I noticed on the site for HR 8127 that a CBO Cost Estimate for the bill hasn’t yet been done.  Not surprising considering it’s still in an early stage of the process.

If or when a cost estimate is done, presumably there’ll be some review by CBO’s Joint Committee for Taxation (JCT) for any impact on federal tax revenue that the proposed WIFIA amendments might have.  The tax revenue impact comes from JCT’s assumption that when WIFIA makes a loan for 49% of the cost of a public-sector water project, the project will issue tax-exempt bonds (which wouldn’t have been issued otherwise) to finance some, or all, of the 51% balance.

Recent JCT Tax Revenue Cost Estimates

In the America’s Water Infrastructure Act of 2018 (S 2800), the tax revenue hit to WIFIA due to assumed tax-exempt issuance was $2.6 billion over ten years — much higher than the program’s discretionary appropriations for the period. From my analysis of the numbers, it appears that JCT made the maximum assumption that every $49 of WIFIA lending will result in $51 of tax-exempt bonds.  Based on WIFIA’s actual loans to highly rated public water agencies for essential, non-optional projects, this is almost certainly wrong.  In fact, the opposite assumption that WIFIA loans displace tax-exempt bonds if far more consistent with the program’s results to date. Here’s a post I did at the time: Yes, Get WIFIA’s Budget Scoring Right. Underlying analysis here — The Economic Cost of WIFIA’s Current Loan Portfolio Part 2: Federal Tax Revenue Impact — and a one-page letter, Letter to JCT on WIFIA Assumptions.

JCT also scored the Infrastructure and Investment Jobs Act of 2021(HR 3684) about $1 billion cost for tax-exempt issuance assumed to be caused by grant funding to SRFs. It was assumed that SRFs would leverage the additional capital with tax-exempt bonds. While this is a plausible — and arguably hoped for — outcome, it doesn’t reflect the long-standing reality that few SRFs consistently use leverage or that they might borrow from SWIFIA instead, which has no tax revenue impact. Here’s a post on that: WIFIA Loans to SRFs Will Pay for Themselves.

What I did not see in the CBO/JCT cost estimate for the IIJA is any reference to a tax revenue impact of the $75 million funding for the Corp’s WIFIA section, CWIFP. I could be missing something — perhaps the correct estimate is elsewhere? But if not, it raises a question about why this additional funding for WIFIA loans doesn’t have the same type of tax revenue impact that JCT assumed for other WIFIA spending in S 2800. It’s possible that the funding amount and potential impact was simply immaterial in the context of the giant IIJA — CBO/JCT would have had plenty else to do. However, if JCT consciously decided that CWIFP loans have a different tax revenue impact than other WIFIA loans, what was the basis of their decision? The $75 million will be used to support loans for rehabilitating dams owned by “state, local government, public utility, or private” entities and any federal ownership is disqualifying. Based on ownership, and the program’s minimum investment-grade standard and public sponsorship requirements, a lot of CWIFP projects should in theory be able to issue tax-exempt bonds. A CWIFP loan is generally limited to 49% of project cost, so 51% will need to be financed elsewhere, just as in typical WIFIA loans. Perhaps JCT is assuming that CWIFP dam projects, even if creditworthy, will be more idiosyncratic and complex than typical WIFIA water system projects, and hence more likely to seek capitalization (state grants or loans, P3 equity, etc.) outside the tax-exempt market. That assumption likely reflects reality to some extent — certainly more so than JCT’s overall assumptions about other WIFIA loans.

Tax Revenue Impact of 55-Year Term Amendment

With the above background, there are a few points to consider in anticipation of CBO/JCT’s cost estimate for HR 8127.

The only item in the bill that would seem to affect future spending is the amendment in Section 6 that authorizes unspecified appropriations for CWIFP for 2022-2026. I don’t know how CBO looks at this, but with regard to the tax impact of possible increases in CWIFP funding, I would guess that JCT will take a view consistent with IIJA scoring — it’s either immaterial or CWIFP loans do not cause more tax-exempt debt to be issued. But not necessarily — it’ll be interesting if they take a different position for HR 8127.

