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FCRA Non-Federal: Truth, Narratives, and the New Criteria

This post sketches out four sets of bullet points that summarize different aspects of the FCRA Non-Federal analysis to date.

The Simple and Elegant Truth

At this point, the true picture of how FCRA is meant to apply to federal loans that finance non-federal interests in federally involved projects has become very clear:

  • The federal budget is meant to include resource allocation decisions that are under the control of the federal government. Resource allocation that is ‘subject to the discipline’ of non-federal entities should not be included (Chapter 3 of the 1967 Budget Report).
  • Federal program loans are problematic in a cash budget because their repayment cash flows will be recorded as revenue, which is highly distortionary. Federal loans must therefore be treated separately in an accrual-based framework. That separation is the sole purpose of FCRA (Chapter 5 of the 1967 Budget Report and 1990 FCRA law).
  • Use of loan proceeds is irrelevant to the purpose and operation of FCRA — the loan’s repayment characteristics are the sole basis for FCRA qualification. Loan proceeds will be governed by the statutory eligibility and use requirements of the loan program.
  • Therefore, in addition to basic criteria that a WIFIA borrower is a non-federal entity allocating non-federal resources for repayment, non-federal cost shares in a federally involved projects should be subject to two additional FCRA criteria. First, that the value of the cost share to the non-federal borrower is commensurate with its cost of repaying the loan. Second, that the borrower made its allocation decisions freely, according to its standard procedures for financing large capital expenditures, and independently of the federal participant.
  • These additional criteria can be statutorily enacted and replace (or serve as the basis of significant modification of) WIFIA’s seriously and fundamentally flawed current FCRA Criteria. This is the New Approach.

I think that’s the whole story — simple and elegant in some ways, like most truthful things.

The Pro-Criteria Narrative

Unfortunately, the task at hand is no longer about truth, however simple and elegant.

I’ve come to the conclusion that the current Criteria aren’t based on a sincere or well-informed analysis of FCRA law and principles, and unrelated to the truth of the issue except where they butcher it. But that conclusion is largely irrelevant to any practical solution which must be developed in a political context. What matters in that context is the narrative created by the Pro-Criteria side of the issue, either directly by the authors or indirectly by the various entities interpreting the Criteria for application or possible modification. The Pro-Criteria Narrative is not yet explicitly stated anywhere as far as I know, but based on some evidence (e.g., CBO scoring) and the reasoning (such as it is) given in the Criteria publication itself, my best guess is that it goes as follows:

  • A project or an asset with some federal involvement might be considered a wholly ‘federal project’ or ‘federal asset’ for federal budget purposes. Per the 1967 Budget Report, if there’s any ambiguity in the determination, the project or asset should be considered federal.
  • Notwithstanding WIFIA eligibility, a Section 3908 (b)(8) non-federal cost share in a federally involved project may be a ‘federal asset’ for federal budget purposes. This is assumed to be the case for all projects involving two specific federal agencies, USACE and Bureau of Reclamation.
  • A federal asset must be recorded in the federal budget on a cash basis. Regardless of the identity of the borrower, a WIFIA loan to finance a cost share determined by the Criteria to be a ‘federal asset’ therefore must also be recorded on a cash basis, and not on a FCRA accrual basis.

I’ve tried to make this sound as plausible as possible. It wasn’t easy. The goal was for someone reading these bullets quickly to get the impression that the current Criteria’s questions are based on logical and prudential principles. Something like:

We don’t want any games from cost shares in federally involved projects sneakily hiding something from the budget, right? So, if there’s any doubt, include it. And if the cost share ‘federal asset’ is included in the cash budget, the WIFIA loan paying for it ought to be as well. I mean, it’s the same federal asset, or sort of the same, or something. Anyway, just commonsense. Put the WIFIA loan in the nice and safe-sounding cash budget like all the other federal assets. No tricky accrual FCRA privileges for you, mister non-federal cost-share! Oh, that means the loan is effectively ineligible? Well, too bad — we must maintain the sacred integrity of the federal budget!

