Drinking Water

State Revolving Fund

United States Environmental

Protection Agency

The Office of Ground Water

and Drinking Water

Infrastructure Branch

Drinking Water

State Revolving Fund

Program

Operations

Manual

Provisional Edition
United States Environmental Protection Agency

The Office of Ground Water and Drinking Water

Infrastructure Branch

Drinking Water State Revolving Fund

Program Operations Manual

Provisional Edition
Table of Contents

Chapter 1 - Introduction

1.1. Statutory Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

1.2 DWSRF Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

1.3 Program Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Chapter 2 – Steps in the Federal DWSRF Funding Process

2.1 The President’s Budget Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

2.2 Congressional Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

2.3 OMB Apportionment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

2.4 Allotment to States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Chapter 3 – Steps in the Federal DWSRF Project Funding Cycle

3.1 State Develops the Federal Capitalization Grant Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

3.2 EPA Review of the Capitalization Grant Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

3.3 Withholding DWSRF Funds Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

3.4 State Agrees to Provide Matching Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

3.5 State Leveraging Activities to Increase Funds Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

3.6 Fund Transfers (Between the DWSRF and CWSRF Programs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

3.7 Federal Funding Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

3.8 Special Program Assistance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

3.9 Cooperation and Coordination with other Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

3.10 Project Application Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

3.11 Detailed State Loan Application Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

3.12 Project Approval and General Loan Closing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

3.13 Construction Activities and Loan Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

3.14 Project Completion and Close-Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Chapter 4 – Funding through the DWSRF Set-Asides

4.1 Four Types of Set-Asides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

4.2 Key Requirements and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55

Chapter 5 – State Follow-Up Activities

5.1 State Develops the DWSRF Annual/Biennial Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

5.2 State Completes and Submits the DWSRF Annual Audit to EPA . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

5.3 Submitting Annual Set-Aside Performance Status Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

5.4 Reporting for DWNIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64

Chapter 6 – EPA Oversight Activities

6.1 State and EPA Annual Review Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

6.2 EPA Regional Review Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67

Chapter 7 – Revisiting the Program Structure

7.1 Assessing Implications of Fund Management Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
1

Acronyms

ACH Automated Clearing House

AG Attorney General

ASAP Automated Standard Application for Payments

CE Categorical Exclusion

CFR Code of Federal Regulations

CWSRF Clean Water State Revolving Fund

DWNIMS Drinking Water National Information Management System

DWSRF Drinking Water State Revolving Fund 

EA Environmental Assessment

EIS Environmental Impact Statement

EPA Environmental Protection Agency

FCTR Federal Cash Transaction Report

FSR Financial Status Report

FTE Fulltime Equivalence

FY Fiscal Year

GAAP Generally Accepted Accounting Procedures

GAGAS Generally Accepted Auditing Standards

GAO Government Accountability Office

GO General Obligation

IUP Intended Use Plan

MBE Minority Business Enterprise

NEPA National Environmental Policy Act

OA Operating Agreement

OIG Office of Inspector General

OMB Office of Management and Budget

PAM Program Activity Measure

PART Program Assessment Rating Tool

PER Program Evaluation Report

PPL Project Priority List

PWS Public Water System

PWSS Public Water System Supervision

SDWA Safe Drinking Water Act

SERP State Environmental Review Process

SRF State Revolving Fund

SWP Source Water Protection

TFM Technical, Financial, and Managerial

WBE Women's Business Enterprise
Chapter 1 / Section 1.1 2

1.1

Statutory Background

1.1.1

Development of the Safe Drinking Water Act

Congress passed the Safe Drinking Water Act (SDWA)

in 1974 and amended it in 1986 and 1996 to protect

public health by regulating the nation’s public drinking

water supply. Under SDWA authority, the United States

Environmental Protection Agency (EPA) establishes

national health-based standards for drinking water that

protect against a wide range of contaminants, and ir

provides national leadership in implementing a suite of

programs designed to protect water supplies and ensure

the sound operation of water systems. Drinking water

standards set either enforceable maximum levels of individual contaminants in drinking water or required ways

to treat water to remove contaminants. EPA, state governments, and water systems work together to make

sure that these standards are met. 