The FCRA amendment and other clarifying items about small communities, eligibility for transferred and congressionally authorized projects, and collaborative delivery will likely accelerate CWIFP applications — and maybe even add a few to EPA’s WIFIA program. But I don’t think these will have either a spending or tax impact since they don’t change the level of authorized appropriations.

The maturity date amendment in Section 5 will probably be seen by CBO/JCT in the same way — that it affects only program utilization but not spending or tax impact. But I think that is not quite correct. This is because the 55-year maximum term will apply to EPA’s WIFIA loans (which JCT has assumed will cause more tax-exempt issuance), not just CWIFP (where they apparently don’t). Currently, WIFIA loan terms aren’t that different from those for bonds in the tax-exempt market, regardless of project useful life. But for long-lived projects, a 55-year WIFIA loan at UST pricing will be significantly different than a 30-year tax-exempt muni bond. A highly rated public water agency financing an essential long-lived system (e.g., pipe replacement) might decide that a WIFIA loan with a 35-year term was not worth the effort and to go with 100% muni bonds to finance the project. A 55-year WIFIA loan could change their decision to a 49% WIFIA/51% muni bond mix — in effect, the WIFIA loan’s longer term is causing tax-exempt issuance displacement. And that results in more, not less, federal tax revenue.

The same concept would apply if a limited buydown amendment is added to HR 8127. There is no equivalent to the limited buydown in the muni bond market, and the usefulness of the feature might prompt water agencies to opt for a WIFIA loan instead of bonds. There’s a general principle here, I think — for EPA WIFIA’s highly rated public agency borrowers, the more non-market features a WIFIA loan has, the more likely it will be used to displace tax-exempt market bonds. This is already demonstrable from WIFIA’s success to date with the post-execution construction rate lock and reset, features that allowed the program to compete head-on against muni bonds right from the start. Adding more features will augment this competitive advantage, increasing tax revenue while providing financing that should improve US water infrastructure.

I don’t know the protocols behind a congressional request for a CBO/JCT cost estimate on a bill. But if it’s possible to request a specific focus, that might be worth doing for HR 8127 with respect to the tax revenue impact of the 55-year term. At least it would surface JCT’s underlying assumptions about WIFIA and CWIFP, and perhaps they’ll be open to revising their models to incorporate WIFIA’s actual results to date and take a more data-driven approach going forward. At best, the cost estimate for HR 8127 might include revised estimates of tax-exempt issuance for WIFIA altogether, a negative overall cost for the bill, and positive implications for future infrastructure loan program development.

Three federal infrastructure loan programs – WIFIA, TIFIA and CIFIA – collectively offer loan features that are useful and effective for long-term infrastructure financing.  Usually, the features are provided through a program loan made directly to a qualifying project.  But there’s also an indirect path – WIFIA and TIFIA can lend to water state revolving funds (SRFs) and rural state infrastructure banks (RSIBs), respectively.  These entities then can make separate, smaller loans that incorporate or reflect the program loans’ features.

In these cases, the ‘wholesale-to-retail lender’ approach has some sector-specific policy objectives.  For the SRFs, the goal is to encourage leverage at smaller, unleveraged funds, thereby increasing the impact of federal grant funding.  A more expansive effort was proposed by the SRF-WIN Act in 2018, but it did not pass.  For RSIBs, there’s a significant interest rate subsidy (50% of UST base), in effect providing a federal grant to states for their rural sectors.

Mass-Producing Loan Features and Outsourcing Transaction Origination

But now that the federal program lending to state lenders approach is statutorily established and (to some extent) utilized, there’s a more generalized way to look at it.  The programs’ loan features are essentially financial, not sectoral.  They have been designed and approved to provide a type of financing to US infrastructure that will encourage overall infrastructure policy outcomes – sustainability, resilience, social and economic goals, accelerated renewal, etc.  The features can work towards these goals at specific projects regardless of whether they’ve been delivered directly by the program or indirectly by another lender that has received a program loan.  In many ways, incorporating these financial features is the easiest part of loan origination and execution – they get written into the documents with more-or-less standard language and operate in much the same way for all loans.  Unlike other aspects of federal infrastructure loan program transaction processing, loan financial features can be mass produced.