Am I exaggerating that this misshapen story will be the takeaway in most cases? Probably not.

The Pro-Eligibility Counter-Narrative

As is the way of all narratives in a political context, a counter to the Pro-Criteria Narrative can’t get into strict truth and logic, though ideally any result should end up being consistent with that standard. What parts of the Elegant Truth can be told as a story? Start with the name — not the anti-Criteria, but the Pro-Eligibility Counter-Narrative story. Always say ‘current Criteria’ to imply that an update is naturally imminent. I’ll try more:

  • The current Criteria ignore the most relevant and fundamental principles in the 1967 Budget Report. The main principle in ‘Coverage of the Budget’ (Chapter 3) is that when a non-federal entity is obviously making the decision about its own resource allocation, that activity should not be included in the federal budget. Why is this not obvious for non-federal cost share borrowers that agree to repay millions of dollars from their own non-federal resources?
  • A non-federal cost share in a project will establish a legally valid and substantial non-federal interest in that project. How the non-federal cost share participant pays for its non-federal interest — upfront cash, bank project financing, tax-exempt bonds or a WIFIA loan — is not relevant. On what basis can the current Criteria consider a valid non-federal interest to be a ‘federal asset’? Why does that characterization apply only when WIFIA financing is involved?
  • A WIFIA loan is a federal financial asset that must be recorded on an accrual basis in the federal budget to avoid the distorting effect of non-federal repayment. That is why FCRA was enacted. On what grounds in FCRA law and principles can the current Criteria require that a federal financial asset be recorded on a cash basis?

This wasn’t easy either. So much has to be left out to keep the counter-narrative at the dismal level of the Pro-Criteria Narrative. Hence the frequency of questions — get the Pro-Criteria side to expand their narrative so its full incoherence becomes more obvious.

The Pro-Eligibility New Criteria

The Pro-Eligibility Counter-Narrative should always be followed with an alternative to the current Criteria. Regardless of its merits in the context of the Elegant Truth, such a Pro-Eligibility counteroffer is obviously the essential element of a political solution. In effect, the goal of the Counter-Narrative is to direct focus on the counteroffer, which I think should be based on the New Approach. Originally, I thought simply calling this the ‘Counteroffer’ would be right, but now I’m thinking ‘New Criteria’ might be better packaging. I’ll try it that way for now.

The New Criteria can and should be summarized as succinctly as possible:

  • The current Criteria aren’t based on FCRA law or principles, arbitrarily restrict statutory eligibility and have failed to comply with the 20202 Congressional Directive. They must be replaced.
  • The New Criteria are solidly based on FCRA law and the principles in the 1967 Budget Report. As such, they can be stated as clear and explicit statutory criteria, not opaque bureaucratic questions.
  • The New Criteria include the basic requirement that the borrower is a non-federal entity with a non-federal source of repayment. Two additional criteria establish that the WIFIA loan is financing a valid non-federal interest in a project.
  • The two additional criteria are that the non-federal borrower (1) receives value from its non-federal interest commensurate with its cost of the WIFIA loan, and (2) has undertaken the WIFIA loan repayment obligation independently of any federal participant in the project. Compliance will explicitly confirm FCRA accrual treatment for the WIFIA loan and should be straightforward for eligible loan applicants.

The next step is to start to package the narratives and the New Criteria for a political context. Does that sound fun? No — it will probably be the hardest part of this whole exercise.

The FCRA Non-Federal truth is not packaged, of course, because it’s not directly relevant to that context, but I hope it will remain the foundation of any resolution of the issue. Or at least some type of a consolation.

FCRA Non-Federal: CBO’s 2021 Scoring for S.914 and the Core of the Issue

As a follow-on to the prior post about CBO’s scoring for S.3591, this one looks at another CBO FCRA cost estimate, for S.914 in 2021.

