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Unliquidated Obligations 

Resulted in Missed 

Opportunities to Improve 

Drinking Water Infrastructure

Report No. 14-P-0318 July 16, 2014

U.S. ENVIRONMENTAL PROTECTION AGENCY

OFFICE OF INSPECTOR GENERAL
Report Contributors: Heriberto Ibarra

Janet Kasper

Doug LaTessa

Patrick McIntyre

Nicole Pilate

Mary Anne Strasser

Abbreviations

CFR Code of Federal Regulations

DWSRF Drinking Water State Revolving Fund

EPA U.S. Environmental Protection Agency

GAO U.S. Government Accountability Office

IUP Intended Use Plan

OIG Office of Inspector General

SFY State Fiscal Year

Cover photo: A wastewater treatment plant in Stratford, Connecticut. (EPA photo)

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EPA Inspector General 

1200 Pennsylvania Avenue, NW

Mailcode 2410T

Washington, DC 20460
 

14-P-0318

July 16, 2014

Why We Did This Review

We performed this audit to 

determine whether the 

U.S. Environmental Protection 

Agency (EPA) has been 

effective in identifying and 

deobligating unneeded 

Drinking Water State Revolving 

Fund (DWSRF) assistance 

agreement funds and

preventing unwarranted 

accumulations of unliquidated 

obligations. Our objectives 

were to determine whether 

(1) EPA and state actions 

taken to address large 

balances of DWSRF 

unliquidated obligations 

reduced such obligations, and 

(2) state lists of projects to be 

funded by capitalization grants 

realistically reflect the projects 

that may be funded.

This report addresses the 

following EPA goals and 

cross-agency strategies:

 Working to make a visible 

difference in communities.

 Protecting America’s 

waters.

For further information, 

contact our public affairs office 

at (202) 566-2391.

The full report is at:

www.epa.gov/oig/reports/2014/ 

20140716-14-P-0318.pdf

 

Unliquidated Obligations Resulted in 

Missed Opportunities to Improve 

Drinking Water Infrastructure

 What We Found

We found that the EPA and the five states

we reviewed took many actions to reduce 

DWSRF unliquidated balances, but those 

actions have not reduced DWSRF 

unliquidated balances to the goal of below 

13 percent of the cumulative federal 

capitalization grants awarded. For the 

period we examined the five states 

reviewed—California, Connecticut, Hawaii, Missouri and New Mexico—executed 

small numbers of loans each year and did not maximize the use of all DWSRF 

resources, including capitalization grant awards. State programs reviewed were 

not adequately projecting the DWSRF resources that would be available in the 

future to enable the states to anticipate the amount of projects needed to be 

ready for loan execution in a given year. As a result, $231 million of capitalization 

grant funds remained idle, loans were not issued, and communities were not able 

to implement needed drinking water improvements.

We also noted that states’ project lists included in the capitalization grant 

application—called fundable lists—did not reflect projects that would be funded in 

the current year and overestimated the number of projects that will receive 

funding. Less than one-third of the projects on the fundable lists we reviewed 

resulted in executed DWSRF loans during the current grant year. We found that,

generally, these states did not have a consistent “ready-to-proceed” definition. 

When projects are not ready to proceed, expected environmental benefits are 

delayed. Because states use the fundable lists to justify their annual 

capitalization grants, the fundable lists should communicate to the EPA and the 

public the projects that will be funded with taxpayer money.

 Recommendations and Planned Corrective Actions

We recommend that the Assistant Administrator for Water require states with 

unliquidated obligations that exceed the Office of Water’s 13-percent-cutoff goal 

to project future cash flows to ensure funds are expended as efficiently as 

possible. We also recommend that the Assistant Administrator develop guidance 

for states on what projects are to be included on the fundable lists and require 

regions, when reviewing capitalization grant applications, to ensure states are 

complying with the guidance. The EPA agreed to take sufficient corrective 

actions on most of the recommendations. The EPA still needs to take steps to 

ensure states have adopted the EPA’s guidance on the definition of “ready to 

proceed.”

U.S. Environmental Protection Agency

Office of Inspector General

At a Glance

When hundreds of millions of 

DWSRF dollars remain idle, states 

miss opportunities to improve the 

health of their communities’ 

drinking water infrastructure and 

the opportunity to infuse funds 

into the economy and create jobs. 
July 14, 2014

MEMORANDUM

SUBJECT: Unliquidated Obligations Resulted in Missed Opportunities to Improve

Drinking Water Infrastructure

Report No. 14-P-0318

FROM: Arthur A. Elkins Jr.

TO: Nancy K. Stoner, Acting Assistant Administrator

Office of Water

This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the

U.S. Environmental Protection Agency (EPA). This report contains findings that describe the problems 

the OIG has identified and corrective actions the OIG recommends. This report represents the opinion of 

the OIG and does not necessarily represent the final EPA position. EPA managers, in accordance with 

established audit resolution procedures, will make final determinations on matters in this report.

The office responsible for implementing the audit recommendations is the Office of Water’s Office of 

Ground Water and Drinking Water.

Action Required

Recommendation 3 and a portion of recommendation 1 are open and unresolved. In accordance with 

EPA Manual 2750, the resolution process begins immediately with the issuance of this report. We are 

requesting a meeting within 30 days between the Office of Water’s Director, Office of Ground Water 

and Drinking Water, and the OIG’s Assistant Inspector General for Audit. If resolution is still not 

reached, the Office of Water’s Director, Office of Ground Water and Drinking Water, is required to 

complete and submit the dispute resolution request to the Chief Financial Officer to continue resolution.

We will post this report to our website at http://www.epa.gov/oig.

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

WASHINGTON, D.C. 20460

THE INSPECTOR GENERAL
Unliquidated Obligations Resulted in Missed Opportunities 14-P-0318

to Improve Drinking Water Infrastructure

Table of Contents

Chapters

1 Introduction ...................................................................................................... 1

Purpose ..................................................................................................... 1

Background................................................................................................ 1

Responsible Offices ................................................................................... 3

Scope and Methodology ............................................................................ 3

Prior Audit Coverage.................................................................................. 4

2 Unused Funds Resulted in Missed Opportunities to Improve 

Drinking Water Infrastructure .......................................................................... 5

Efficient Use of Funds Required................................................................. 5

Unliquidated Obligations Remain High....................................................... 6

Financial Projections of DWSRF Resources Needed to 

 Maximize Fund Utilization ................................................................ 8

Idle Funds Cause Diminished Results and Missed Opportunities............... 9

Recommendation....................................................................................... 9

Agency Comments and OIG Evaluation..................................................... 9

3 More Ready-to-Proceed Projects Would Improve 

Drinking Water Infrastructure .......................................................................... 11

Fundable Lists Should Contain Projects Expected to Be 

 Executed Within 1 Year.................................................................... 11

States Overestimate Projects That Will Receive Funding........................... 12

Projects on Fundable Lists Not Ready to Proceed to Construction ............ 14

Environmental Improvements Are Delayed ................................................ 15

Recommendations..................................................................................... 16

Agency Comments and OIG Evaluation..................................................... 16

Status of Recommendations and Potential Monetary Benefits ............................. 18

Appendices

A Agency Response to Draft Report 19

B April 14, 2014 Office of Water’s Strategy 24

C Distribution 30
14-P-0318 1

Chapter 1

Introduction

Purpose

The purpose of this audit was to determine whether the U.S. Environmental 

Protection Agency (EPA) has been effective in identifying and deobligating 

unneeded Drinking Water State Revolving Fund (DWSRF) assistance agreement 

funds and preventing unwarranted accumulations of unliquidated obligations. 

An unliquidated obligation is the unexpended balance remaining from the amount 

of federal funds that the EPA has obligated to an agreement. Our objectives were 

to determine whether:

 EPA and state actions taken to address large balances of DWSRF 

unliquidated obligations reduced such obligations.

 State lists of projects to be funded by capitalization grants realistically 

reflect the projects that may be funded.