In this context, federal infrastructure program lending to state lenders is a type of outsourcing that can deploy financial features based on federal capabilities to a wider range of infrastructure projects than the programs can do on their own.  Given the huge scale of the US infrastructure renewal challenge, especially relative to the size of federal infrastructure loan programs, shouldn’t such outsourcing be an overall policy objective regardless of specific sectoral applications?  If the loan features are useful in encouraging infrastructure outcomes, can be mass produced with existing federal capacity, and are deliverable through other public-sector lenders that are already originating infrastructure investments, then why not?

Infrastructure Pension Obligation Loan Program

There are likely various ways to implement outsourcing federal infrastructure loan features, ranging from simply expanding existing processes (e.g., more funding and features for SWIFIA, WIFIA’s SRF section) to an open program for all qualified lenders, including those in the private sector.  For this post, I’d like to sketch out one that would involve state-level public-sector pension funds.  I think this will illustrate the potential of outsourcing even within the public sector but also highlight some of the challenges.

State pension funds certainly have scale and investment capabilities.  There are about 300 funds with about $4 trillion of assets.  Obviously, most of their investment operations aren’t connected to financing long-term infrastructure projects, which would likely fit into their private market fixed-income and alternative buckets – maybe 1% or 2%?  Still, that small percentage is about $40-80 billion in portfolio volume, roughly the current aggregate capacity of TIFIA, WIFIA and CIFIA combined.

There’s no question that the investment teams of state pension funds would know how to utilize the financial features of federal infrastructure loans.  The harder part is how to attach and ensure compliance with both standard federal crosscutters (e.g., Davis-Bacon, NEPA, tec.) and infrastructure policy objectives (resiliency, sustainability, etc.).  And there will be a related question about how the benefits of the loan features should be shared between the pension fund and the ultimate borrowers.  The benefits should motivate both the pension fund and the borrower to implement policy outcomes that wouldn’t have happened otherwise – but how to split them?  Is rigorous oversight necessary to prevent windfalls to either?  Pensions and borrowers will obviously make arms-length decisions based on self-interest, so there’s an element of market discipline on the borrower side.  To the extent that potential windfalls accrue on the pension side, it’s worth pointing that these are public-sector funds, so the ultimate beneficiaries are the state’s citizens.  That’s not so different from a typical WIFIA loan where it’s unclear whether the benefits are improving the infrastructure project or simply being used to reduce the community’s water rates.

Federal infrastructure loans to state pensions could be implemented through special sections in existing sectoral programs, as WIFIA and TIFIA do for SRFs and RSIBs, respectively.  But perhaps the potential scale and specialized aspects of the lending would justify a separate program.  To simplify the illustration of the concept, especially in connection with comparison to state pensions’ bond alternatives (discussed below), this post will assume the latter as a ‘Infrastructure Pension Obligation Loan program’ or IPOL.

Not a Bailout

There’s one thing to make very clear right from the start – the IPOL program is not intended as a bailout [1].  US public pension underfunding is a serious issue. It rightly gets a lot of public discussion, including the possibility of a federal bailout at some point, something underscored by a recent $36 billion rescue of private, multi-employer plans.  More specifically, a 2020 proposal for federal infrastructure lending to pensions was explicitly intended to alleviate pensions’ underfunding, with the infrastructure focus being essentially a bipartisan side-benefit.  Despite the proposed program’s WIFIA-like acronym, the proposal got no traction and apparently little attention.  But the political dynamics are there.

Because political temptation to mix and match separate issues will always exist, the IPOL should be designed with anti-bailout characteristics.  The focus should be explicitly and solely about federal infrastructure policy objectives and how state pensions (regardless of their unfunded status) can help implement a federal loan outsourcing approach – the infrastructure projects are the point, not the loan delivery mechanism.  Pension qualifications, basic subsidies and federal appropriation levels should reflect that focus – a high minimum investment-grade rating (perhaps AA/Aa2?) and US Treasury flat minimum pricing should allow IPOL program credit subsidy leverage to be about 100:1, as it is in WIFIA.  Even a $50 billion program would require only about $500 million in discretionary appropriations – that’s enough to encourage policy-oriented infrastructure lending, but it’s not bailout territory. 