CBO’s 2021 FCRA rationale is, as you’d expect, basically the same as discussed in the prior post. But I’d like to highlight one sentence that in many ways summarizes the FCRA issue at the center of both cost estimates:

Under the proposed direction, [WIFIA] and [CWIFP] could make loans and loan guarantees for federal projects or assets and record the costs on an accrual basis rather than on a cash basis.

This is simply not true, as discussed at length many times elsewhere on this site. The loan is to finance the non-federal borrower’s non-federal interest in the project. Unless the non-federal borrower is a crook or an imbecile, why the hell else are non-federal sources agreeing to repay the loan? Once that’s made clear, FCRA law & principles are very straightforward.

As with the 2020 cost estimate, I can’t help but see an echo of the current Criteria’s rabbit hole of FCRA misunderstanding and confusion in this one. There’s something else wrong with CBO’s statement, but it’s a bit difficult to identify precisely. Whose ‘costs’ are being recorded? The WIFIA loan? The cost share? The whole project? What exactly does the statement mean?

Into the Rabbit Hole

It’s worth going into the rabbit hole for a moment to try to see where the echoes are coming from. We’ll start by illustrating the implications of accepting the current Criteria as a guide for FCRA classification and work back from there.

Let’s say that CWIFP makes a $100 million loan to an honest and intelligent non-federal borrower with a non-federal source of repayment to finance a cost share in a federally involved project. The borrower’s community will really benefit from the cost share — they voted overwhelmingly for extra local taxes and everything. But the project falls afoul of the Criteria’s dread footnote 4 and the cost share is therefore a ‘federal asset’ — kind of like an expropriation, no?

Nevertheless, CWIFP persists. Cash accounting now applies, so the loan incurs an expenditure of the full $100 million. Ah, that’s bad, bad, bad. The program has to go to Congress for a lot of extra credit subsidy. That won’t be pretty.

But the CWIFP loan proponents point out that there’s more to the story, even apart from the obvious merits of the project. After the painful upfront expenditure, all the cash flow inflows from the loan’s repayment are revenues — yes, just like more taxes incoming. Investment-grade, secured, contractually enforceable and precisely scheduled federal taxes that the community is willing to pay! And they offered it! They even raised their own local taxes to pay for additional federal revenues to finance a new federal asset!

But wait — there’s more! The total undiscounted debt service of the loan is over $250 million, which means that the net revenue gain to the federal government is over $150 million!

Okay, on a discounted basis, using a UST rate, the revenues happen to equal about $100 million, so the gain is really just covering the deficit UST financing required for the upfront expenditure. And worse, they come in over 40 years, far beyond any imaginable electoral reality. The expenditure, however, is today’s problem.

But you know, problems are relative. If the year is a fiscal trainwreck anyway (e.g., Covid times), maybe an extra $100 million of credit subsidy will matter even less than it usually does — barely noticeable. Future years are perhaps expected be far leaner and budgeting ferociously stringent (e.g., now). Wouldn’t it be nice to have a little incoming revenue that can be used for new spending? Also, CBO’s projection timeframe for cost estimates is ten years, so after the initial expenditure there’s a fair chunk of undiscounted cash incoming to achieve revenue-neutrality for new initiatives that have multi-year costs. And the community paying the extra revenues is actually happy — grateful even! — that their CWIFP loan got done to finance a federal asset. For everyone else, the $150 million cash ‘gain’ to the federal government can of course take central place in the usual soundbite narrative.

Maybe the story is not so bad, after all? Mmmm…if some is good, more might be better. Maybe think about making more federal loans to federally involved projects that specifically fall under the Criteria’s footnote 4? Maybe the Criteria could be applied elsewhere? Just saying.

Exactly What FCRA was Intended to Stop

I didn’t have to make this story up. The basic scenario is exactly what the 1990 FCRA law was enacted to prevent. If you classify a non-federal loan’s reversing cash flows as expenditures and revenues, you’ll get no end of budgeting games mischaracterizing gain and shifting timing. Accrual accounting for federal loans is not some sort of privilege or special gift — pre-1990 federal loan programs used (and abused) cash accounting and were apparently fine with it. Rather, accrual accounting is a long-established mechanism to enforce a more accurate reflection of true gain and cost of finance and leave less room for funny business.