Background

The Safe Drinking Water Act Amendments of 1996 established the DWSRF to 

provide states with a financing mechanism for ensuring safe drinking water to the 

public. Since the program’s inception in 1996 through March 1, 2013, the EPA 

awarded over $15.5 billion in DWSRF capitalization grants to states. Of that 

amount, $2 billion has remained unliquidated. An Office of Water manager

indicated that 17 of the 50 states and Puerto Rico, or 34 percent, have 

unliquidated obligations that exceed 13 percent. The Office of Water’s current

focus is states with unliquidated obligation balances that approximately equal

2 years’ worth of grants being open, which is roughly the national average of total 

unliquidated obligations to federal capitalization grants awarded, or 13 percent. 

Prior Office of Inspector General (OIG) audits identified that the EPA’s internal 

controls have not always been effective in preventing unwarranted accumulations 

of unliquidated obligations.

The Safe Drinking Water Act Amendments of 1996 provided the EPA with the 

authority to enter into capitalization grant agreements with eligible states to 

further health protection and promote the efficient use of fund resources. 

Annually, capitalization grants are made available to each state and Puerto Rico 

for the purpose of providing loans to individual drinking water systems for 

infrastructure improvements. While states operate their own DWSRF programs,

the EPA is responsible for oversight to ensure state programs are complying with 

applicable federal requirements throughout the project and close-out processes.
14-P-0318 2

The EPA allots federal DWSRF funds to the states according to a formula that 

reflects their proportional share of needs identified in the most recent Drinking 

Water Infrastructure Needs Survey. In order for a state to receive the DWSRF 

funds allotted to it, the state must submit a complete capitalization grant 

application. Capitalization grant applications must include an annual Intended Use 

Plan (IUP) that contains the state’s Comprehensive List and a subset of that list—

the fundable list—as shown in figure 1. 

Figure 1: General DWSRF priority setting process

Source: DWSRF Program Operations Manual (Provisional Edition).

The fundable list includes projects expected to receive assistance in the next year. 

The DWSRF Program Operation Manual states that the IUP is the focal point of 

the capitalization grant application and agreement. It describes how the DWSRF 

program intends to allocate all of its available funds, including federal 

capitalization grants, state matching funds, loan repayment, fund interest earning, 

loan fees and bond proceeds. States must use all funds in accordance with an 

approved IUP.

The Safe Drinking Water Act Amendments of 1996 require the state revolving 

fund to be available in perpetuity for providing financial assistance to water 

systems as shown in figure 2. A 20 percent match to the capitalization grant is

required. Funds are transferred to the state on a reimbursement basis after 

assistance recipients have billed the state for work completed and the state requests 

a transfer. In general, the recipients are required to repay the loan with interest. 

However, a state can also provide additional loan subsidies to disadvantaged 

communities that include negative interest rates. Interest earnings from the state’s 
14-P-0318 3

DWSRF fund account can also accrue and increase the balance of the state’s 

revolving fund.

Figure 2: Sources and uses of states’ DWSRF

Source: EPA Region 9 presentation dated September 25, 2012.

The EPA Office of Water and EPA Regions 1, 6, 7 and 9 have been working with 

states that have high unliquidated obligation balances to identify the reasons more 

loans have not been executed and reduced unliquidated obligation balances. 

Responsible Offices

The Office of Water’s Office of Ground Water and Drinking Water is the EPA 

office with primary responsibility for the issues covered by this report. 

Scope and Methodology

We conducted this audit from March 2013 through March 2014, in accordance 

with generally accepted government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our audit

objectives. We believe that the evidence obtained provides a reasonable basis for 

our findings and conclusions based on our audit objectives.

Our primary contact for this audit was the Office of Ground Water and Drinking 

Water. We also judgmentally selected four EPA regions (Regions 1, 6, 7 and 9) 

that had the highest percentage of capitalization grant unliquidated obligations. 

From those regions, we judgmentally selected the following five states with high 

unliquidated obligations for detailed review: California, Connecticut, Hawaii, 
14-P-0318 4

Missouri and New Mexico. We performed site visits and conducted interviews at 

each of the sampled state’s DWSRF program offices except for Hawaii. We 

conducted all interviews for Hawaii via teleconference. We interviewed EPA 

Office of Water headquarters staff; and Regions 1, 6, 7 and 9 staff. We also 

reviewed:

 The Safe Drinking Water Act Amendments of 1996.

 The Code of Federal Regulations.

 EPA regulations and guidance.

 Guidance and documentation, IUPs, annual reviews, and the 

comprehensive priority lists and fundable lists for the five states reviewed.

 EPA performance evaluation plans and the EPA’s communications with 

the states. 

To determine whether the EPA and state actions taken to address large balances 

of DWSRF unliquidated obligations reduced such obligations, we interviewed key 

EPA and state staff and analyzed DWSRF program documentation for state fiscal 

years (SFYs) 2010 through 2013. We determined the procedures used by the 

EPA Office of Water and the selected states, and tested key procedures. We also 

analyzed SFYs 2010 through 2013 DWSRF unliquidated obligation balances to 

determine whether balances have been reduced. 

To determine whether state projects to be funded by capitalization grants reflect 

the projects that may be funded, we compared state fundable lists of projects from 

SFYs 2010 through 2013 to projects funded for each respective year. We also 

determined when projects listed on fundable lists were actually funded. 

Prior Audit Coverage

We researched prior EPA OIG and U.S. Government Accountability Office 

(GAO) reports related to EPA’s DWSRF program. We noted one EPA OIG report 

and one GAO report that were pertinent to the program. 

Table 1: Prior reports related to the DWSRF program

Report No./Date Title Description

EPA OIG 12-P-0102

December 1, 2011

Enhanced Coordination 

Needed to Ensure 

Drinking Water State 

Revolving Funds Are 

Used to Help 

Communicate Not 

Meeting Standards

This report stated that the DWSRF may never reach 

some communities with the highest number of 

health-based drinking water violations because:

(a) these communities have no contact with the state 

DWSRF office and are not aware of the program; 

(b) they do not have technical, managerial or 

financial capacity; or (c) they cannot afford a loan.

GAO-02-125

January 24, 2002

Key Aspects of EPA's 

Revolving Fund 

Program Needed to be 

Strengthened

This report concluded that the EPA is not taking full 

advantage of the oversight tools currently available 

to monitor states’ implementation of the DWSRF 

program.

Source: EPA OIG generated from Web search.
14-P-0318 5

Chapter 2

Unused Funds Resulted in Missed Opportunities to 

Improve Drinking Water Infrastructure 

Actions taken by the EPA, four EPA regions and the five states we reviewed did 

not reduce DWSRF unliquidated obligation balances below 13 percent of the 

cumulative federal capitalization grants awarded. As of September 30, 2013, the 

states we reviewed exceeded 13 percent of unliquidated obligations by 

$231 million. The Safe Drinking Water Act requires that the Administrator create 

provisions to ensure that each state commits and expends funds allotted to the 

state as efficiently as possible. Until SFY 2013, the five states reviewed—

California, Connecticut, Hawaii, Missouri and New Mexico—had executed small 

numbers of loans each year and had not maximized the use of all DWSRF 

resources, including the capitalization grant awards. Three of the five states 

reviewed did not use financial tools to assist in projecting future DWSRF funds 

and predict the number and value of projects needed to be ready for loan 

execution in any given year. When loans are not issued, intended drinking water 

improvements may not be implemented and states lose opportunities to infuse 

funds into their economy and create jobs.

Efficient Use of Funds Required

The Safe Drinking Water Act requires that the Administrator create provisions to 

ensure that each state commits and expends funds allotted to the state as 

efficiently as possible. In turn, the DWSRF program final guidelines are codified 

in the Code of Federal Regulations (CFR) at 40 CFR Part 35 Subpart L, and 

require states to agree to commit and expend all funds as efficiently as possible 

and in an expeditious and timely manner. 