1.1.2

The Role of the Drinking Water

State Revolving Fund (DWSRF)

The 1996 Amendments to SDWA, Section 1452, created the DWSRF program. The DWSRF is a multifaceted tool for states to use in achieving the public health

protection objectives of SDWA. States operate their

own DWSRF programs and receive annual capitalization grants from EPA which they use to support lowinterest loans and other types of assistance to public

water systems. Additional provisions also allow state

DWSRF programs to target extra assistance to those

communities with the greatest economic need. (See

Section 3.8.1 for additional information on providing

assistance to small and disadvantaged communities.)

The state agency that establishes DWSRF assistance priorities and carries out program oversight activities is the

same state agency that also administers the Public

Water System Supervision (PWSS) program. The

PWSS program carries out many key activities, including developing and maintaining drinking water regulations, tracking compliance information, and ensuring

that all public water systems follow state regulations.

States may entrust day-to-day operations and financial

management of their DWSRF program to another

agency such as a finance authority as long as priority

setting and program oversight responsibilities remain

with the PWSS program

CHAPTER 1

Introduction

KEY POINTS IN CHAPTER 1

• Created through the 1996 Amendments to SDWA, the

DWSRF program is a multifaceted tool for states to use in

achieving public health protection.

• DWSRF programs must follow all requirements as set

forth under the DWSRF Interim Final Rule, the DWSRF

Program Guidelines, and EPA’s general grant regulations

at 40 CFR Part 31.

• EPA, the Office of Management and Budget, the

Government Accountability Office, and Congress

conduct varying levels of DWSRF oversight activities to

ensure compliance and effective program management.

Examples of Key PWSS Program Activities:

• Developing state drinking water regulations;

• Maintaining an inventory of public water systems;

• Conducting sanitary surveys of public water systems;

• Providing technical assistance to PWS operators; and

• Ensuring all systems comply with state requirements.
Chapter 1 / Section 1.2 3

few years of DWSRF implementation and from comments provided on a first draft of the rule by a workgroup of State Revolving Fund practitioners. 

1.2.2

General Grant Regulations

The Interim Final Rule supplements EPA’s general

grant regulations at 40 CFR Part 31 which contain

administrative requirements that apply to governmental

recipients of EPA grants and subgrants. With the

exception of requirements for the participation of

minority and women’s business enterprises1

, EPA’s general grant regulations at 40 CFR Part 31 do not apply

to recipients of loans and other types of assistance from

a state DWSRF program Fund. Instead, these general

grant regulations apply to state agency recipients of

DWSRF capitalization grants. These general grant regulations describe the planning activities and forms

required to apply for a grant, the acceptable financial

administration of grant funds, the appropriate methods

for changes and subawards, the monitoring of program

activities, reporting requirements, records retention,

enforcement procedures, and post-grant requirements.

Guidelines for conducting audits are also included.

1.3

Program Oversight

1.3.1

DWSRF Circle of Accountability

EPA DWSRF program conditions and reporting

requirements provide EPA with a summary of individual

state program activities. Information used by EPA

includes the Intended Use Plan, the Biennial Report,

program files, financial records, the capitalization grant

application, set-aside work plans, capitalization grant

award conditions, the annual audit, and reports provided through the Drinking Water National Information

Management System (DWNIMS). This information, in

combination with Annual Reviews of state programs and

the development of state Program Evaluation Reports

(PERs), provides EPA insight into state use of funds and

helps guide management and administration decisions.

DWSRF Priorities

DWSRF funds are used to ensure:

• Public health protection,

• Compliance with drinking water standards, and

• Affordable access to drinking water.

1 Each DWSRF program is required to develop a fair share goal for the participation

of minority and women’s business enterprises in receiving DWSRF project assistance.