Enforcement is automatic when the accounting framework is uniformly accrual-based, like FASB’s GAAP for private-sector reporting entities. But when the overall framework is primarily cash-based, another step is required to separate activities where accrual enforcement is critical (making loans with reversing cash flows) from those where it’s less important because the scope for distortion is much smaller (almost all the rest of federal budgeting for one-way outflows). The 1967 Report (Chapter 5, Federal Credit) spends a lot of time on describing the importance of this separation (and hence, the rationale for FCRA) and the key distinction between loans and everything else. That distinction is the non-federal borrower’s substantive “…obligation for repayment, plus interest…”, that is, the inflow part of the reversal. It is clear in the context of the Report that this repayment must not be under federal control but an allocation of resources ‘subject to the discipline of the marketplace’ (Chapter 3, Coverage of the Budget). That’s essentially captured by the concept FCRA loans requiring exclusively non-federal repayment sources — those sources make the allocation decision subject to their own, non-federal discipline (e.g., sharp-eyed P3 investors or skeptical local taxpayers).

Use of Proceeds Don’t Matter to FCRA

What isn’t mentioned is the loan’s use of proceeds. I am certain this was because it wasn’t considered necessary. Theoretically, where the loan proceeds are spent don’t affect the loan’s reversing cash pattern, which is the sole factor separate FCRA treatment was meant to address. Absent any policy-determined limitations from the lending program (which of course there always are), the non-federal borrower could just give the money away as far as FCRA is concerned. Even gift it to a worthy federal agency, who presumably will dutifully record the windfall in its cash budget.

Practically, I’m sure the 1967 Report’s authors and FCRA law’s drafters just couldn’t imagine that in the real world, loan proceeds would be used for anything other than to further the non-federal borrower’s own rational and sophisticated self-interest, within the strict limits imposed by lending program rules. Unless there’s crookedness or imbecility involved, I can’t either. The proceeds will inexorably be spent on a programmatically eligible non-federal interest. If policymakers or oversight agencies don’t like a particular use of loan proceeds, they should go ahead and amend the program’s statutory eligibility. FCRA is not remotely the right place to do that.

Use of Proceeds is the Core of the Issue

Yet the current Criteria’s confused focus on the WIFIA loan’s use of proceeds is precisely at the core of the issue. The preliminary reasoning, such as it is, can be summarized as follows:

  • A federally involved project can be classified as a single ‘federal project’. There’s nothing about this in FCRA law, but the Criteria refer to a ‘when in doubt, include it’ principle from Chapter 3 of the 1967 Report as the basis for such a novel consolidation. Nothing else in the 1967 Report is mentioned or apparently was considered. Or even read.
  • All the assets in a ‘federal project’ are ‘federal assets’. Another completely novel concept.
  • A statutorily eligible WIFIA loan with a non-federal borrower and a non-federal repayment source that finances a cost share asset in a ‘federal project’ is therefore financing a ‘federal asset’. Note the cost share becomes a ‘federal asset’ only if a WIFIA loan is used. Cash payment or tax-exempt bond financing apparently doesn’t have this effect.
  • Budgeting for non-financial federal assets must be on a cash basis, not accrual. A cost share that is financed with a WIFIA loan is a non-financial ‘federal asset’ and as such must be included in the cash budget.

All bad enough so far, but there’s still no link to FCRA law or principles. As discussed above, in theory if WIFIA eligibility allowed loans for patriotic donations and that’s what the non-federal borrower wanted to do, a WIFIA loan to finance the gifted ‘federal asset’ would still be forced to use FCRA accrual because the game-prone reversing cash flows are still there. An additional, especially egregious and illogical, step is required to comply with the specific language in the Congressional directive and also perhaps to reach a desired, agenda-driven conclusion:

  • Because the ‘federal asset’ financed by the WIFIA loan must be included in the cash budget, the WIFIA loan must also be included in the cash budget. Therefore, FCRA classification is not available.

