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.