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.