Like the prior post about A-11, this one takes a ‘legalistic’ view of what’s required with respect to WIFIA loan optionality for federal oversight compliance, this time by OMB Circular A-129.
There is a lot in A-129 about fundamental credit program policy — what the program is for, what it accomplishes, whether there are alternatives, etc. Much of it is problematic for EPA WIFIA, if actual outcomes were ever honestly reviewed. But that’s a big topic for another post. Here’ll we just look at what A-129 appears to require for correct FCRA budgeting, a narrower topic with more objective standards to evaluate whether the Program is in compliance.
We’ll parse the brief language above. Obviously, the Program needs to be in strict compliance with FCRA law, but the top statement goes a bit further. ‘In accordance with FCRA’ implies compliance with the spirit and principles, as well as the letter, of the law. Or so it can be read — in any case, there aren’t any modifiers or qualifiers to the statement, so a more expansive or natural interpretation seems to be justified. I’m sure the authors of the 1967 Budget Commission and the drafters of the lapidary 1990 law would have wanted it to be seen that way.
The next phrase clarifies that compliance is pro-active: “…agencies must analyze and control the risk and cost of their programs.” A surface view, like “all our borrowers are highly rated, completely non-federal eligible entities, so everything is OK” is not at all sufficient. The risks and costs of financial portfolios are always complex, and all the more so for big, long-term infrastructure loans. Credit risk is one factor, and perhaps the primary one at most federal credit programs, but it’s not the only one, and especially not at EPA WIFIA. Maybe the folks at the Program expected the loans to be all about clean water and improving the environment and that sort of thing, and they didn’t sign up for abstract financial analysis. Too bad — if you commit $25b of taxpayers’ money, you’d better learn how to properly analyze the actual risks and costs of the portfolio or hire people that can.
Now comes an interesting sentence: “Agencies must develop statistical models predictive of defaults and other deviations from the loan contract.” As discussed in a number of prior posts, some statistical analysis and modelling will be required to correctly estimate and apportion for the cost of WIFIA loan optionality, taking into account the probabilities of various factors. Such models are of course already in standard use for credit risk but note that the sentence doesn’t say “utilize” statistical models. It says that the Program “must develop” them. In other words, consistent with the requirement to ‘analyze’, the Program can’t just rely on off-the-shelf models that work for most other federal credit programs and call it a day. If there’s evidence that Program loans pose some unusual or unique risks and costs, as there is clearly at WIFIA, a customized statistical and ‘predictive’ model must be developed. Complicated? Boring? A PITA? Again, too bad — if you can see a risk or cost, you must develop the appropriate models.
But we should be precise. The sentence talks about “other deviations from the loan contract”. Obviously, that includes all the other things a borrower might do, short of payment default, that are in violation of the loan contract and pose a risk or cost to the government. Failure to perform on a covenant, for example. But the exercise of WIFIA loan options is not a deviation from the loan contract in that sense. The optionality is doubtless clearly stated within the document, and the borrowers’ lawyers would make very sure about that in connection with their clients’ underlying motivations. Strictly and literally construed, the language would seem to limit model development to factors arising from loan contract default or near-default, with the costly consequences of loan option exercise given a free pass.
However, there is another, more natural, way to interpret what OMB was trying to convey with the word ‘deviation’. Yes, of course, all defaults are included. But it would make more sense if ‘deviations from original expectations about the loan’ were also included. When a WIFIA loan is executed, it is expected (per official EPA narrative, anyway) that it is to be a source of financing for a project. Cancellation or delayed disbursement is possible, but they would be a ‘deviation’ from the original intent and expectations, the precise description of which forms the bulk of the loan contract. It might be considered unusual (in fed credit land) for a loan cancellation or delayed draw to pose risks and costs, but if there’s evidence these ‘deviations’ do, then I think they come under this sentence.
More generally, whatever OMB had in mind, FCRA law and the Anti-Deficiency Act would seem to require that any identified risk or cost to the Program be analyzed and modelled with appropriate methodology, e.g. statistical for WIFIA optionality. There is no free pass for certain kinds of unexpected costs — if there were, this would be exploited as a budget-gaming loophole, which was exactly what FCRA law was intended to prevent. As noted above, the Program must act “In accordance with FCRA”.
[Mmm…”exploited as a budget-gaming loophole” like, oh I don’t know, intentional reliance on PIA and mandatory appropriations to make WIFIA look magically cost-effective?]
Bottom line for this one? Whether they like it or not, I think EPA WIFIA was and is obligated to evaluate WIFIA optionality per the requirements of A-129. I have seen no evidence that they have done so or are planning to do so. It is possible that the Program simply didn’t disclose such evidence, but then why did OMB FY25 and FYTD26 loan subsidy apportionments apparently only include credit risk? Well, perhaps the picture is more complicated. Eventually, however, it’ll be clear whether or not EPA WIFIA is in compliance.