IPOL Loan Features

As with other federal infrastructure loan programs, the IPOL’s central mechanism to implement policy outcomes is the value of program loan features. For those, the place to start is what’s already established and offered at WIFIA, TIFIA and CIFIA. There are seven that I think are especially relevant.

Four of the features concern interest rate management during transaction origination and portfolio management thereafter:

• UST Rate Lock: As noted above, basic pricing should be the applicable US Treasury rate at loan execution. More importantly, loan drawdowns at this fixed rate would be optional within a period of years (maybe 3-5?) to allow the pension fund to originate and process investments.  The post-execution rate lock during drawdown is a common feature at the three existing programs, but it was expanded at WIFIA in construction financing terms for long-term capital improvement programs at utilities, not just specific projects. Portfolio assembly is analogous [2].

• Rate Lock Reset: The IPOL program can reset of the rate lock if Treasury rates fall before drawdown. This is not statutorily required, but it’s an established procedure at WIFIA and TIFIA.

• Limited Buydown: The program can set a limited interest rate cap at the date a loan application is accepted, which may be months or even years before loan execution. This permissive feature is statutory in TIFIA and (with additional details) at CIFIA, though currently absent in WIFIA for some reason.

• No Cancellation or Prepayment Penalties: This is a standard feature in all three existing programs.

Three other features involve non-pricing aspects of the loan:

• 55-Year Term: TIFIA offers loan terms of up to 75 years for projects with long useful lives and a 55-year term is being proposed for WIFIA. Assuming that the pension is building a long-duration portfolio in an actuarial context of 60-70 years, an IPOL term of 55 years (at least?) would seem to be analogously justified.

• Credit Rating Based on Portfolio or Pension Recourse: As mentioned above, IPOL loans should require a high investment grade rating. The rating may be based on the expected (and demonstrable) rating of the portfolio when funded or, more practically, on recourse to the pension. Most states are rated at least AA/Aa2 and generally backstop pension obligations.

• 80% Portfolio Leverage: CIFIA offers loans of up to 80% of project cost and the same leverage was proposed in the SRF-WIN act for SWIFIA loans. If IPOL’s goal is to outsource in scale, a high leverage ratio would make sense when combined with high minimum credit quality described above.

IPOL Loans vs. POBs

The value of WIFIA loans to highly rated public water agencies is assessed by a comparison to their debt market alternatives, tax-exempt revenue bonds. In the same way, federal IPOL loans should be compared to the state pensions’ financing market alternative, pension obligation bonds, or POBs. Despite the pensions’ public-sector status, POBs aren’t tax-exempt. As a result, direct arbitrage is rare, and POBs are used by only a few states to leverage equity returns, a somewhat risky strategy which depends a lot on market timing. IPOL loans cannot be used for that purpose — the benefits of the loan features (most notably the UST interest rate and rate lock) should be directed towards (and perhaps limited to) low-risk, long-term infrastructure investments like highly rated private placements. Some positive return should be expected to provide motivation for policy implementation but as discussed above, not excessive windfalls.

The risks of POB issuance are well-recognized. IPOL loans should have a far lower risk profile — here’s a comparison with GFOA’s current advisory on POBs (click on to enlarge):

Next Steps?

At this point, the concept of outsourcing transaction origination to deploy federal infrastructure loan features is a thought experiment and the IPOL program simply an illustration. This post is really just an initial outline for future discussions if there’s interest — which I think there will be.

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Notes

[1] More precisely, not more of a ‘bailout’ or subsidy than federal infrastructure loans are already in terms of transfer payments to specific communities. Possibly less, if loan features are explicitly designed and assessed in terms of real-world infrastructure additionality.