.

The EPA’s State Revolving Fund Management Handbook presents DWSRF 

management concepts and good financial managerial practices. It demonstrates 

that the EPA is aware of the importance of financial management and the 

importance of cash flow projections for revolving loan funds. The handbook 

indicates that fund management must be considered across the dimension of time 

to balance what can be accomplished in the present versus the future. Cash flow 

modeling is the principal technique for analyzing the financial impact of decisions 

over time given the financial complexities of revolving loan funds. While the 

handbook does not require that states perform cash projections of all DWSRF 

funds to determine the program loan capabilities, it is considered to be good 

financial management practice.
14-P-0318 6

Unliquidated Obligations Remain High

As of September 30, 2013, the DWSRF unliquidated balances for all five states

reviewed remain high. In four of the five states, the unliquidated obligation 

balances increased from 2010. The five states reviewed had cumulative 

unliquidated balances of over $533 million, as shown in table 2:

Table 2: Cumulative unliquidated obligation balances as of September 30, 2013

States

2010 2011 2012 2013

Percent change 

in balance from 

(Dollars stated in thousands) 2010 to 2013

California $605,757 $557,557 $445,877 $357,523 -41%

Connecticut 26,044 26,412 39,384 34,736 33%

Hawaii 30,867 34,523 38,104 38,137 24%

Missouri 58,268 60,615 60,876 59,745 3%

New Mexico 30,746 33,680 43,551 43,195 40%

Total $751,682 $712,787 $627,792 $533,336

Source: National Information Management System database and OIG analysis.

The EPA Office of Water focused on an unliquidated obligation balance for each 

state of 2 years for a state’s grant award, which is approximately equal to 

13 percent of the cumulative federal capitalization grants awarded. Any state with 

a balance above this level is considered to have a high unliquidated obligation 

balance. The five states reviewed exceeded the level by more than $200 million,

as shown in table 3. 

Table 3: Amount of states’ September 30, 2013 unliquidated obligation balance 

exceeding 13 percent of cumulative federal capitalization grants awarded

State

Cumulative federal 

grants

Unliquidated 

obligations

Amount 

exceeding 

13 percent

(Dollars stated in the thousands)

California $1,539,666 $357,523 $157,367

Connecticut 176,732 34,736 11,761

Hawaii 159,377 38,137 17,418

Missouri 289,028 59,745 22,171

New Mexico 163,623 43,195 21,924

Total $2,328,426 $533,336 $230,641 

Source: National Information Management System database and OIG analysis.

Actions to Reduce Unliquidated Obligations

We found that the Office of Water, the four EPA regions and five states reviewed 

were all focused on reducing unliquidated obligations and have taken various

actions to reduce unliquidated balances in the DWSRF program. 
14-P-0318 7

California, which has the highest DWSRF unliquidated balance of all the states, 

decreased its balance by 41 percent between September 30, 2010, and 

September 30, 2013. Over the past 4 years, California’s Department of 

Public Health has taken a number of steps that have resulted in a reduction of the 

unliquidated obligation balance, including:

 Cease the practice of committing funds to projects not ready to proceed.

 Implement new terms and conditions in loan agreements to require no less 

than quarterly the submission of claims on costs incurred.

 Provide higher priority rankings for larger communities that absorb 

smaller communities. This allows a small community that could not meet 

technical and managerial requirements of the DWSRF program the ability 

to meet requirements and be funded.

 Increase staffing.

 Separate planning and construction phases into two loans.

 Use contractors to increase outreach and working with small and 

disadvantaged communities with the application process and providing 

technical assistance.

 Improving pace of expenditures by awarding total funding agreements that 

have exceeded annual cap grants over the last 3 years

 The EPA’s Region 9 aided the California Department of Public Health in 

developing a cash flow model to project future loan capabilities. The model 

is being used to determine how the Department of Public Health will reach 

the 120 percent commitment rate goal that the EPA has set for its program. 

Other states have also taken action to reduce unliquidated obligation balances. 

Connecticut developed a pipeline of projects, restructured its organization and 

revised its project ranking procedures to allow ready-to-proceed projects to be 

more readily funded. Hawaii conducted workshops called “road shows” to 

educate potential recipients about the benefits of the DWSRF program and 

encourage large systems to take loans. Missouri offered to pay for the initial 

engineering report, plans and specifications, as well as phase one reports to assist 

communities in using the DWSRF program. New Mexico changed the annual 

fundable list process to a quarterly process that requires loans be issued within 

3 months for projects on the fundable list. They also recently developed a cash

flow model to anticipate resources available for loans and estimate the value of 

projects that need to be in the pipeline. 

The actions taken have enabled states to increase their number of annually executed 

loans. However, unliquidated obligation balances only decrease when loan 

recipients begin projects and request payments. Therefore, unliquidated obligations 

will not be reduced until payment requests are submitted against these loans. 
14-P-0318 8

Financial Projections of DWSRF Resources Needed to Maximize 

Fund Utilization 

The reasons for the low numbers of loans executed vary from state to state 

because of unique challenges faced by each state. Challenges can include staffing 

shortages, lack of focus on the DWSRF program and more attractive funding 

sources. However, three of the five states reviewed did not use cash flow models

to assist in projecting the amount of DWSRF funds that would be available in the 

future to aid those states in anticipating the number and value of projects needed 

to be ready for loan execution in any given year. The other two states have only 

recently begun to implement and use cash flow models.

To aid in decreasing DWSRF unliquidated obligation balances, state programs 

need to project their present fund inflows and outflows of cash into the future. 

The EPA’s State Revolving Fund Management Handbook1states “cash flow 

modeling/financial planning is the principal technique for analyzing the financial 

impact of decisions over time, given the financial complexity of revolving loan 

funds.” Cash flow modeling would help states confidently forecast the amount of 

DWSRF dollars available so that they can anticipate the value of ready-to-proceed 

projects needed each year and aid them in addressing high unliquidated balances.

We found the following:

 Hawaii determines the number of loans it can commit using all DWSRF 

fund sources, but does not have the projects ready to proceed; therefore, it 

only executed a small portion of the projects on its fundable lists. 

 Connecticut’s Department of Public Health recently began to project the 

amount of funds expected to be drawn down on projects and the respective 

amount of DWSRF grant balances, but has not taken into account 

repayments of principal, interest and retained earnings to project future 

inflows. 

 Missouri does not perform financial projections to predict the amount of 

all DWSRF funds that would be available in the future to finance projects. 

 California and New Mexico recently began to implement and use cash 

flow models. 

On April 19, 2013, the EPA issued California a notice of noncompliance which 

determined that the state’s Department of Public Health had not timely and 

efficiently committed and expended its DWSRF funds. While there were several 

contributing factors to the state’s noncompliance, the EPA cited that the 

Department of Public Health had not applied the modeling tools needed to 

integrate financial and project activities and had not accurately accounted for loan 

repayments into the fund. The EPA also stated that as a result the unexpended 

funds lost millions of dollars of purchasing power for public health purposes 

because of inflation, and the unspent funds do not support the revolving nature of 

 

1 EPA 832-B-01-003 April 2001.
14-P-0318 9

the fund. Region 9 aided California’s Department of Public Health in the creation 

of a cash flow model to project future program loan fund balances, which has 

provided a better way of ensuring that the DWSRF program sources are 

efficiently used. California staff told us that implementation of the cash flow 

model has helped them understand the value of the resources available.

Idle Funds Cause Diminished Results and Missed Opportunities

Without financial projections to determine the amount of loans that can be 

executed with all DWSRF fund sources, $230,640,728 has not been committed 

and expended as efficiently as possible in the five states we reviewed. When loans 

are not issued and capitalization grant funds remain idle, the value of money is 

diminished, needed drinking water improvements are not implemented, 

communities do not receive the intended health benefits, and states miss 

opportunities to infuse funds into the state’s economy and create jobs. As a result, 

we consider the $230,640,728 as funds that could be put to better use based on 

implementation of the recommendations.