Just as the DWSRF program is required to make progress in meeting these fair share

goals, SRF loan recipients of assistance in an amount equal to the capitalization

grant are also required to follow a standard procedure to ensure compliance in this

area. (Please see Section 3.11.3 for more information.)

The 1996 Amendments extended the safe drinking water

framework of public health, compliance, and affordability

to encompass Source Water Protection (SWP), operator

training, technical assistance, and public education. The

DWSRF program design reflects this source-to-tap

approach. States can set aside a portion of their capitalization grants to fund activities that improve the management of water systems and establish or expand programs

that protect sources of drinking water. Some DWSRF

funds can also be used to help states support the implementation of PWSS program activities. DWSRF funding

for these purposes is contingent upon efforts to improve

and maintain system capacity. Although DWSRF setaside funds may be used to administer the state PWSS

program, there is a federal limitation on the use of setaside funds for enforcement activities. 

1.2

DWSRF Regulations

1.2.1

DWSRF Interim Final Rule

Issued in August 2000, the DWSRF Interim Final Rule

codifies the DWSRF Program Final Guidelines (1997)

and explains various program requirements, including:

steps to receiving a capitalization grant; what states may

do with capitalization grant funds intended for infrastructure projects; what states may do with funds intended for set-aside activities; and the roles of the states and

EPA in managing and administering the DWSRF program. The rule gives states significant flexibility to

design their DWSRF programs and to direct funding

toward their most pressing compliance and public

health-related needs.

EPA attempted to include all major program requirements, including items required by SDWA and those

EPA considers necessary for effective program management. The rule modifies and adds to the Final

Guidelines based on policies that evolved during the first
Chapter 1 / Section 1.3 4

Additionally, Congress and multiple agencies oversee

DWSRF program operations in order to ensure efficiency, effective implementation, and management in order

to best serve the public interest. These different oversight components act to further increase accountability

by conducting audits and investigations of DWSRF program policies and administration. These oversight activities are then used to guide funding decisions and program management policies. 

1.3.2

EPA Office of Inspector General

The EPA Office of Inspector General (OIG) is an independent office within the EPA. It consists of analysts,

auditors, and investigators, among others. Its purpose

is to help the EPA and its programs, including the

DWSRF, operate more efficiently and to detect and prevent waste, fraud, and abuse. To accomplish this, it performs audits, evaluations, and investigations. It also

provides public liaison and hotline services to review

public complaints about EPA programs and activities. 

1.3.3

Office of Management and Budget

The Office of Management and Budget (OMB) oversees the preparation of the federal budget and supervises its administration in Executive Branch agencies,

including the EPA. OMB evaluates the effectiveness of

programs, policies, and procedures of these agencies,

including the DWSRF, with the goals of improving

administrative management, developing better performance measures and coordinating mechanisms, and

reducing unnecessary burdens on the public.

1.3.4

Government Accountability Office

The Government Accountability Office (GAO) helps

Congress oversee federal programs and operations,

including the DWSRF, in order to ensure that they are

serving the public interest. The agency consists of analysts, auditors, lawyers, economists, information technology specialists, and many others with the purpose of

enhancing the economy, efficiency, credibility, and

effectiveness of the federal government. In accordance

with this purpose, GAO conducts financial audits, program reviews, legal support, and policy analyses, and

investigations. For example, in 2001, GAO released a

report to Congress entitled, Water Infrastructure:

Information on Federal and State Financial Assistance

to provide information on assistance from state and federal agencies for drinking water and wastewater capital

improvements since 1991.