[2] Readers of this site might wonder how including this and the other interest rate features will not lead to the FCRA loss ratchet described in previous posts on WIFIA’s economic cost. A good question that, if it’s ever raised by policymakers, perhaps ought to be answered in the context of fairness as opposed to logic. Federal infrastructure loan programs should work with the funding tools at hand, including FCRA subtleties, on an equitable basis as long as the fundamental goal of improving US public infrastructure is furthered. Realpolitik, in other words.

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.

This is the seventh post in the FCRA Non-Federal Series

FCRA is not the only federal law that needs to make a distinction between federal and non-federal debt repayment sources. Federal tax law has this at IRC § 149 (b):

(b) Federally guaranteed bond is not tax exempt

(1) In general Section 103(a) shall not apply to any State or local bond if such bond is federally guaranteed.

(2) Federally guaranteed defined. For purposes of paragraph (1), a bond is federally guaranteed if:

(A) the payment of principal or interest with respect to such bond is guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof) …..

(C) the payment of principal or interest on such bond is otherwise indirectly guaranteed (in whole or in part) by the United States (or an agency or instrumentality thereof).

The primary purpose of this prohibition is to prevent the creation of a class of ‘tax-exempt Treasury bonds’ that would compete with Treasury’s taxable issues.  It is another example of a rule that determines federal boundaries for certain debt-related activities.  Federal debt isn’t eligible for tax-exempt status (which would interfere with Treasury’s management of the nation’s debt) or for FCRA treatment (which would undermine the accuracy of the nation’s budget).    

The same issue arises in both cases – short of explicit federal guarantees or repayment obligations, when is the debt ‘federal’ or ‘non-federal’?  Just as in the FCRA non-federal issue, it can be complicated for the application of IRC 149 (b) (emphasis added):

The prohibition under section 149 applies not only to direct guarantees, but also in circumstances where an underlying arrangement may result in the federal government indirectly guaranteeing debt service on an obligation. Congress intended that the determination of whether a federal guarantee exists be based on the underlying economic substance of a transaction, taking into account all facts and circumstances. See H.R. Rep. No. 99-426, at 1013 (1985),1986-3 (Vol. 2) C.B. 538.

For both IRC 149 (b) and FCRA, the underlying economic substance of the transaction must be examined with respect to federal involvement, not the nominal forms. This is because the substance of the transaction is what matters for the rule’s objective — for the former, to avoid the creation of securities that the market would view as effectively tax-exempt Treasuries, and for the latter, to ensure that a FCRA loan’s repayment obligation is subject to external, non-federal discipline.

In 2003, the IRS released a Private Letter Ruling concerning a facility’s ability to issue tax-exempt bonds despite significant federal contractual involvement in various activities at the facility, some of which directly or indirectly created revenues which could be used for bond debt service. The question was whether such federal involvement was a de facto guarantee of the bonds. The decision focused on the facts related to the transfer of risk in the bonds’ repayment obligations (emphasis added):

Based on the facts and circumstances, the payments to the Organization under the Contracts will not cause the Bonds to be federally guaranteed within the meaning of section 149(b). Although the revenues from the Facility will consist primarily of amounts received from the Agencies, the mere fact that federal funds may be available to pay debt service on the Bonds does not result in an indirect federal guarantee. Rather, the question is whether the substance of the transaction (i.e., the contractual relationships between the Organization and the Agencies) results in a transfer of risk to the federal government to pay debt service on the Bonds.

Despite the federal revenues and other activities (which presumably enhanced the overall creditworthiness of the facility’s bonds), the IRS didn’t find that the federal government was at risk for the bonds’ repayment:

In the instant case, there has been no transfer of risk to the federal government to pay debt service on the Bonds.  There is no guaranteed stream of revenues from the Agencies that is available to pay debt service on the Bonds.  Unlike a guarantee, the Agencies have no obligation to make payments of debt service upon a default on the Bonds.  Rather, any payments from the Agencies are subject to the Organization’s fulfillment of its obligations under the Contracts.  Moreover, payments under the Contracts are subject to the Agencies’ receipt of funds pursuant to annual appropriations. Thus, there is no transfer of risk to the federal government to pay debt service on the Bonds in the event of a default and the Bonds will not be federally guaranteed within the meaning of section 149(b).