Recommendation

We recommend that the Assistant Administrator for Water:

1. Reduce unliquidated obligations by:

a. Working with states with high unliquidated obligations to use 

financial tools to project future cash flows to aid in liquidating 

balances by using those projections in planning for expending

funds in a timely and efficient manner. 

b. Quarterly providing to the regions a summary of states that have 

attended the cash flow analysis training and compare that with 

states not achieving the goals of the 2014 strategy to identify states 

that may need additional assistance.

Agency Comments and OIG Evaluation 

While the EPA disagreed with recommendation 1a, it described actions it had 

recently taken to address the issue of unliquidated obligations. On April 14, 2014, 

the Director, Office of Ground Water and Drinking Water, issued a strategy for 

reducing unliquidated obligations. The goals of the strategy are (a) to fully use 

funds from previous DWSRF grants (fiscal year 2013 and prior) by the end of 

September 2016 and (b) complete draw down of funds from future years’ grants 

within 2 years of the date of the award. The strategy includes a section on 

forecasting financing capacity through use of cash flow or similar analysis. The 

strategy states:
14-P-0318 10

Cash flow modelling allows a state to determine the amount of 

assistance its program can prudently provide in a given year and 

can help a state assess the impacts of current year financing 

decisions on future years’ financing capacity. Particularly when 

used in conjunction with a robust list of fundable projects that are 

ready to proceed, cash flow analysis can help states to maximize 

the pace of project funding where supported by sound financial 

management principles.

In the 2014 strategy, the Director asked the regional water directors to encourage 

states not using cash flow analysis to participate in training offered. The EPA 

stated in the response that it believed this approach, framed within the expectation 

that states will work toward operating their DWSRFs to have unliquidated 

obligations at the lowest practical level while recognizing that state circumstances 

vary, will promote appropriate focus on grant fund liquidation. 

In response to recommendation 1, the Office of Ground Water and Drinking 

Water suggested we retain the spirit of the recommendation but rephrase as 

“Work with states” rather than “Require.” The EPA stated it started working with 

states on this initiative in the second quarter of fiscal year 2014 and that it is an 

ongoing activity.

The 2014 strategy addresses the issue identified in our report—mainly, the 

reduction of prior-year DWSRF obligations. However, we are concerned that 

revising the recommendation to only ask the EPA to “work with states” to use 

financial tools to project future cash flows does not reflect a commitment to a 

specific action(s). As an alternative, we have revised the first recommendation to 

reflect the wording the EPA suggested and added an additional action to monitor 

states involvement in the cash flow analysis training. The OIG considers the April 

2014 strategy as responsive to recommendation 1a; however, they agency will 

need to provide a response, with corrective action dates, for recommendation 1b. 

The EPA should ensure that the 2014 strategy is implemented. 

Appendix A provides the agency’s full response to the recommendations. 

Appendix B provides the agency’s April 14, 2014, strategy for reducing 

unliquidated obligations issued to regional water division directors.
14-P-0318 11

Chapter 3

More Ready-to-Proceed Projects Would Improve

Drinking Water Infrastructure

States’ fundable lists included in the intended use plan (IUP) of the capitalization 

grant application overestimate the number of projects that will receive loans 

during the current funding cycle. Less than one third of the projects on the 

fundable lists reviewed resulted in executed DWSRF loans within the time period 

covered by the current IUP. Federal regulations say the IUP must contain a 

fundable list of projects that are expected to receive assistance from available 

funds designated for use in the current IUP. Reasons why states execute a fraction 

of loans for the projects on their fundable lists varied, but we found that,

generally, these states do not have a consistent “ready-to-proceed” definition.

When projects are not funded and high unliquidated obligation balances occur, 

needed environmental improvements are delayed. 

Fundable Lists Should Contain Projects Expected to Be Executed 

Within 1 Year

According to 40 CFR §35.3555, a state must prepare an annual IUP that describes 

how it intends to use the DWSRF capitalization grant to support the overall goals 

of the program. The Safe Drinking Water Act Amendments of 1996 requires

states to annually submit an IUP that includes a list of projects to be assisted in 

the first fiscal year that begins after the date of the plan. Title 40 CFR Part 35 

states that the IUP must contain a comprehensive list of projects and a fundable 

list of projects. The EPA’s DWSRF Program Operations Manual, dated October 

2006, presents DWSRF management concepts and good financial managerial 

practices. It states that two lists of priority projects are included in the annual IUP: 

the comprehensive list and the fundable project list. From the comprehensive list,

programs develop a fundable list of projects that are expected to receive 

assistance in the upcoming year. The fundable list of projects is developed based 

on projects that are ready to proceed during the current funding cycle.

On December 2, 2011, the EPA Administrator sent a letter to all states providing

them with steps that could be taken to expedite the flow of State Revolving Fund

dollars into the state’s economy, including:

 Draft assistance agreements for projects being funded through federal 

capitalization so that they are ready to be signed upon award of the 

capitalization grant.

 Work closely with communities to build a pipeline of projects that are 

ready to proceed so that contracts can be awarded and construction can 

begin upon the award of assistance agreements. 
14-P-0318 12

States Overestimate Projects That Will Receive Funding

Based on our review and comparison of the represented states’ SFY 2011 through 

2013 fundable lists and annual reports, fundable lists do not realistically represent 

those projects expected to receive DWSRF assistance in the corresponding SFYs.

Only a fraction of the projects on the fundable lists result in executed DWSRF 

loans within the current IUP year, and generally, the value of the awards made is 

significantly less than the value of the projects on the states’ fundable lists. The 

regions we reviewed did not expect all of the projects listed on the fundable list to

result in an executed loan agreement during that year. Fundable lists intentionally 

exceed the value of the grant to allow for unforeseen problems with projects that 

do not move forward as expected. However, for SFY 2011 through SFY 2013, the 

number of loans executed equal less than one-third of the projects listed. Hawaii 

executed loans equal to 7.9 percent of the number of projects listed; California 

executed the highest percentage, executing 31.1 percent of the number of projects 

listed on the fundable list. Table 4 compares the number and value of projects on 

states’ fundable lists to the number of loans actually made for SFYs 2011 through

2013.

Table 4: Number and value of projects on fundable lists and loans made by SFY

SFY State

Total number of: Value of:

Projects on 

fundable 

list

Final loan 

agreements

Projects on 

fundable list

Final loan 

agreements

2011

California 145 27 $245,332,554 $235,315,624

Connecticut a 0 2 0 1,841,000

Hawaii 69 3 242,415,608 5,178,581

Missouri 22 5 38,990,258 2,974,900

New Mexico 21 5 27,815,000 2,640,035

2012

California 83 30 174,199,656 268,696,175

Connecticut 88 5 63,374,606 3,288,663

Hawaii 76 5 255,499,500 5,856,911

Missouri 27 6 41,626,606 14,826,684

New Mexico 29 0 31,113,020 0

2013

California 77 38 235,534,658 265,239,107

Connecticut 102 39 124,319,917 34,170,363

Hawaii 83 10 267,649,500 27,632,906

Missouri 20 9 55,906,704 13,552,333

New Mexico 22 16 37,779,934 25,526,002

Source: EPA OIG analysis of state data.

Note: a Connecticut indicated it did not create a fundable list in SFY 2011 due to the 

heavy workload created by the American Recovery and Reinvestment Act. 
14-P-0318 13

Due to the generally low number of loans made relative to projects on the states’ 

fundable lists, subsequent states’ fundable lists contain a high percentage of 

projects that carried over from prior years. Figure 3 shows the percent of projects 

included on the fundable list that were repeated from previous fundable lists.

Figure 3: Percentage of projects on state fundable lists that carried over from prior years

Source: EPA OIG analysis of state data.

Note: 

a Connecticut indicated it did not create a fundable list in SFY 2011 due to the

heavy workload created by the American Recovery and Reinvestment Act. 