Intended

Use Plan

DWNIMS

Data

Annual

Audit

Biennial

Report

Program

Files

Financial

Records

Capitalization

Grant

Application

Set-Aside

Work

Plans

Capitalization

Grant Award

and Conditions

Annual Review

and Program

Evaluation Report

DWSRF Circle of Accountability

EPA Office of Inspector General

• Helps EPA programs operate more efficiently

• Performs audits, evaluations, and investigations

• Evaluates possible cases of waste, fraud, and abuse

Office of Management and Budget

• Oversees the administration of the federal budget

• Evaluates the effectiveness of programs

• Leads the development of government policy

Government Accountability Office

• Assists Congress in overseeing federal programs

• Conducts financial audits, program reviews, policy analyses,

and investigations
Chapter 1 / Section 1.3 5

1.3.5

Congress

Congress oversees EPA’s administration of the DWSRF

to review and monitor the Agency’s performance, program success, and effects of policy implementation under

SDWA. The goal is to determine whether the laws and

the programs created by Congress are implemented and

carried out in accordance with the intent of Congress.

The Senate Environment and Public Works Committee

(Subcommittee on Fisheries, Wildlife, and Water) and the

House Energy and Commerce Committee

(Subcommittee on Environment and Hazardous

Materials) are the authorizing committees for SDWA and

thus monitor the impact of the legislation they initiate.

The Senate Appropriation Subcommittee on Interior and

related Agencies and the House Appropriations

Subcommittee on Interior, Environment, and Related

Agencies develop the annual legislation appropriating

funds to EPA for DWSRF capitalization grants each year.

They are interested in how the money is spent. 

Every three to five years, the authorizing committees are

obligated to review and study how EPA administers

SDWA, including its application, administration, execution, and effectiveness. This includes the organization

and operation of EPA. It also includes the impact of tax

policies on SDWA and the DWSRF programs in particular. The appropriations committees examine the

DWSRF annually, but not in the same detail as the

authorizing committees. 

The Congressional committees, and sometimes individual Representatives and Senators, will request reports

and other information from EPA that describe program

performance. For example, in 2003, EPA issued The

Drinking Water State Revolving Fund Program:

Financing America’s Drinking Water from the Source

to the Tap, Report to Congress. Such reports and

additional information help Congress ensure that EPA

can effectively manage and carry out program objectives, help judge whether executive policies reflect the

public interest, and build a knowledge base for future

legislation.

The Drinking Water

State Revolving

Fund: Financing

America’s Drinking

Water

Congress

• Oversees EPA’s administration of the DWSRF

• Reviews and monitors the Agency’s performance

• Every three to five years, the authorizing committees are

obligated to review and study how EPA administers SDWA

KEY RESPONSIBILITIES: CHAPTER ONE

DWSRF Regulations and Program Oversight

EPA

• EPA, OMB, GAO, and Congress are charged with overseeing DWSRF program operations in order to ensure

compliance, efficiency, and effective implementation of program activities. 

State Program Office

• The state agency that establishes DWSRF assistance priorities and carries out program oversight activities must be

the same agency that that also administers the PWSS program. This agency is termed the primacy agency.

• All DWSRF programs are subject to certain program conditions and reporting requirements as set forth under

the DWSRF Interim Final Rule, the DWSRF Program Guidelines, and EPA’s general grant regulations at 40

CFR Part 31. For example the program office is charged with developing the Intended Use Plan, the DWSRF

Annual/Biennial Report, and annual program audit.
2.1

The President’s Budget Request

2.1.1

Development of the President’s Budget

Each year, the President’s Budget request is received by

Congress on or before the first Monday in February.

This schedule is set according to requirements under

the Congressional Budget Act of 1974. The President’s

Budget contains details on the Administration’s policies

and funding priorities for the upcoming fiscal year. The

Budget includes information on spending estimates by

category, revenue and borrowing levels, and input from

the various federal agencies. (For more information and

access to the annual federal budget and related information, see http://www.whitehouse.gov/omb/budget.)

To help guide budget decisions, OMB uses the Program

Assessment Rating Tool (PART). PART is a series of

questions that seek to assess the purpose, management,

strategic planning, and performance of individual programs, including the DWSRF. Programs must demonstrate that their purpose is clear, that they are results-oriented, that they are well managed, and that they achieve

intended results. The purpose of PART is to improve

the performance and management of federal programs.

Its evaluation of program effectiveness also plays a role

during the development of the President’s Budget by

providing relevant information for allocating limited

funds to programs that can best demonstrate success.