Although this is a federal tax ruling, the ‘risk transfer’ principle here is completely consistent with the federal budget’s external discipline principle described in the 1967 Report. If the federal participant in a project is, or could be, substantively obligated to repay the project’s debt, the project’s lenders won’t be looking to the project for repayment, but to the federal government. The debt effectively becomes subject only to internal federal discipline. This outcome is prohibited by IRS and Treasury (because their internal decision is to avoid creating tax-exempt Treasury bonds) and examined by infrastructure loan programs with respect to FCRA treatment (because FCRA requires external, non-federal discipline on repayment cash flows).

Because IRC 149 (b) and FCRA decisions for federally involved projects will involve looking at the same facts in basically the same way, I think that a decision in one can serve as an analogous precedent for, or at least provide guidance to, the other. An infrastructure loan program faced with an application from a federally involved project should ask whether the project intends to issue tax-exempt bonds with the same repayment sources as the proposed program loan (in a prior post, I noted this idea in the explanation of Criterion F and in the guidance for WIFIA’s question 11).

There’s no evidence I’ve found that that Treasury pointed out the possible relevance of IRC 149 (b) in developing the WIFIA ‘criteria’. I think this suggests that, despite the Congressional directive and their ultimate sign-off on the published criteria, Treasury wasn’t very involved in the criteria’s development.

IRC 149 (b) and FCRA at Amtrak and Fargo-Moorhead

There are at least two recent cases where federally involved entities issued tax-exempt debt and applied to a federal infrastructure loan program.

The first is Amtrak. As an independent federal agency, Amtrak doesn’t issue tax-exempt debt, presumably because their direct debt would be perceived to carry an implied federal guarantee. But in the agency’s 2021 financial statement, there’s a note describing an Amtrak maintenance facility, subject to a lease-leaseback with a local development authority, that did issue about $100 million of tax-exempt revenue bonds. Presumably, despite Amtrak’s substantial involvement in the facility, the tax opinion was based on factors similar to those in the 2003 PLR described above. Apparently, there wasn’t a risk of an Amtrak obligation to repay the bonds, so the IRC 149 (b) prohibition didn’t apply.

Later in that statement, there’s a note describing a $2.45 billion loan from the RRIF federal program in 2016. RRIF’s analysis of this loan for FCRA treatment was also mentioned in the GAO Report. Per the GAO, the program said that they “ensured the 2016 …loan provided to Amtrak was fully repayable by Northeast Corridor revenues. DOT officials assessed Amtrak’s available revenues and did not consider any federal assistance as a repayment source for the loan.”

It appears that for both IRC 149 (b) and FCRA tests applied here with consistent outcomes, the non-federal source of repayment was the key factor, whereas Amtrak’s overall status as an independent federal agency was not.

The second case is the Fargo-Moorhead project, which received a $569 million WIFIA loan in 2021. The loan received FCRA treatment prior to the implementation of current WIFIA ‘criteria’, but “EPA officials told [the GAO] that if the criteria had been in place during the letter of interest review of the Fargo-Moorhead project, the project would have been deemed ineligible to receive the special budgetary treatment under FCRA.”

Yet later in 2021, the same project issued $280 million of tax-exempt private activity bonds through a state development authority. There isn’t much publicly available information about the details, but it seems that the bonds were part of the $2.75 billion P3 financing that included the WIFIA loan, so some basic terms (e.g., security, repayment sources, etc.) would presumably be similar. I think PABs get even more scrutiny regarding tax-exempt status than typical bonds, so it would appear that the project’s federal involvement was not an issue for IRC 149 (b).

If the project’s WIFIA loan and PABs were in fact essentially equivalent with respect to a non-federal source of repayment, how can the loan’s retrospective ineligibility for FCRA treatment under the new ‘criteria’ be consistent with the tax-exempt status of the PABs? I find it difficult to see how both can be a correct assessment of the project’s debt.