Here we are. This is the core of WIFIA’s current FCRA issue. The amount of confusion and illogicality is breathtaking. For one, a WIFIA loan is a federal financial asset for which FCRA accrual treatment is mandatory, not a special privilege. The use of the loan’s proceeds is entirely separate and completely irrelevant to the WIFIA loan’s important FCRA characteristic, its reversing cash flows. It is the WIFIA loan’s own characteristics as a federal financial asset that determine its correct budgeting, not the separate asset (federal or non-federal, whatever) created by the loan’s proceeds. Not only are the ‘federal asset’ and the WIFIA loan asset two different federal assets, but it was recognized by the 1967 Report that they are also so fundamentally unlike as to require different treatment in the federal budget.

It gets worse. Not only do the Criteria ignore everything in the 1967 Report except for one largely irrelevant statement taken out of context, but they invent new budgeting concepts that go directly against what the Report does say that’s relevant to this budgeting issue. Is the WIFIA loan’s repayment source under federal control? Well, no. Is the repayment demonstrably subject to non-federal discipline? Well, yes. Does the WIFIA loan create a substantive and predictable reversing cash flow pattern? Yes, that’s true, too. Then how can the WIFIA loan be included in the cash budget? Because the loan proceeds paid for something we call a ‘federal asset’ in a ‘federal project’ and federal assets go into the cash budget. Right or wrong, why is that classification relevant to budgeting for a separate federal financial asset like the WIFIA loan? Because… I’m honestly not sure how the last question could be answered with any kind of logic or reference to FCRA principles.

But the question has never been asked. The Criteria don’t explain anything about their reasoning and conclusion, instead relying on a series of assertions (including in its purest form in footnote 4) with the sole exception of the irrelevant quote noted above. The resultant picture is confusing, and though the Criteria are clearly flawed in many ways, it takes some effort to backfill the missing pieces and pin down exactly why, as the inordinate extent of FCRA Non-Federal posts on this topic on this site shows.

I think I’ve got it right now: The single most precise and fundamental problem with the Criteria is that budgeting for a ‘federal asset’ (real or imagined) does not override FCRA budgeting for an eligible WIFIA loan because the loan’s proceeds were spent on that asset. There is no logical or principle-based connection between the two. There are plenty of other errors and oddities in the Criteria, but once the core of its erroneous reasoning is surfaced and invalidated, the Criteria’s unfounded connection to FCRA is lost and the rest of its obstructive mess can be forgotten.

FCRA Non-Federal: Revisiting CBO’s 2020 Scoring for S.3591

This post looks at CBO’s rationale for rejecting the WIFIA FCRA amendment language in S.3591, a 2020 Senate bill. This is worth revisiting in some detail for two reasons. The first is that the soon-to-be-reintroduced HR 8127 and current HR 2671 House bills use very similar language in their FCRA amendments as S.3591 did [1]. If CBO scores that language again at some point in the process, presumably they’ll apply the same rationale.

The second, more fundamental reason, is to review the New Approach in a context of the amendment proponents’ intentions and CBO’s basic reasoning.

The analysis begins on page 3 of CBO’s 11/20/20 Cost Estimate (emphasis added):

S. 3591 would limit the criteria used to determine the budgetary treatment of the anticipated net cost or savings of loans or loan guarantees made under EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) program.

This is indisputably correct on the surface, because that’s the way the amendment language is written. But did that language accurately reflect fundamental intent? Was the amendment intended to limit any additional FCRA criteria being applied by WIFIA for loans to federally involved projects? Or just definitively get rid of the seriously flawed current Criteria? I think it was the latter, primarily because by that point the issue had become (and remains) contentious, and the amendment’s proponents likely wanted to stake out an unambiguous position. That’s understandable, especially because FCRA law and principles seem so clear that’s it’s hard to imagine why additional criteria would be needed other than to keep the issue in a bureaucratic rabbit hole. It took me a year of thinking about this issue to come up with a possible, if vanishingly rare, scenario that appears to require additional FCRA criteria, as described in the in the New Approach post.