Possible ratings include “effective,” “moderately effective,” “adequate,” “ineffective,” and “results not demonstrated.” The DWSRF has received a rating of “adequate.” (For detailed information on the PART process,

see http//www.whitehouse.gov/omb/part/.)

According to the President’s Budget, the DWSRF falls

under Budget Function 300, also known as funding for

Natural Resources and the Environment. This budget

category encompasses several funding areas, including

the development and maintenance of our national water

resources and the management of our drinking water

and wastewater infrastructure systems.

2.2

Congressional Appropriation

2.2.1

Congress Presents the Final Budget Resolution

After the President’s Budget request is submitted to

Congress, both the House and Senate Budget

Committees hold hearings to discuss the budget and

gather expert testimony and advice from the various fedChapter 2 / Section 2.1 6

CHAPTER 2

Steps in the Federal DWSRF Funding Process

KEY POINTS IN CHAPTER 2

• To help guide budget decisions OMB uses PART to

assess the purpose, management, and performance of

individual programs, including the DWSRF.

• House and Senate Budget Committees hold hearings to

discuss the President’s Budget and gather expert testimony from federal agencies, including EPA.

• The passage of an appropriations bill and its signing into

law permits a federal agency to make payments from the

federal Treasury for specified program purposes, including the DWSRF.

• EPA allots DWSRF funds to states according to a formula

that reflects proportional drinking water infrastructure

needs.

The Purpose of OMB’s Part Analysis . . .

to improve the performance and

management of federal programs
Chapter 2 / Section 2.2 7

eral agencies, including EPA. For example, in May of

2005, the EPA Administrator appeared before the Senate

Appropriations Committee to discuss the President’s

Budget for FY2006.2 During this process, individual

Members of the Budget Committees can offer amendments and make other suggestions for change before a

final version of the budget is presented. According to the

Budget Act, Congress is required to present a final version of the House and Senate budget resolutions –

termed the concurrent resolution – by April 15th of each

year. This deadline is rarely met in practice. This budget

sets an overall framework for all appropriations bills considered before Congress. (For more information on this

topic, see http://www.house.gov/ budget/ and

http://budget.senate.gov/.)

2.2.2

Congress Considers Multiple

Appropriations Bills

Annually, Congress considers multiple appropriations

bills. It is important to note that annual appropriations

bills will change from year-to-year. For 2006, the

House included eleven appropriations bills. The

Drinking Water SRF is included under the Interior and

Environment appropriations bill. Others included:

Agriculture; Defense; Science, State, Justice, and

Commerce; Energy and Water; Foreign Operations;

Homeland Security; Interior and Environment; Labor,

Health and Human Services, and Education; Legislative

Branch; Military Quality of Life and Veterans Affairs;

and Transportation, Treasury, HUD, Judiciary, and the

District of Columbia.

Similarly, the Senate included the Drinking Water SRF

program under the Interior appropriations bill. Other

bills in 2006 included: Agriculture; Commerce, Justice,

and Science; Defense; the District of Columbia; Energy

and Water; State/Foreign Operations; Homeland

Security; Interior; Labor, Health and Human Services,

and Education; Legislative Branch; Military and Veterans

Affairs; and Transportation, Treasury, Judiciary, and

HUD.

The passage of an appropriations bill and its signing into

law by the President permits a federal agency to make

payments from the Federal Treasury for incurred obligations and other specified purposes. Appropriations

provide a formal approval for the expenditure of public

funds for a specified purpose over a set period of time. 

2.2.3

Congress Approves Individual

Appropriations Bills

Appropriations bills are considered by both the House

and Senate Appropriations Committees. Individual

bills are divided among each Committee’s respective

subcommittees depending on the specific area of federal

funding. Each subcommittee works to develop their

individual appropriations bill according to the original

Presidential Budget request, new priorities, and the

previous appropriations bills. After each subcommittee

develops their final recommendation, all appropriations

bills are amended as necessary and approved by the full

House and Senate Appropriations Committees. (For a

listing of current membership on subcommittees

charged with consideration of program appropriations

for the national DWSRF program, see the House and

Senate Appropriations websites at http://appropriations.

house.gov/ and http://appropriations.senate.gov/.)