This is the sixth post in the FCRA Non-Federal Series

In June 2022, HR 8127, The Water Infrastructure Finance and Innovation Act Amendments of 2022, was introduced in Congress.  Section 7 of this bill proposes a simple statutory fix to WIFIA’s FCRA issue based on the non-federal sources of loan repayment:

SEC. 5037 BUDGETARY TREATMENT OF CERTAIN AMOUNTS OF FINANCIAL ASSISTANCE. If the recipient of financial assistance for a project under this subtitle is an eligible entity other than a Federal entity, agency, or instrumentality, and the dedicated sources of repayment of that financial assistance are non-Federal revenue sources, such financial assistance shall, for purposes of budgetary treatment under the Federal Credit Reform Act of 1990 (2 U.S.C. 661 et seq.) — (1) be deemed to be non-Federal; and (2) be treated as a direct loan or loan guarantee (as such terms are defined, respectively, in such Act).

This admirably lapidary language goes right the core of the FCRA non-federal issue and is consistent with everything I’ve reviewed so far.  It closely tracks the stated criteria outlined in the prior post in this series:

• The “recipient of financial assistance… other than a Federal entity, agency, or instrumentality” is essentially what I mean by a ‘non-federal entity’ in Criterion B, with the consistent implication that it is also the ‘primary beneficiary’ of such financial assistance in Criterion D.

• Criterion B’s requirement for non-federal repayment sources is then captured by the next condition: “…and the dedicated sources of repayment of that financial assistance are non-Federal revenue sources”.

• Criterion E’s requirement for a siloed approach to FCRA treatment is I think also subtly reflected by this part: “…for a project under this subtitle is an eligible entity…”.  In other words, a WIFIA-eligible project can be a federal entity, but it won’t pass the two conditionals (non-federal entity and non-federal repayment) and therefore won’t get the FCRA treatment specified in the (1) and (2) clauses.  The proposed amendment doesn’t mess with WIFIA’s statutory eligibility, it simply clarifies budgetary treatment.

Perhaps some parts could be expanded for the avoidance of doubt – a confirmation that the non-federal recipient’s decision was not federally coerced (Criterion C), an explicit connection between the use of the program loan for non-federal recipient’s part of project construction and non-federal repayment (Criterion D) and may even a requirement for budgetary consistency from the project’s federal participants (Criterion F). But these details are optional in a statutory approach and could be addressed separately elsewhere.

Resistance to a Statutory Fix

In an ideal world, a statutory fix for the FCRA non-federal issue is the optimal approach and I think HR 8127’s proposed amendment works very well for that purpose.  On the surface, FCRA law’s silence on program loans to federally involved projects looks like a difficult problem.  But as I’ve plowed through the primary sources in this series, I’ve seen that it really isn’t.  The budgetary principles behind the creation of FCRA are clear and consistent with those of the overall federal budget.  They can be applied to federally involved projects in a straightforward way, as the proposed amendment does effectively and efficiently.  If explained carefully, surely everyone will see this and agree that the amendment is a simple fix that allows WIFIA and especially CWIFP to get on with the critical mission of improving US water infrastructure?

Maybe not.  In the real world of political and bureaucratic processes, I foresee resistance to this statutory fix, regardless of its clarity and correctness:

• The biggest one is that HR 8127’s amendment for WIFIA’s FCRA treatment is in effect an amendment of FCRA itself.  How can the central definition in a law that is meant to determine the uniform budgetary treatment for all federal credit programs be effectively re-defined per a statutory requirement at a particular program?  That’s not to say that the amendment’s definition wouldn’t work for FCRA (it simply clarifies what I think is already implied by the language of FCRA’s direct loan definition) but as a matter of process, I don’t think it’s easy to change a big, well-established law in a piecemeal way.  This kind of objection can’t be answered by pointing out the substantive merits of the proposed amendment.  If it is raised, the likely outcome is only an agreement that, ‘yes, that’s a good idea for amending FCRA someday, but for now we can’t do it just for WIFIA’.

