By John Ryan
Are the 2020 WIFIA Federal Credit Reform Act Criteria an example of bureaucratic overreach? Before Jan. 20 of this year, the answer to that question would perhaps not have mattered much. But now it does – as a precursor to more direct action. So, let’s see.
A 2019 Congressional Directive required Office of Management & Budget (OMB) and the U.S. Environmental Protection Agency (EPA) to develop the Criteria. That was a legislative, not a bureaucratic, action, right?
Yes, on the surface the Criteria were a response to a Congressional directive. But, why would Congress be involved in such a technical matter, much less put out detailed instructions for its resolution, in the absence of some sort of behind-the-scenes initiative from relevant federal bureaucrats? We’re not talking about a Solyndra-type, headline-grabbing issue here. The Criteria are solely about the FCRA classification of cash flows from investment-grade Water Infrastructure Finance & Innovation Authority (WIFIA) and Corps Water Infrastructure Financing Program (CWIFP) loans for non-federal cost shares in federal projects. Specifically, the Criteria are meant to judge whether such a loan’s cash flows are ‘expenses’ and ‘revenues’ (as under federal cash budgeting) or recorded on an accrual basis (as is done throughout the financial world and for federal program loans in the federal budget since FCRA’s enactment in 1990).
It looks like a minor bookkeeping issue about the characterization of low-risk cash flows. But in fact, FCRA classification has latent bureaucratic power. WIFIA and CWIFP programs can operate with very small appropriations when their high-quality loans are recorded on an accrual basis. But recording even a single loan’s funding on a cash basis will wipe out the program’s entire budget. As a practical matter, a non-federal cost-share loan that doesn’t receive FCRA classification is effectively ineligible at WIFIA and CWIFP, completely regardless of statutory eligibility. Or the loan’s other merits – like high credit quality, reduced federal outlays for the project, and benefits for a community. No FCRA treatment, no loan, end of story.
Somebody wanted that power. In almost all cases, FCRA classification is so objectively clear that it can’t be withheld. This is also fundamentally true for program loans to non-federal cost shares in federal projects, perhaps with minor additional evaluation procedures to ensure that a loan’s non-federal repayment source (the key to FCRA classification) was not coerced by federal pressure. However, a non-federal cost share in a federal project is just complicated enough to raise a question: “Is WIFIA or CWIFP lending to a federal project?” That sounds bad – federal program loans to federal projects practically shout, ‘nefarious budget gimmickry.’ FCRA law applies only to a ‘non-federal borrower’, which is of course the obviously non-federal applicant for a WIFIA or CWIFP loan. But maybe the substantive borrower in a cost-share situation is the federal project? After all, that’s where the money is spent. Are federal loan programs colluding with other federal agencies to deceive the taxpayers? Oh no! Are our precious budgetary standards under assault?
Never mind that all such questions can be objectively answered “no” with an analysis of what FCRA budget treatment was meant to do, something which is very clearly set out in the 1967 Budget Commission Report (the basis of the 1990 FCRA law and specifically mentioned in the Congressional Directive as a primary reference source). Never mind — because the point is not to answer questions but to keep raising them until there appears to be a genuine issue. An issue which can only be judged by budgetary experts with special knowledge of the mysteries of FCRA law. That is, an issue which has bureaucratic power.
My guess is that an individual or a group at OMB wanted to restrict federal financing eligibility for non-federal cost shares, especially at the soon-to-be operational CWIFP program, and decided a technical FCRA issue was the way to do it. WIFIA and CWIFP programs, with their stakeholders, understandably pushed back for substantive reasons. But pushback necessarily entailed questioning OMB’s technical expertise, making a compromise on the substantive issues impossible. And so, the issue was raised to Congressional attention — one side seeking substantive relief and the other an affirmation of the final authority of their expertise.
Okay, maybe the origin story isn’t pretty. But the Criteria have been published, including a Background section that explains the issue and specifically quotes the 1967 Report. Doesn’t that defuse any arbitrary use of FCRA classification going forward?
