIA and CWIFP contain specific conditions about certified compliance with the Criteria — they’ll still be on the books, right? Couldn’t the pro-Criteria side simply say that the new definition and modified cost-share requirements are all very nice, but the applicants will have to jump through the Criteria’s hoops as well? And mention, oh by the way, the non-statutory modification of 3908 (b)(8) in footnote 4 is still applicable?
I’d be fairly certain that an additional step is required to defuse the current Criteria and close the rabbit hole for good.
The simplest way, and perhaps what the proponents of HR 8127 and HR 2671 were thinking of, is for Congress to add more law that essentially deems approval by the program and OMB under the new amendments to be compliance under the Criteria wherever that’s required in existing funding authorizations, and then exclude funding conditions (or anything else) related to the Criteria from new legislation going forward. Simple and definitive — but very public and a bit harsh to the pro-Criteria side, no?
It may make sense to consider face-saving alternatives for this step, if only to preserve political energy for substantive battles about WIFIA eligibility. One approach is simply to note that if FCRA-related parts of WIFIA law are amended, the Criteria should naturally be modified to conform to that new law. A short, judgement-free Congressional directive could instruct the relevant parties work together off-stage to produce criteria that are consistent with the processes outlined in the amendments. Some useful refinements and clarifications to the approval process may even come out of that, though the real point is to give the pro-Criteria side an opportunity to gracefully back down in private. Since the new criteria will be consistent with the new law, there needn’t be any further fuss about the issue. Everybody wins.
But if the pro-Criteria side wants to continue fighting to preserve their rabbit hole version of FCRA reality — well, then it’s back to the public arena, where they will likely lose. This is because while WIFIA and CWIFP eligibility for real public infrastructure matters to real people, the current Criteria aren’t worth defending for any reason since they can easily be replaced by something that’s demonstrably better. I believe the pro-Criteria side knows this, and if they’re offered a diplomatic off-ramp, they’ll take it.