FCRA Non-Federal Addendum: Section 3908 (b)(8)

This post is an addendum to the FCRA Non-Federal Series and my other FCRA analyses for federally involved projects. It adds some thoughts about a short paragraph for the use of WIFIA loan proceeds in current law. The provision touches on loan repayment sources in a way that is consistent with my prior FCRA analyses. However, it’s worth reviewing in a little more depth not only for completeness (I should have included it earlier) but because a careful reading might shed some light on OMB’s thinking behind a footnote in their published FCRA criteria.

Section 3908 (b)(8)

Section 3908 of the WIFIA statute describes various guidance and rules for the program’s secured loans. This is where the financial criteria for Transaction Eligibility are found, as I used those terms in the FCRA Non-Federal No.1 post.

Paragraph (b)(8) in this section is (somewhat implicitly) about federal cost-share situations, in effect federally involved projects:

(8) Non-Federal share
The proceeds of a secured loan under this section may be used to pay any non-Federal share of project costs required if the loan is repayable from non-Federal funds.

The provision simply confirms that using loan proceeds for a local cost-share in a federally involved project is permitted as long as the source of repayment is non-federal. It wasn’t developed (or perhaps even thought about much) for WIFIA specifically — the exact same language is found in exactly the same place in TIFIA law. So most likely a cut-n-paste. [1]

That’s straightforward enough on the surface and the repayment proviso is completely consistent with our conclusions here about FCRA budgeting treatment for federally involved projects. But note that the (b)(8) provision (and Section 3908 in general) is not really about FCRA or any type of budgeting by WIFIA. Most directly, the provision reflects a policy decision that WIFIA loans can be used for this purpose (presumably because it will help deliver more of the sought-for infrastructure) with a proviso that can also been seen as policy (or prudential?) decision — to ensure that the financed cost-share really is an external share, not some sort of intra-federal shell game. If the purpose of a cost-share is to benefit federal taxpayers by reducing the federal resources involved in a big project, the reduction has to be ultimately sourced from non-federal taxpayers, whether paid for upfront or over time by debt repayment. As such, including the proviso would make sense even if FCRA didn’t exist.

I can imagine that the drafters of TIFIA law thought about their (b)(8) paragraph in this policy context. They seem to have decided that valid cost-sharing in federally involved projects can promote win-win outcomes and their new loan program should be explicitly permitted to help. But they also wanted to avoid an opening for internal federal games and added the proviso. WIFIA inherited their decision, perhaps thoughtlessly or simply because such an obviously good idea didn’t require much thought. In any case, Congress agreed in both cases. In effect, (b)(8) is a kind of statutory eligibility in TIFIA and WIFIA that has nothing to do with FCRA per se.

Footnote 4 in OMB’s Criteria

With the above policy objectives in mind, and FCRA out of mind for the moment, we can revisit OMB’s footnote in the 2020 Criteria:

(4) WIFIA authorizes loans to support local cos-sharing requirements. See 33 U.S.C. 3908(b)(8) …. However, such a loan that would finance a project that is in whole, or in part, a project authorized by Congress for the Army Corps of Engineers or the Bureau of Reclamation to construct would not meet the Federal asset screening process…

In effect, this footnote modifies Section 3908 (b)(8) by adding another proviso that rescinds the permission to use WIFIA loan proceeds for cost-share situations which involve two specific Federal agencies, the Corps and the Bureau, regardless of repayment source. The fact that OMB adds a rationale about their decision that projects involving these agencies will never pass their criteria is not very relevant.

Obviously, Congress can modify a loan program’s statutory eligibility (they probably should do that more often) but what’s OMB’s position here? Certainly, their job is to interpret statutes in terms of operational management and add prudential guardrails to their implementation, especially when large-scale federal spending is involved. Some sort of guidance about how federal loans to federal cost-share situations should be managed (again, purely from a policy implementation perspective) would seem to be fully justified in light of the potential, in itself reflected by (b)(8)’s proviso, that games might be played. OMB’s Circular A-129 about loan program management is full of such guidance and in effect, sets forth a lot of rules.

Let’s assume for argument’s sake that such guidance about WIFIA’s (b)(8) eligibility is especially warranted for two the Federal agencies mentioned in the footnote. You could imagine a set of procedures and check lists that applied whenever these two agencies were involved, with particular emphasis on confirming certain facts. The totality of this could present a very high bar for potential WIFIA applicants to overcome, and as a practical matter, many if not all would take a pass. But this approach would still be consistent with interpreting statutory eligibility, not modifying it.

In contrast to this hypothetical, I think OMB’s footnote 4 crosses the line into statutory modification. The footnote is written with definitive language (“would not meet”) that might be applicable in very simple, black-and-white financing situations. Something self-evidently outside Congressional intent that no one would disagree with — e.g., “cost share financing for terrorist organizations would not meet our screening process”. But for the complex, sophisticated multi-party project financings regularly developed for the kind of infrastructure project that these agencies would be involved with, how can OMB claim that all possible variations of loan use and repayment sources will fall afoul of their ‘process’? The factual pre-judgement is so broad that the footnote becomes an unsupported and unjustified assertion — in effect, a modification of WIFIA’s statutory eligibility.

Footnote 4 would be bad enough if it showed up in a policy-oriented circular like A-129. But here it is in criteria that are solely meant to clarify a FCRA budgeting issue. Yes, (b)(8)’s proviso is consistent with a correct interpretation of FCRA law, but as discussed above, there are other reasons to include the proviso from a policy perspective, unrelated to FCRA budgeting. And if the published FCRA criteria are working properly for all cases, why is it necessary to single out loans involving two specific agencies for differential treatment?

Unfortunately, I cannot help thinking that OMB had already made a decision that WIFIA loans for projects involving the Corps or the Bureau needed to be prohibited for some reason which might be related to budgeting but likely not FCRA per se. The FCRA criteria presented them with an opportunity to make a stealthy statutory modification in a context that’s so intrinsically technical and complex that few would dare question it. If this background is basically true, that doesn’t mean the tactic was clearly and malevolently plotted out. Confusion about FCRA and what the criteria were meant to accomplish probably played a big role, and a longstanding wish (very possibly well-meaning) became father to the specific footnote. That’s consistent with the rest of the criteria’s Alice in Wonderland nature, as described in this recent post.

Regardless of intent, however, the overall conclusion about OMB’s criteria in that post applies especially to footnote 4 — just junk the lot and start over.

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Notes

[1] Interestingly, the provision doesn’t appear in CIFIA law, which was drafted after the FCRA criteria were published. This might reflect some impact of the FCRA issue — though I doubt it. CIFIA is different in other ways and (most importantly) that program’s advocates would not have been contemplating federal involvement in private-equity backed, 45Q monetizing, profit-maximizing pipeline projects, in contrast to public transportation & water infrastructure projects.