If getting rid of the current Criteria was and still is the sole goal, the first task of the New Approach is to show amendment proponents why additional criteria are (at least theoretically) necessary and how they can be incorporated in WIFIA’s statute in a way that won’t impede truly eligible applicants. Admitting to CBO and other oversight agencies that additional criteria are necessary is not only objectively valid but a critical first step in making progress on this issue by establishing some common ground.

Now back to the CBO side. The paragraph continues:

Under the bill, any budgetary impacts would be recorded on an accrual basis if the borrower is a nonfederal entity and would be repaying the obligation with nonfederal funds. This provision would allow the costs or savings for loans to federal projects that meet those two criteria to be recorded on an accrual basis.

The two criteria, a non-federal borrower and a non-federal repayment source, are all that FCRA law and principles would seem to require in an honest world. The 1967 Report makes it crystal clear that the purpose of FCRA is very narrow: to get non-federal loan repayment cash inflows out of the cash budget due to their distorting effect and gaming potential. How many criteria are required to determine that a large investment-grade loan to a sophisticated non-federal borrower with an extensively analyzed non-federal repayment source is exactly what the 1967 Report was talking about? Not many. Absent the current Criteria, I think CBO would find it as difficult as the amendment’s proponents likely did to imagine exactly what additional criteria are needed. In fact, the difficulty of the exercise is probably what led OMB down the rabbit hole in the belief that there had to be something there that could be used to limit statutory eligibility.

The final sentence in the paragraph looks like an innocuous technical reminder:

That budgetary treatment [FCRA accrual] is not allowed for federal projects under current law.

In fact, it’s quite misleading, though probably unintentionally so. FCRA accrual treatment isn’t allowed for anything other than intangible federal financial assets, certainly not manifestly tangible federal projects. I think what’s meant here is that FCRA treatment is not allowed for federal loans that finance federal projects. But that’s also misleading. As a matter of fundamental statutory eligibility and policy purpose, a federal loan program like WIFIA should never be financing a federal project in the first place. To suggest that FCRA treatment is the program’s sole restriction on loans to finance federal assets, and that inadequate WIFIA FCRA criteria will therefore open the floodgates to all sorts of intra-agency mischief, is simply nonsense.

CBO knows this. What we’re seeing in the above sentence is an echo of the current Criteria’s rabbit hole, where questions are ‘criteria’, FCRA budgeting is applied to projects, a federally involved project is almost always a ‘federal project’ in accordance with undisclosed consolidation principles, consolidation is the only relevant topic for FCRA in the 1967 Report, law can be amended by footnoted diktats, and on and on.

This points to the next task of the New Approach: to demonstrate to CBO that the current Criteria are seriously and fundamentally flawed by proposing criteria that are in fact clearly based on FCRA law and foundational principles. CBO will never openly admit it, of course, but they don’t have to. Raising doubts about the validity of the current Criteria should be enough for CBO to quietly move on from their 2020 scoring, especially if a better alternative is proposed.

The next relevant paragraph again echoes the Criteria, but two specific phrases can be used as the entry point of New Approach concepts:

However, the status of a borrower as a nonfederal entity repaying a loan with nonfederal funds is not a sufficient basis for the loan or loan guarantee to receive FCRA treatment under current law. In directing this budgetary treatment under S. 3591, EPA could make loans and loan guarantees for federal projects or assets and record the costs on an accrual basis—which would be reflected in a subsidy cost—rather than on a cash basis, thus understating the initial funding required for those commitments.

The New Approach agrees with CBO that a non-federal borrower and non-federal repayment source are a necessary, but not sufficient basis, for FCRA classification. The applicant has also to demonstrate that its proposed loan is free from crookedness and imbecility [2]. That shouldn’t be hard. If it is, rejection is probably warranted for reasons that go far beyond FCRA budgeting.