Federal regulations state that projects on fundable lists should be projects that are 

expected to receive assistance from available funds designated for use in the 

current intended use plan. However, we found that many projects are listed on 

state fundable lists for several years before they are finally awarded funds. 

Table 5 shows the year a project was first listed on the fundable list for the loans 

executed in SFY 2013:

Table 5: Projects first appeared on state fundable lists

State

Number of 

loans made in 

SFY 2013

Project originated on respective fundable lists

SFY 2010 SFY 2011 SFY 2012 SFY 2013

California a38 15 8 2 9

Hawaii 10 3 5 2 0

Missouri 9 3 2 3 1

Connecticut 39 4

bN/A 35 0

New Mexico a16 2 7 0 4

Source: EPA OIG analysis of state data.

Notes: a Four California and three New Mexico projects were not identified by auditors on the 

SFY 2010–2013 state fundable lists. 

 b Connecticut indicated it did not create a fundable list in SFY 2011 due to the 

heavy workload created by the American Recovery and Reinvestment Act. 

46% 49%

68%

0%

14%

42%

68% 67%

11%

71%

57%

72%

55%

81%

22%

California Hawaii Missouri Connecticut New Mexico

SFY 2011 SFY 2012 SFY 2013
14-P-0318 14

Projects on Fundable Lists Not Ready to Proceed to Construction

The states we reviewed executed loans for a fraction of the projects on their 

fundable lists for a variety of reasons. Generally, we found that these states do not 

have a consistent definition of “ready to proceed.” According to the EPA’s 

DWSRF Program Operations Manual dated October 2006, projects on the 

fundable list should be ready to proceed. However, EPA has not defined “ready to

proceed” in its regulations, although EPA best practices suggest that projects are 

ready to proceed when a signed construction contract is in place. States, however, 

do not have a consistent definition of “ready to proceed.”

 Missouri places projects on the fundable list once an applicant has 

submitted a complete facility plan for approval and has established an 

acceptable debt instrument for their proposal. This is the state’s definition 

of “ready to proceed.” According to Missouri staff, when projects are 

initially placed on the fundable list, they are not necessarily construction 

ready, and in most cases it takes anywhere from 18 to 24 months for a 

project to proceed through the state’s approval process. Therefore, 

“readiness to proceed” can be interpreted as ready to proceed with the 

state review process rather than with construction. 

 The Hawaii fundable list contained projects that had construction start 

dates that were not within the current fiscal year, and contained projects 

that had unrealistic start dates. Hawaii staff informed the OIG that 

although there is no definition for “ready to proceed,” the state deems 

projects ready to proceed in terms of how soon they may start construction 

or, at the very least, how soon they may issue a “notice to proceed” to a 

contractor.

 California changed the definition of its fundable list in the 2010–2011 

IUP because it did not represent the list of projects that would be awarded 

funds within the current fiscal year. Prior to this, California’s fundable list 

was synonymous to its Invited Project List—or those projects that were 

invited to submit a full application for funding from available funds. 

California staff told us that the term “ready to proceed” is not explicitly 

defined by the state, but the state views projects that are ready to proceed 

as those projected to be ready to enter into a funding agreement. 

 New Mexico recently added “ready to proceed” to its criteria for including 

projects on the fundable list. New Mexico adopted the definition of “ready

to proceed” as any project that will be funded within the next 3 months. 

Prior to 2013, whether a project was ready to proceed was not a 

consideration for including projects on New Mexico’s fundable list. 

 Connecticut also recently added “ready to proceed” to its project-ranking 

criteria. The state has a 2-year project-ranking process for projects that are 
14-P-0318 15

ready to proceed with the activities as explained in the projects’ workplan 

within the next 2 years. The projects that are deemed ready to proceed in 

the first year are ranked and placed on the first year’s list. Those projects 

that were ready to proceed in the second year would be placed in the 

second year’s list.

Staff at all five states indicated that, in the past, they had difficulty getting 

projects ready to proceed. Some states are still having difficulty getting enough 

projects ready for loan execution to reduce the unliquidated obligation balance to 

the value of 2 years of grants. Without a process to develop project capacity so 

that there is a succession or pipeline of projects ready to proceed, it will be 

difficult to reduce unliquidated obligation balances. 

EPA regional offices need to improve their review of state fundable lists. States 

submit their IUPs in anticipation of their annual capitalization grant. EPA staff 

from one regional office told us that their review is not generally focused on the 

fundable list. Staff from another regional office informed us that projects on one 

state’s fundable list are not necessarily ready to proceed, despite the fact that 

federal regulations required such projects to be funded within the time period 

covered by the IUP (which is typically 1 year). Staff from another regional office 

told us that the spirit of the fundable list is to identify projects ready to proceed, 

but did not know why the projects on the fundable list did not always receive 

funding. 

Environmental Improvements Are Delayed

Since states use the fundable lists to justify their annual capitalization grants, the 

fundable lists should communicate to the EPA and the public a practical list of 

projects that will be funded with taxpayer money. When projects are not ready to

proceed, expected environmental benefits are delayed. The EPA’s priority is to 

move DWSRF funds as quickly as possible, to carry out projects on the ground to 

deliver improved environmental and public health protection. To accomplish this, 

states need to work with their communities to ensure fundable lists’ projects are 

ready to proceed with construction so that project loans can be executed and 

construction can begin upon the receipt of annual capitalization grants. It is this 

pipeline of ready-to-proceed-with-construction projects that should comprise 

states’ annual fundable lists. Doing so will ensure that states award a high 

percentage of these projects, resulting in improved environmental and health 

protection, and reducing unliquidated obligations. 
14-P-0318 16

Recommendations

We recommend that the Assistant Administrator for Water:

2. Develop guidance for states on what projects are to be included on the 

fundable list, including a definition for “ready to proceed.”

3. Require that EPA regions, when reviewing the capitalization grant 

application for states with high unliquidated obligation balances, ensure 

states have adopted the EPA’s guidance on the definition of “ready to 

proceed” and use that definition in developing the fundable list.

4. Communicate to states having high unliquidated obligation balances that 

they should adopt the best management practice of having a wellorganized process to ensure that projects on the fundable list are ready to 

proceed to loan execution within the current IUP year. 

Agency Comments and OIG Evaluation 

The EPA disagreed with recommendations 2 and 3 and agreed with

recommendation 4.

In response to recommendation 2, the Office of Ground Water and Drinking 

Water agreed that it is important to assist states in developing a common 

understanding of what “ready to proceed” means in the context of unliquidated 

obligation reduction. This issue is highlighted in the April 2014 strategy, which 

emphasizes the need for projects to be ready to proceed in that states should plan 

to award funding for projects that are ready to begin construction. Projects on the 

fundable list should be immediately ready, or be poised to be ready, to enter into 

assistance agreements. The Office of Ground Water and Drinking Water indicated 

it will be working with regions to assist states in reflecting this approach in their 

fundable lists. 

The Office of Ground Water and Drinking Water recommended dropping 

recommendation 2 because it is closely related to recommendation 3. The OIG 

does not agree that the recommendation should be dropped. However, we believe

the agency’s action as detailed in the April 2014 strategy should address 

recommendation 2. Therefore, we consider recommendation 2 closed. 