• I expect OMB will defend their work. HR 8127’s amendment will not only replace OMB’s published ‘criteria’ for WIFIA, explaining why the amendment is correct will expose their ‘criteria’ as hopelessly wrong.  As criteria they are in fact hopeless but trying to prove that will be difficult precisely because they are only implied, never clearly stated.  Even basic definitions of ‘borrower’, ‘project’, ‘beneficiaries’, etc. can slip and slide all over the place.  And OMB, as the agency responsible for federal budget accuracy, will have the high ground at every turn.   Their real motives might be closer to saving face and maintaining bureaucratic authority in all technical budget matters, but does that ever matter? If you can’t prove why WIFIA’s current ‘criteria’ are inadequate in the elevated context of budget theory, you can’t show why the amendment is necessary without some appeal to real-world expediency. The optics of that aren’t great.

• OMB won’t be the only one defending the status quo.  As noted in the introductory post of this series, it’s hard to tell why a technical clarification of FCRA for federally involved projects became such a heated issue.  But it did, and the parties involved will have a stake in maintaining that their solution, however imperfect in reality, is the right one.

An Alternative Approach

A statutory fix for WIFIA’s FCRA non-federal issue is likely to be a tough fight.  Again, it won’t have much to do with the merits of HR 8127’s amendment but with other factors that are irrelevant to the objective, which is to permit the full and efficient implementation of WIFIA’s and CWIFP’s policy mission.  Is this a fight worth having now?  Perhaps it is – I don’t know the complete story.

But if a multi-factor fight is not in fact useful to HR 8127’s stakeholders, I think there may be another approach that avoids unnecessary confrontation and focuses instead on ensuring that the essence of the amendment becomes the de facto interpretation of FCRA at WIFIA and CWIFP.

In the prior post in this series, I showed that WIFIA’s eighteen questions posing as ‘criteria’ could be interpreted and answered in the context of guidance for six stated criteria solidly based on the primary sources mandated in the Congressional directive.  Although some of the guidance had to work around the implied (but erroneous) intent of the questions, I think the answers would lead to the right conclusion for federal involved projects with genuinely non-federal entities and repayment sources.  It was not a difficult exercise – primarily because, as mentioned above, FCRA treatment for federally involved projects is not a difficult issue. In this approach, the fact that the published ‘criteria’ are questions is useful because guidance for potential WIFIA applicants to answer them is justified — and that’s where the real criteria can be placed.

The HR 8127 amendment is completely consistent with the six criteria I was using, so the same guidance exercise will work as well.  Why not make it official?  As opposed to an amendment with the criteria, HR 8127 could include an instruction that requires WIFIA and CWIFP to develop guidance for applicants in answering the questions in OMB’s published ‘criteria’.  The need for such guidance in a technical area can be demonstrated without any reference to budget principles or even criticism of the current ‘criteria’ – what might look like expediency in a budget context is now simply evidence of the necessity to improve the implementation of statutory policy objectives.  OMB’s approval of the guidance will be required one way or another, so their involvement should be mentioned in the instruction. That might mean a fight.  But it will be on a much smaller, quieter scale, without face-saving and authority factors being involved.  Or perhaps OMB will have little interest in dealing with this issue once again and tacitly agree with the guidance’s criteria, especially if there’s a possibility that a more public resolution will be necessary if the guidance approach doesn’t work.  

Maybe something like this, referencing back to the sources mandated by the Congressional directive:

SEC. [  ] WIFIA CRITERIA GUIDANCE  Not later than [90] days after the date of enactment of this Act, the Secretary of the Army, acting through the Chief of Engineers together with The Administrator of the Environmental Protection Agency and the Director of the Office of Management and Budget, shall jointly develop guidance for loan program applicants in answering the questions listed in WIFIA Criteria Pursuant to the Further Consolidated Appropriations Act, 2020 as published in the Federal Register June 30, 2020, such guidance being consistent with the requirements for the budgetary treatment provided for in section 504 of the Federal Credit Reform Act of 1990 and based on the recommendations contained in the 1967 Report of the President’s Commission on Budget Concepts.