The demonstrations of value and independent decision-making will also confirm that the asset being financed by the WIFIA loan is non-federal because why else would a non-crooked, non-imbecilic non-federal borrower be paying for it?

It is as simple as that. If an honest and intelligent non-federal entity spends $100 million on a federally involved project in its own interest, there will be a $100 million non-federal interest in that project. It’s that asset WIFIA and CWIFP loans are financing, not some sort of mysterious ‘federal’ Chesire cat in the rabbit hole.

The final and most important task of the New Approach is to focus CBO and other oversight analysis on the intrinsically non-federal nature of an asset that a non-federal borrower pays for. That will bring us back to the real-world where FCRA classification, with a few minor confirmations, is as straightforward as the 1967 Report and FCRA law intended it to be.

The Numbers

If CBO is persuaded that the additional criteria proposed in the New Approach are sufficient for FCRA budgeting purposes, their cost estimate should go back to the accrual basis normally applied to WIFIA and other loan programs [3]. The amendments themselves shouldn’t cost anything, as they simply enable the utilization of funding already provided by Congress and I don’t think CBO has ever scored that on the basis it wouldn’t be used.

Still, a couple of things are worth noting. CBO’s 2020 cost estimate assumed that if S.3591 was enacted, there’d be restored eligibility for $150 million per year of WIFIA loans to federally involved projects, which seems low. Now that CWIFP is being implemented and has funding for dams and levees, the estimate looks unrealistically low, based on the potential borrowers I’ve written about here and especially here. Might CWIFP’s implementation change something in CBO’s cost estimates for new WIFIA law? I can’t think of anything at this point, but perhaps the change in WIFIA’s scope since 2020 ought to be kept in mind.

Interestingly, CBO had a view of what would have happened to the current Criteria if S.3591 had been enacted. Here’s their footnote 5:

The Further Consolidated Appropriations Act, 2020, provided subsidy budget authority for the WIFIA loan program but required EPA to develop criteria to determine project eligibility and apply those criteria for projects selected in the 2020 cohort. CBO estimates that [the current Criteria] would effectively prohibit EPA from selecting projects for WIFIA loans that would receive accrual treatment under S. 3591 but cash treatment under current law. CBO expects those criteria to remain in place through fiscal year 2021. As a result, CBO estimates that the provision would have no effect on direct spending for funds provided in that fiscal year.

They seem to be thinking that the Criteria can remain in force even after new WIFIA law is enacted, at least for a period. I wrote about this scenario in the last section of the New Approach post. But what’s CBO’s basis for assuming that the Criteria go away after one year? Automatically, or are they assuming some additional future action? I wish they’d explained their thinking — perhaps they’d be on board with the kind of graceful exit recommended in the New Approach?_____________________________________________________________________________________________

Notes

[1] HR 8127 and HR 2671 have the same language:

‘‘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
Act).’’.

The Senate bill which CBO scored, S.3591, differs only in referring to “the project or asset for which financial assistance is being provided” in place of “such financial assistance“. As discussed above, this older language is incorrect (FCRA doesn’t apply to projects, only loans), probably echoing (as CBO’s statement did) the Criteria’s basic error. The fact that it’s fixed in the newer House bills is positive, of course. I doubt that change in itself would lead to a different conclusion, since presumably CBO will again apply the same Criteria-based framework, other things being equal. But the change (and especially why it was considered necessary) is a good opener for a discussion that’s very much on the right path.

[2] It’s worth noting that the relevant crookedness here is fundamentally related to an exercise of federal sovereign power, apparently an important factor for CBO’s general scoring principles. That should be highlighted to help establish some common ground outside the current Criteria.

[3] Unfortunately, that will probably include CBO’s previously used assumption that a WIFIA loan for 49% of the assets being financed will necessarily entail the issuance of additional tax-exempt debt for the 51% balance, leading to a hit on federal tax revenue. While that’s demonstrably not true for most EPA WIFIA loans to date, it might be more valid for CWIFP’s lower-rated and more contingent projects. In any case, a separate issue for another day.