In response to recommendation 3, the Office of Ground Water and Drinking 

Water said, “EPA’s Regions are expected to work with states to implement the 

strategy and to ensure that appropriate thought and care have been taken in 

developing states’ fundable lists.” During our exit conference, the Drinking Water 

Infrastructure Branch chief explained that the IUP review process is designed to 

ensure the strategy will be implemented. However, the Office of Ground Water 

and Drinking Water did not provide any instruction, such as an updated standard 
14-P-0318 17

operating procedure, or a memorandum that requires regions to consider states’ 

incorporation of the strategy in their review of the states’ IUP. The OIG believes 

the agency needs to provide an action, or future action, and a corrective action

date to address the recommendation. The audit resolution process will be used to 

resolve the recommendation

In response to recommendation 4, the Office of Ground Water and Drinking 

Water agreed with the recommendation. The practices outlined in the April 2014 

strategy memo focus on projects that are ready to proceed to construction upon 

financing and advises that assistance for planning and design be awarded 

separately if projects are not expected to proceed to construction in the near term 

or project year. The strategy also calls for state adoption of project bypass 

procedures, recognizing that some projects on the fundable list may, for 

unanticipated reasons, not be ready to proceed as originally envisioned; and for 

the development of fundable lists that are sufficiently robust to facilitate the use 

of bypass procedures if needed. The EPA issued the strategy to the regional water 

division directors on April 14, 2014, and the strategy has been shared with the 

states. We consider this recommendation to be closed. 

Appendix A provides the agency’s full response to the recommendations. 

Appendix B provides the agency’s April 14, 2014, strategy for reducing 

unliquidated obligations issued to regional water division directors.
14-P-0318 18

Status of Recommendations and 

Potential Monetary Benefits

RECOMMENDATIONS

POTENTIAL MONETARY 

BENEFITS (in $000s)

Rec. 

No.

Page 

No. Subject Status1 Action Official

Planned 

Completion 

Date

Claimed 

Amount

Agreed-To 

Amount

1 9 Reduce unliquidated obligations by:

a. Working with states with high unliquidated 

obligations to use financial tools to project 

future cash flows to aid in liquidating 

balances by using those projections in 

planning for expending funds in a timely and 

efficient manner.

C Assistant Administrator 

for Water

4/14/14 230,641

b. Quarterly providing to the regions a summary 

of states that have attended the cash flow 

analysis training and compare that with 

states not achieving the goals of the 2014 

strategy to identify states that may need 

additional assistance.

U Assistant Administrator 

for Water

2 16 Develop guidance for states on what projects are to 

be included on the fundable list, including a 

definition for “ready to proceed.

C Assistant Administrator 

for Water

4/14/14

3 16 Require that EPA regions, when reviewing the 

capitalization grant application for states with high 

unliquidated obligation balances, ensure states 

have adopted the EPA’s guidance on the definition 

of “ready to proceed” and use that definition in 

developing the fundable list.

U Assistant Administrator 

for Water

4 16 Communicate to states having high unliquidated 

obligation balances that they should adopt the best 

management practice of having a well-organized 

process to ensure that projects on the fundable list 

are ready to proceed to loan execution within the 

current IUP year.

C Assistant Administrator 

for Water

4/14/14

1 O = recommendation is open with agreed-to corrective actions pending 

C = recommendation is closed with all agreed-to actions completed 

U = recommendation is unresolved with resolution efforts in progress
14-P-0318 19

Appendix A

Agency Response to Draft Report

(Received April 25, 2014)

MEMORANDUM

SUBJECT: Response to the Office of Inspector General Draft Project No. OA-FY13-0214, 

“Unliquidated Obligations Resulted in Missed Opportunities to Improve Drinking 

Water Infrastructure,” dated March 12, 2014

FROM: Nancy K. Stoner

Acting Assistant Administrator

TO: Arthur A. Elkins, Jr.

Inspector General 

Thank you for the opportunity to respond to the issues and recommendations in the subject audit 

report. The following is a summary of the agency’s overall position, along with its position on 

each of the report recommendations. For those report recommendations with which the agency 

agrees, we have provided either high-level intended corrective actions and estimated completion 

dates to the extent we can or reasons why we are unable to provide high-level intended corrective 

actions and estimated completion dates at this time. For those report recommendations with 

which the agency does not agree, we have explained our position. 

AGENCY’S OVERALL POSITION

The EPA agrees that the timely expenditure of federal funds for infrastructure is needed to 

ensure maximum use of resources and advance investment in the reliable delivery of safe 

drinking water. We welcome the IG’s recommendations on potential improvements to this 

program in an effort to enhance the EPA’s Drinking Water State Revolving Fund program. The 

EPA would like to acknowledge the role the primacy states have in this program. This might 

pose a programmatic challenge when determining how the EPA can adopt some of the corrective 

actions cited in the IG’s report. 
14-P-0318 20

AGENCY’S RESPONSE TO REPORT RECOMMENDATIONS

No. Recommendation High-Level Intended Corrective 

Actions

Estimated 

Completion by 

Quarter and FY

4 Communicate to States having 

high unliquidated obligation 

balances that they should adopt 

the best management practice of 

having a well-organized process to 

ensure that projects on the 

fundable list are ready to proceed 

to loan execution within the 

current IUP year. 

The practices outlined in the 

DWSRF ULO Reduction Strategy 

memo focus on projects that are 

ready to proceed to construction 

upon financing and advises that 

assistance for planning and design 

be awarded separately if projects are 

not expected to proceed to 

construction in the near term or 

project year. The Strategy also calls 

for state adoption of project bypass 

procedures, recognizing that some 

projects on the fundable list may, for 

unanticipated reasons, not be ready 

to proceed as originally envisioned; 

and for the development of fundable 

lists that are sufficiently robust to 

facilitate the use of bypass 

procedures if needed. Bypass 

procedures will enable a state to 

efficiently reach a ready-to-proceed 

project further down the list if 

needed. OGWDW also suggests 

that the IG’s report reflect that it is 

appropriate for states’ fundable lists 

to contain projects (immediately 

ready-to-proceed or poised to be so) 

of cumulative value that sufficiently 

exceeds the amount a state expects 

to provide in assistance in the period 

covered by the IUP.

OGWDW’s 

DWSRF ULO 

Reduction 

Strategy was 

released on April 

14, 2014; 

progress will be 

regularly tracked 

and reinforcement 

of the Strategy’s 

messages will be 

ongoing.
14-P-0318 21

Disagreements: 

No. Recommendation Agency Explanation/Response Proposed 

Alternative

1 Require States with high 

unliquidated obligations to use 

financial tools to project future 

cash flows to aid in liquidating 

balances by using those 

projections in planning for 

expending funds in a timely and 

efficient manner.

The draft report repeatedly asserts 

that OGWDW has established a 

ULO target of less than 13 percent 

of the cumulative federal 

capitalization grants awarded. This 

is a mischaracterization. During the 

time the OIG was conducting 

research for this report, OGWDW 

was developing a strategy to address 

ULO in the long term. Metrics 

under consideration included a 

metric based on states holding no 

more than two years-worth of 

capitalization grants as ULO at any 

given time. At the time of initial 

discussion, two years-worth of 

capitalization grants would have 

been approximately 13% of the 

cumulative federal capitalization 

grants awarded. OGWDW has 

since adopted a metric based on 

pace of funds liquidation as an 

appropriate indicator that conveys 

an understanding of assistance 

agreements being awarded and 

projects being initiated in a timely 

fashion (independent of percentage, 

which can mask liquidation status 

due to the accumulation of 

appropriations over time). On April 

14, 2014, the Office Director 

emailed the Strategy to the Regional 

Water Division Directors. The 

Strategy includes objectives 

targeted towards spend-down of 

legacy ULO by the end of FY16 and 

management of future ULO based 

on liquidation of federal grant funds 

24 months from the date of a state’s 

capitalization grant award, 

respecting that there will be 

differences among states. 

OGWDW believes that this 

Retain the spirit of 

the 

recommendation 

but re-phrase as 

“Work with 

States” rather than 

“Require.” Started 

working with 

states on this 

initiative in 

2QFY14; it’s an 

ongoing activity. 
14-P-0318 22

approach, framed within the 

expectation that states will work 

towards operating their DWSRFs to 

have ULO at the lowest practical 

level while recognizing that state 

circumstances vary, will promote 

appropriate focus on grant funds 

liquidation. OGWDW requests that 

the memorandum be included as an 

appendix to the IG’s report.

2 Develop guidance for States on 

what projects are to be included 

on fundable list, including a 

definition for “ready to proceed”.

