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.

OMB’s FCRA Criteria Didn’t Comply with the Directive

In prior posts, I’ve been generally critical of OMB’s WIFIA FCRA criteria. In this one, I’ll focus on a specific point — that the published criteria failed to comply with the requirements of their Congressional directive. Not by a little or in a few details — the non-compliance is fundamental and pervasive.

The Wrong Question

The Congressional directive is relatively clear. Congress wanted to clarify the FCRA issue for federally involved projects with criteria that “…limit Federal participation in a project consistent with the requirements for the budgetary treatment provided for in section 504 of the Federal Credit Reform Act of 1990.” Since FCRA law is solely about loans, this is obviously talking about WIFIA loans to projects, and the limitations on Federal participation in a project with respect to those loans. For example, the most basic limiting criterion here is that the Federal participant can’t directly or indirectly guarantee the loan since FCRA is limited to non-federal borrowers. See? It’s not that hard.

Additional, more nuanced criteria can be developed along these lines with the principles outlined in the 1967 Budget Report, as the directive required. It’s straightforward if you’re asking the right question — FCRA law and the relevant principles in Chapter 5 of the 1967 Report are grounded in the calm rationality of the Enlightenment, not impenetrable Medieval theology or ancient pagan mysteries. I think correct criteria would look something like this: Six Criteria for Federally Involved Projects. Read Chapter 5 and you can try it yourself.

But OMB asked the wrong question. From the Background section of the Federal Register publication:

The question of whether or not to include a project or asset in the budget hinges on whether the project or asset in question is Federal or non-Federal in nature.

How to interpret this statement? What is the ‘project or asset’ here? The specific issue the criteria are meant to address is about budgeting for WIFIA loans — nothing else. The only ‘asset’ involved is a WIFIA loan which is indisputably a federal asset and unquestionably will be included in WIFIA’s federal budget. The question that requires clarification is which bucket of the federal budget the loan belongs in — FCRA or cash-based.

But apparently that wasn’t the question that OMB wanted to answer. The above statement only makes sense if their criteria are focused on classifying the federally involved project itself, not a WIFIA loan to it. Perhaps that classification is relevant for some reporting purposes (CBO scoring or economic impact data?) but if so, that’s a matter for the federal participant’s budgeting, not the WIFIA loan program. More importantly, that classification is not what the Congressional directive asked for, which is criteria to “limit Federal participation in a project”. They didn’t ask for a way to “limit WIFIA participation in a project that OMB determines to be a ‘Federal Project'”.

Still, OMB’s singular determination to classify Federal Projects instead of loans did require some connection to FCRA law, at least nominally, to appear to comply with the directive. That was accomplished with confusing subtlety by this free-floating assertion further on in the Background section:

Regardless of the identity of the borrower, however, requiring that a Federal project
or asset be recorded in the budget on a net present value basis would be inconsistent with 31 U.S.C. 1501

Since the ‘identity of the borrower’ doesn’t matter (yet), a WIFIA loan to a project can only be classified with respect to the use of loan proceeds, right? If OMB has deemed the project as ‘Federal’, those proceeds are also ‘Federal’ and therefore the loan’s borrower can now be identified — as a ‘Federal’ borrower! And FCRA treatment is statutorily only available for non-federal borrowers! See what was done there? OMB is conflating the project assets created with WIFIA loan proceeds with the financial asset that WIFIA creates by making a loan, thereby dragging WIFIA’s FCRA asset budgeting into OMB’s project’s classification.

This legerdemain neatly sidesteps FCRA law’s actual definition of an eligible loan as one to a “non-federal borrower under a contract that requires the repayment of such funds” (where the repayment obligation is integral to the borrower’s identity) and substitutes for it a novel definition of ‘borrower’ that is determined by where the loan proceeds are spent. However, the same word, ‘borrower’, can be used in the phrase ‘non-federal borrower’ and OMB’s project classification approach can apparently be connected to FCRA law. This would be impressive in a twisted way if intentional — but I suspect, per Occam’s Law, it was largely the result of a combination of wishful thinking and genuine confusion.

Cutting through the confusion, it turns out that OMB’s criteria are not in fact based on FCRA law but — something else. That’s the first failure to comply with the Congressional directive.

Down the Rabbit Hole with OMB.