It would, if the Criteria were done correctly. But they weren’t. The Background section is a jargon-filled word salad that doesn’t clarify anything and simply asserts that there is an issue somewhere in the lettuce. The quote from the 1967 Report comes from a chapter about the overall scope of the federal budget and is not relevant to FCRA classification. The directly relevant chapter in the 1967 Report (helpfully entitled ‘Federal Credit Programs’) is completely ignored, presumably because it would have provided answers instead of more ambiguity. And most glaringly, the Criteria aren’t ‘criteria’ at all – they are questions that aim at the characterization of the project as ‘federal,’ something which has nothing to do with FCRA budgeting for federal loans for non-federal assets. There is no clarity whatsoever about FCRA classification for specific loans to specific non-federal cost share assets.
Well, botched jobs happen all the time, even with the best of intentions. An overreach agenda isn’t necessarily involved. Could it be that the Criteria’s authors were themselves simply confused about FCRA classification?
Originally, I thought that that might be the case, at least to some extent. But there is one detail in the text of the Background section which indicates that the obfuscation was intentional. Throughout the section, the phrase ‘projects or assets’ is used, except in the final line which summarizes the conclusion. In that sentence, the reference to ‘assets’ is inexplicably deleted, leaving only ‘projects’ to be evaluated for FCRA classification under the Criteria. In effect, cost share assets which are demonstrably non-federal can’t even be considered. Everything must be focused on the characterization of the ‘project’ which by definition will have a large federal involvement in cost share situations. Characterization as a ‘federal project’ is effectively a foregone conclusion. Game over.
I’m guessing that in reviewing the final draft the authors realized that leaving ‘assets’ in the conclusion might open the door to a solidly based defense of FCRA classification for specific WIFIA and CWIFP loans for cost share assets. So, regardless of logic or consistency, they simply deleted the reference. That looks like a smoking gun of agenda-driven intent to me.
One side of the aisle might want to elevate the WIFIA FCRA Criteria as a perfect example of the overreach they say they’re currently fighting – and then propose to eliminate it. The other side has every reason to quickly respond that such a poster child is an example of what they are not defending – and then support eliminating it.
So perhaps the Criteria are an example of federal bureaucratic overreach. But it’s just one in many, and while important to specific stakeholders, its impact is limited. Why do you think pointing out the overreach in this case might lead to action?
Because the WIFIA FCRA Criteria have all the elements of a poster child for bureaucratic overreach – intentional misapplication and obfuscation of technical rules in pursuit of a private agenda that is directly contrary to legislative intent and the good-faith efforts of other agencies to execute that intent, all while disregarding any harm done to real-world stakeholders. And while sometimes a particular private bureaucratic agenda might resonate with some people, I cannot imagine that ever being true in this case. Arbitrarily restricting statutory federal financing eligibility for important water projects? Discouraging non-federal cost shares, willingly paid for by communities through loan repayment, that reduce federal outlays? Obfuscating and twisting clear FCRA principles in the name of budget integrity? Who, other than the bureaucrats pursuing this private agenda themselves, would defend any of this?
The answer is no one. Under the new administration, I would think that OMB has every incentive to make this embarrassing mess disappear, either by deletion or substantial amendment. In a political context, there’s the possibility of bipartisan consensus. One side of the aisle might want to elevate the WIFIA FCRA Criteria as a perfect example of the overreach they say they’re currently fighting – and then propose to eliminate it. The other side has every reason to quickly respond that such a poster child is an example of what they are not defending – and then support eliminating it.
For WIFIA and CWIFP stakeholders, whose previous efforts to seek relief from the Criteria have not been successful, I think it’s fair to say that the world in which this bureaucratic overreach could be promulgated and sustained is rapidly changing. Despite much uncertainty in the current upheaval, now may be a good time to try again.
The views and opinions in this article are solely those of the author.
John Ryan is principal of InRecap LLC, focused on debt alternatives for the recapitalization of basic public infrastructure. Ryan has an extensive background in structured and project finance, and recently served as an expert consultant to the U.S. EPA. He is a frequent contributor to WF&M on EPA’s WIFIA loan program and related topics.
Leave a Reply