OGWDW agrees that it is important 

to assist states in developing a 

common understanding of what 

“ready to proceed” means in the 

context of ULO reduction. This 

issue is highlighted in the Strategy 

which emphasizes the need for 

projects to be ready to proceed in 

that states should plan to award 

funding for projects that are ready to 

begin construction; and should 

generally separate assistance for 

planning and design from assistance 

for construction. We will be 

working with Regions to assist 

states in reflecting this approach in 

their fundable lists. 

This 

recommendation is 

closely related to 

Recommendation 

3. OGWDW 

recommends 

dropping 

Recommendation 

2 and modifying 

Recommendation 

3 as suggested 

next.

3 Require that EPA Regions, when 

reviewing the capitalization grant 

application for States with high 

unliquidated obligation balances, 

ensure State have adopted the 

EPA’s guidance on the definition 

of “ready to proceed” and use the 

definition in developing the 

fundable list. 

EPA’s Regions are expected to 

work with states to implement the 

Strategy and to ensure that 

appropriate thought and care have 

been taken in developing states’ 

fundable lists. The Strategy also 

highlights the potential for states to 

use DWSRF loan or set aside funds 

to assist water systems with project 

conception, planning and design 

leading to readiness to proceed to 

construction.

OGWDW 

recommends 

modifying 

Recommendation 

3 to “Regions 

should work with 

States to improve 

processes for 

accessing project 

readiness to 

proceed to 

construction, or to 

plan/design as 

appropriate. 
14-P-0318 23

Contact Information:

If you have any questions regarding this response, please contact Peter Grevatt, Director of the 

Office of Ground Water and Drinking Water on 202-564-3750 or Elizabeth Corr at 202-564-

3798.

Attachments: 

Drinking Water State Revolving Funds Unliquidated Obligations Reduction Strategy

National Priorities for the Drinking Water State Revolving Fund Program

Maximizing the Benefits of the Drinking Water State Revolving Fund through Efficient Federal 

Funds Management Practices

Letter to Don Chapman, Director of California Department of Public Health

Cc: 

Mike Shapiro

Peter Grevatt

Michael Mason

Marilyn Ramos
14-P-0318 24

Appendix B

April 14, 2014 Office of Water’s Strategy

(Received April 25, 2014)

MEMORANDUM

SUBJECT: Drinking Water State Revolving Fund (DWSRF) Unliquidated Obligations (ULO)

Reduction Strategy

FROM: Peter Grevatt, Director

Office of Ground Water and Drinking Water

TO: Water Division Directors

Regions I-X

This memorandum presents a national strategy to reduce unliquidated obligations (ULO) under 

the Drinking Water State Revolving Fund (DWSRF). DWSRF ULO are unspent funds from 

grants provided to states by the Environmental Protection Agency to assist drinking water 

systems in financing needed infrastructure improvements. States may also use a portion of their 

DWSRF grant funds as set asides for other important public health protection purposes including 

helping water systems, particularly small systems, strengthen their technical, managerial and 

financial capacity; implementing state Public Water System Supervision (PWSS) programs; and 

providing support for source water protection. The DWSRF ULO reduction strategy is directed 

to the timely expenditure of federal funds for these activities and supports our broader collective 

goal of maximizing the use of all DWSRF resources to advance investment in the reliable 

delivery of safe drinking water to the American people.

The strategy focuses on two key objectives: 1) liquidation of past years’ grant funds and 2) 

maintenance of lower levels of ULO in future years. These objectives are framed within the 

expectation that states will work towards operating their DWSRFs to have ULO at the lowest 

practical level while recognizing the varying institutional and financial circumstances of each 

state. The objectives are accompanied by a set of practices to assist states and to encourage them 

to operate the best infrastructure financing programs they are able within their respective 

institutional frameworks. These objectives and practices are described in further detail below. 

The strategy’s overall approach is further reinforced by the “best practices” identified by both the 

Council of Infrastructure Financing Authorities (CIFA) and the Association of State Drinking 

Water Administrators (ASDWA).

The strategy evolved from a series of consultations with states, CIFA, ASDWA, and you and 

your Regional DWSRF and PWSS staffs. The strategy’s objectives and practices have received 

positive feedback from CIFA’s and ASDWA’s boards of directors, reflecting the continuing 

strong emphasis that these organizations place on sound DWSRF funds management. I
14-P-0318 25

appreciate your thoughtful input and perspectives and your acknowledgement of the multiple 

aspects of DWSRF funds utilization that need to be addressed collaboratively now and into the 

future of the program to ensure timely, expeditious and efficient use of these federal dollars. The 

strategy also builds on my memorandum to you of September 12, 2013, which describes 

flexibilities that states have under DWSRF regulations to help in addressing certain aspects of 

ULO, including use of federal funds on a first-in first-out (FIFO) basis; bypass procedures for 

projects not yet ready to proceed; funds use equivalence for additional subsidy and green 

projects; and funds reserve authority for DWSRF set asides. These flexibilities are already used

by many states and will enable others to accelerate their efforts to spend their DWSRF grant 

funds. 

I want to express my appreciation for your support and that of your staffs in the development and 

early implementation of key aspects of this strategy. An important step that all Regions took 

working with states in 2013 was to award all DWSRF state grants in the fiscal year of 

appropriation. The state associations have also endorsed this step. We will need to continue on 

this foundation of prompt grant awards in 2014 and future years. Your continued engagement on 

these issues will be essential to assure the full, timely use of these funds to address high priority 

public health protection needs of water systems within each state.

Strategic Objectives

The strategy aims to reduce DWSRF ULO for both loan and set aside funds to lower yet 

practical levels, targeted to occur within financially manageable timeframes as indicated by the 

experience of states with low ULO, while respecting that there will be differences among states. 

This aim is reflected in the strategy’s objectives:

(1) Full utilization of funds from previous DWSRF grants (FY 2013 and prior years’ funds) 

by the end of September 2016.

These grant funds may be referred to as “legacy ULO” as they will have been available 

for a significant period of time by the end of fiscal year 2016. These loan and set aside

funds are a focus of immediate concern and attention. I encourage you to focus most 

intensively on states with higher ULO while ensuring that others remain on their paths to 

meet or continue to stay within this objective.

(2) Complete draw down of funds from future years’ grants within two years from the date of 

grant award.

This objective addresses the maintenance of lower ULO in the future to support timely, 

expeditious and efficient use of DWSRF grant funds for both loan and set aside 

assistance. The purpose is to prevent accumulation of grant funds and minimize the 

number of open grants. States that are meeting or exceeding this objective are 
14-P-0318 26

encouraged to continue to do so. Regions are asked to work closely with all other states 

to reduce carriage of ULO and manage within the objective.1

Practices

The strategy focuses on fundamental DWSRF program management practices, with heightened 

emphasis on approaches that can help reduce ULO. Many states are already successfully using 

these “best practices” to support sound funds management and timely public health protection. I 

am asking you to join me in working with states to adopt the following practices, directed toward 

the strategic objectives, where needed:

(1) Focus on Ready-To-Proceed Projects. Proactive efforts by states to help get projects 

ready to proceed to financing and to ensure that construction of funded projects is 

initiated on schedule represent an investment in protecting the health of our communities. 

States have options available through the use of either DWSRF loan funds or set aside 

funds, or both, to work with water systems at each phase, from project conception 

through planning and design, to ensure that priority infrastructure projects are ready to 

proceed to construction. State financial assistance for project planning and design can 

offer opportunities for water systems, especially small systems, in preparing projects for 

construction. States are strongly advised to ensure that construction funding for projects 

on the fundable list is not awarded until projects are ready to begin construction. If 

DWSRF funds are provided up front for planning and design, those funds should be 

awarded separately from funds for construction, unless the project is assured to proceed 

to construction within the near term; for example, in the same program year.