The directive has another hurdle for OMB’s project classification approach to clear — using the 1967 Report’s principles and recommendations. Fortunately for the approach, it’s easy to find one if you only read Chapter 3, ‘Coverage of the Budget’, which is largely about inclusion in ambiguous situations. The Report’s authors admit that this area is a rabbit hole. And OMB enthusiastically jumps right in — a perfect context to keep things vague and mysterious. The sole principle cited for the criteria from the 1967 Report basically says, ‘when in doubt about an activity with some federal involvement, include the whole thing’. How handy for the classification of a complex, multi-party project with a federal participant and practically guaranteed to get the desired result — an entirely Federal Project!

Still, the rabbit hole is not all fun and games. It’s inherently difficult to develop clear criteria in such a context and, after all, that’s what Congress asked for. I imagine it could be done with some creative effort, but the inadequacy of the result for an intrinsically unrelated FCRA issue might be obvious and, in any case explicit criteria for Federal project classification would take away large parts of OMB’s ‘eye of the beholder’ option — where’s the fun in that?

Well, in the rabbit hole all challenges of logic or even the meaning of words can be overcome! Perhaps the Congressional directive should have added this source:

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

‘Criteria’ are ‘questions’ and vice versa, ok? The Red Queen can therefore decide that the requirements of the Congressional directive are fully satisfied.

In the Real World

Of course, back in the real world, all of this is nonsense. Questions, which OMB is entitled to ask anytime, are not criteria. They don’t clarify the FCRA issue for the applicant, who is left guessing as to what the result will be when OMB applies its own undisclosed criteria. Congress specifically asked for criteria to be published in the Federal Register — a public document meant to inform the relevant stakeholders. That’s the second, and perhaps most obvious even to a casual observer, failure of OMB to comply with the directive.

More substantively, if OMB had read (or didn’t willfully ignore) Chapter 5 of the 1967 Report, unambiguously titled ‘Federal Credit Programs’, they’d have seen the principles of what later became FCRA law outlined in great detail and with clarity. There are no rabbit holes there. The primary principle outlined is that federal loans require special budgeting treatment due to a substantive obligation for repayment from non-federal sources – something that is echoed in FCRA law’s definition of a FCRA loan. An exercise in ‘Federal project classification’ doesn’t belong here — but budgeting for WIFIA loans, the explicit topic of the directive, clearly does.

OMB failed to utilize the obviously relevant principles of the 1967 Report in their criteria. That’s the third area of non-compliance with the requirements of the Congressional directive.

Footnote Diktats

Finally, the criteria’s two footnotes should be mentioned briefly. This is where OMB’s desire to classify projects as ‘Federal’ and thereby render them (using OMB’s own special logic) ineligible for WIFIA loans is most unambiguously expressed. For projects with Army Corps or Bureau of Land Management involvement, OMB skips the weak sauce of ‘criteria’ and cuts to the chase with diktats. They’re all Federal! WIFIA loans to such projects are never eligible for FCRA treatment! Don’t even think about applying!

I have to think that after trudging through all the tortuous language of the rest of publication, they enjoyed writing these clear statements of reference-free bureaucratic power. However, the footnote diktats are of a piece with the rest of the work — not based on statute, relevant principles, or the requirements and purpose of the Congressional directive. Nothing — just more free-floating assertions. Compliance failure number four? Yes, if going far beyond the scope and intention of the directive counts.

Junk the Lot

I was more optimistic about OMB’s criteria when I started the FCRA Non-Federal Series late last year. I thought that they would probably require some important clarifications and refinements but had to be at least roughly compliant with the Congressional directive to be published. I assumed OMB would defend their work on that basis. That’s why I thought it worth exploring alternatives to the heavy lift of actually amending the WIFIA statute.

I don’t see it that way anymore. The current criteria are irredeemably flawed, probably influenced by some hidden bureaucratic agenda, and entirely non-compliant with the directive. The current lot should simply be junked completely — rescinded, perhaps by another Congressional directive or re-instruction. Or more realistically, since Congress will be involved either way, get ready to battle it out with an amendment that, as law, will presumably supersede OMB’s nonsense. HR 8127 is soon to be re-introduced and will again contain FCRA amendment language for WIFIA.

Doing nothing and simply living with the current criteria is not an option, even though relatively few infrastructure projects have direct federal involvement. There’ll be plenty of other FCRA-type budgeting and oversight issues that need correct and workable interpretations going forward as federal infrastructure loan programs develop — as they must. OMB’s current criteria for this issue set a harmful precedent for that critical process. They’ve got to go.