Update on Extended WIFIA Term — Different Story, Different World

It’s a simple change. WIFIA’s current maximum loan term is 35 years post-construction. That should be extended to at least 55 years for long-lived water infrastructure projects. Now more than ever.

The topic has been covered in previous posts: Same Story, Different World (July 2022), WIFIA 55-Year Loan Term (September 2020) and Extended Term for WIFIA Loans (February 2021).

Different Story

This time, the basic story has in fact changed over the past year. Interest rates are again significantly higher than before, but the important factor is that the UST yield curve is even more inverted. That means a primary benefit of a WIFIA loan, avoiding the negative arbitrage of a construction escrow, is not too valuable in the current environment [1]. Relative to just financing the whole project with tax-exempt bonds, the borrower will save about 3% of project cost on an NPV basis for the current 35-year term. Not immaterial, but much lower than the 5-10% range WIFIA was able to provide in the past. A lot of potential applicants might take a pass.

A 55-year term gets the NPV benefit back up to about 8%. The other numbers (very slight FCRA cost increases, lower tax-expenditure) are also about the same:

The primary driver of the preserved level of benefit is the longer term’s relatively greater utilization of US Treasury flat-forward pricing. This factor is always important for federal infrastructure loans. It is an intrinsic strength of long-term federal lending which enacting a 55-year term will make possible to explicitly recognize and highlight. Much more sustainable and broadly applicable than periodic and potentially costly program benefits based on construction escrow negative arbitrage.

Even More Different World

What I wrote in last year’s post about the importance of the extended term seems even more applicable today:

“In the relative optimism of recent years [up to 2020], extending the maximum term of certain loans in a small sectoral program for large water utilities might have seemed…well, not exactly a compelling priority, regardless of logic or potential benefits. I think it was seen as a minor change for some Western water management projects that had other issues with the WIFIA program (federal budgeting) and useful only to a regional constituency. The WIFIA Improvement Act of 2020 went nowhere.

A pessimistic outlook will – or at least, should – change that perception. Yes, it’s still a minor change and only applicable to long-lived water projects. But more relevant in a tough environment:

  • Local funding will be even scarcer, especially for types of infrastructure where it’s easier to kick the can and defer renewal – like stormwater systems. These projects tend to be mainly composed of long-lived, structural assets which could support and benefit from a 55-year loan term. As more water agencies look for WIFIA loans to mitigate the effects of higher interest rates and inflation, they’ll be plenty with long-lived assets. And they’ll be looking for every penny of benefit they can get. That constituency will be national in scale and highly motivated.
  • Federal infrastructure loan programs will need to expand their capacity but also their capabilities. Not big, transformational changes (that’ll be impossible) but many small, specific modifications to loan products that have predictable benefits. Extending WIFIA’s maximum term is a perfect example of what’ll be required. As such it can serve as a demonstration that, despite overall political polarization and dysfunction [even worse now], at least one area of federal policy can be successful. It shouldn’t be difficult — TIFIA just extended their maximum term (to 75 years, no less) in the 2021 IIJAA. A win for WIFIA’s maximum term will encourage more of what will work.
  • More subtly, longer terms for infrastructure loans help shift the focus to the long run, where it belongs, and away from a business-as-usual mindset. That focus matters for evaluating investment in climate change, long-term environmental sustainability and quality of life for future generations. It’s no secret that the ESG agenda doesn’t seem to have the kind of consensus behind it as it did recently – a trend that is likely to get worse [it has, dramatically]. An extended term for WIFIA loans is a small step in the right direction.“

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Notes

[1] Just mathematically, higher absolute levels of interest rates also erode a WIFIA loan’s value relative to a tax-exempt bond with a comparable term because the tax exemption is applied to a larger amount of income. Post here describes the numbers: Subsidized Debt and Term, Interest Rates. Beyond the 30-year term in the muni market, however, uncertainty about the tax code and income will likely outweigh this advantage — hence another reason for a 55-year WIFIA term.