(2) Develop a Robust List of Fundable Projects. A robust fundable list contains projects 

of cumulative value that sufficiently exceeds the amount a state expects to provide in 

assistance in the period covered by its Intended Use Plan (IUP). Projects on the fundable 

list should be immediately ready, or be poised to be ready, to enter into assistance 

agreements. A well-developed fundable list affords a state the option to bypass projects 

not ready for financing due to unanticipated issues. Incorporation of bypass procedures 

into IUPs enables states to efficiently advance ready projects, while appropriate use of 

these procedures facilitates project timeliness and expeditious funds use for responding to 

priority public health needs. Solicitations by states of water system projects needing 

capital investment to protect public health underpin the development of the 

comprehensive project lists from which fundable lists are drawn and are an important 

 

1 Some states, particularly with respect to set aside funds, may face challenges that could 

constrain their efforts. In such instances, states in collaboration with Regions should 

carefully consider, wherever possible, alternative approaches for using the funds in the 

timeliest manner possible to achieve their intended public health protection purposes. 

Additional time to use set aside funds is envisioned not to extend beyond twelve months.
14-P-0318 27

early step; states’ efforts to ensure that water systems within their jurisdictions are wellinformed of the financing opportunities available through the DWSRF are key to support 

this process. 

(3) Forecast Financing Capacity through Use of Cash Flow or Similar Analysis. 

Understanding the relationships between future incoming funds, projected disbursements

and future project needs is a powerful tool that states can use to optimize the productivity 

of all of their DWSRF funds. Incoming funds include the federal capitalization grant and 

state match, as well as principal and interest payments on loans, leveraged bond proceeds 

and fees. Cash flow modelling allows a state to determine the amount of assistance its 

program can prudently provide in a given year and can help a state assess the impacts of 

current year financing decisions on future years’ financing capacity. Particularly when 

used in conjunction with a robust list of fundable projects that are ready to proceed, cash 

flow analysis can help states to maximize the pace of project funding where supported by 

sound financial management principles. It can also assist states in moving funds more 

quickly to reimburse project expenditures, supporting expeditious draw on federal and 

other sources of funds. I ask that you encourage states not using cash flow analysis to 

participate in training offered by my office to facilitate their understanding of the 

techniques and conditions that support this approach and that you work with them to 

determine how its use might enhance their ability to finance needed drinking water 

infrastructure.

(4) Manage Set Aside Accounts to Reflect the Pace of Funds Use. Set aside funds are a 

hallmark of state flexibility under the DWSRF program and are taken by states for a 

variety of purposes, such as technical assistance, PWSS program management and source 

water protection, as well as for planning and design grants for project readiness. In 

taking set asides, states have options that they can exercise to support effective use of 

these funds while minimizing ULO. States that have long-term projects funded with set 

aside funds can reserve the authority to take funds from a future grant, in lieu of the 

current grant, to support these multi-year projects. States may reserve the authority for 

the two percent, four percent and ten percent set asides. Once authority has been reserved 

it does not expire and may be exercised by the state against any future capitalization 

grant. Other approaches that may be useful to a state in managing set aside accounts 

include adjusting the amounts taken from one year to the next to reflect actual pace of 

spending; and transferring accumulated unused set aside funds to the loan fund.

(5) Draw Down Federal Funds and State Match First. States have several sources within 

their drinking water revolving funds from which to draw funds for reimbursement of 

project expenditures. Please encourage states to draw federal capitalization grant funds 

and state match funds before using other funds, to the extent possible, to cover these 
14-P-0318 28

reimbursements and reduce ULO. This approach of prioritizing federal and state match 

draw down can be informed and facilitated by cash flow analysis. 

(6) Accelerate Federal Cash Draws through Prompt Invoicing. To help manage ULO, 

please encourage states to work with assistance recipients to achieve submission of 

invoices as promptly as possible (such as monthly, as indicated by national association 

“best practices”) and to expedite review of project payment requests to effect timely cash 

draws of federal capitalization grant funds.

These practices are dynamic and interactive. My staff will continue to work with staff in the 

Regions and states and state associations to promote these practices, drawing on the experience 

of states in reducing and maintaining low ULO as well as ongoing efforts by CIFA and ASDWA 

to advance cash flow approaches and set-aside management. 

Strategy Implementation

This strategy is for immediate implementation. I advocate that you confer closely with states in 

your Region to put these practices in place as needed to support ULO reductions and to position 

states as much as possible to achieve the strategy’s objectives, recognizing that states present a 

wide range of circumstances and starting points relative to the objectives and in utilizing the 

supporting practices. For states that currently meet or exceed the objectives, it will be important 

to ensure that these achievements are maintained. For others, your dedicated efforts to assist in 

developing a sound and sustainable path to meet the objectives will be critical. For those states 

understand any factors that may impede meeting the objectives, while working to attain the 

lowest ULO balances possible.

To further assist you, I will make my staff available to consult with your staff and any state 

officials that you identify as needing information or technical assistance. My staff has been 

tracking ULO and will continue to provide this information to your staff on a monthly basis to 

facilitate your frequent evaluation of each state’s progress and assist you in identifying where 

further assistance to states is needed. I will continue to evaluate our collective efforts and will 

seek your input should we need to reinforce this strategy to achieve its purpose of significantly 

lowering ULO levels.

My office is committed to support you and the states. My staff recently conducted a webinar in 

collaboration with state and regional presenters on cash flow analysis as a recommended tool to 

support timely, expeditious and efficient use of funds. Additional webinars and materials are 

planned that will further address this and other financial management aspects of the DWSRF 

program. As you work in consultation with states to understand their individual circumstances,

you may identify other needs and opportunities for overcoming hurdles to reducing ULO. I am 

available upon your request to discuss ways in which my office might be able to assist. There 

may also be opportunities for states to support each other through transfer of knowledge from

direct experience and use of best practices. I would be happy to communicate with states’ 

national organizations to assist in brokering these kinds of state-to-state relationships.
14-P-0318 29

Programmatic mechanisms are also available to you and may be useful in working with states to 

attain ULO reductions. These include specifying state DWSRF grant budget and performance 

periods, and grant conditions, if needed; state changes in Intended Use Plans; and, if appropriate, 

state modifications to DWSRF operating agreements which might be useful in documenting 

state-administered financial processes. While EPA’s grants policy allows up to seven years for 

full expenditure of open grants, the DWSRF regulations call for the expenditure of all funds as 

efficiently as possible, in an expeditious and timely manner. Implementation of this strategy 

across the national DWSRF program will promote a focus on expeditious liquidation of grant 

funds to ensure that appropriated dollars are being used to address critical public health needs in 

a timely manner. 

You may also find it helpful to track the pace of states’ implementation of the above-described 

strategic objectives, as well as use of the practices, as you evaluate whether the strategy’s 

objectives are being achieved in your Region. I will be doing so on a regular basis to support 

collaboration with you on achieving progress in ULO reduction. Together we need to carefully 

evaluate the efforts of each state in ULO reduction. I look to you to actively ascertain that a state 

is making or has made sufficient progress towards sound management of its DWSRF funds and, 

if warranted, to take appropriate action to ensure proper and timely funds use. 

I want to thank each of you and also convey my appreciation to CIFA, ASDWA and their 

respective board members for sharing insights and expertise in the development of this strategy. 

I look forward to working with you and the states to ensure the timely use of DWSRF funds for 

public health protection. Please contact me or have your staff contact Chuck Job, Chief, 

Infrastructure Branch, at (202) 564-3941 or job.charles@epa.gov at any time with questions or to 

share ideas to advance this important initiative.
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Appendix C

Distribution

Office of the Administrator

Assistant Administrator for Water

Agency Follow-Up Official (the CFO)

Agency Follow-Up Coordinator

General Counsel

Associate Administrator for Congressional and Intergovernmental Relations

Associate Administrator for External Affairs and Environmental Education

Principal Deputy Assistant Administrator for Water

Director, Office of Ground Water and Drinking Water, Office of Water

Audit Follow-Up Coordinator, Office of Water