Following approval of their respective appropriations bills,

the House and Senate each appoint conferees (i.e., negotiators) to reconcile differences between their respective

versions of these appropriations bills. House and Senate

conferees group to form an ad hoc panel known as the

Conference Committee to develop one version for each

appropriations bill that can receive support from at least

half of the appointed conferees and can pass both the

House and the Senate by a majority vote. (For more

information on the appropriations bills approval process

and to track individual bills, visit

http://thomas.loc.gov/. This website provides legislative information from the Library of Congress.)

2.2.4

Rescission

Congress may apply a rescission (an across the board

reduction to an appropriation) before final passage of

that appropriation. This practice has been common in

recent years. Rescissions are a tool the appropriations

committees use to keep the total amount of appropriations within agreed upon spending caps. After a final 2 For access to EPA testimony statements before the House and Senate Committees,

see http://www.epa.gov/ocirpage/hearings/index.htm.
appropriations bill is approved, readjustments to the bill

are still possible under certain circumstances.

Authorized under the authority of the Budget Act of

1974, the President may request readjustments to the

previously appropriated budget amounts through the

introduction of a rescission bill. A rescission bill specifies the exact amount of change to all or part of a previously appropriated amount. If the President’s rescission

bill is not passed by Congress within forty-five days,

funds must be released according to the original appropriated amounts. For example, in an attempt to offset

costs associated with Hurricane Katrina, a rescission bill

was introduced for FY2006 that withdrew funds previously appropriated, including funds previously appropriated to EPA. The proposal rescinded $166 million from

the EPA State and Tribal Assistance Grants program. 

2.3

OMB Apportionment

2.3.1

Purpose

Based on appropriations bills signed into law by the

President, OMB develops an apportionment spending

plan. An apportionment plan is intended to achieve the

most effective and economical use of funds made available

by a federal appropriation. The process of apportioning

distributes funds appropriated for specific purposes by time

period of availability and proper oversight agency.

2.4

Allotment to States

2.4.1

National Set-Asides

Before funds appropriated for the DWSRF are allotted

to states, EPA is required to reserve some of the funds

for specific national-level set-asides. Indian Tribes and

Alaska Native Villages can receive grants valued up to

1.5 percent of annually appropriated funds. EPA may

also reserve up to two percent of appropriated funds for

small system technical assistance.

In addition, EPA reserves $2 million for the monitoring

of unregulated drinking water contaminants. From

FY1999 to FY2003, EPA reserved funds to provide

grants to states for reimbursement of the costs of training and certifying operators of drinking water systems

serving 3,300 persons or fewer (known as the Operator

Certification Expense Reimbursement Grant Program

and authorized under the provisions of Section 1419 of

SDWA, as amended). Separate EPA guidelines govern

the management of these national-level set-asides.

2.4.2 

Basis of Allotment

After national set-asides are reserved from the full federal appropriation, remaining funds are allotted to state

DWSRF programs, the District of Columbia, and the

Pacific Island Territories to carry out Section 1452 of

SDWA.

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. Drinking Water

Infrastructure Needs Surveys are due to Congress every

four years starting from the January 1997 survey. Of

note, state costs for participation in the Needs Survey

may be charged to the four percent DWSRF administration set-aside. (See Section 4.1.1 for more information on the four percent DWSRF administration setaside.) No state or Puerto Rico receives less than one

percent of the total funds available for allotment to all

the states (withholding notwithstanding).

In addition to funds allotted for individual state programs, the District of Columbia receives a one percent

share of total allotted funds, while the Virgin Islands

and the Pacific Island Territories together receive an

allotment of 0.33 percent.

Chapter 2 / Section 2.3 8

National Set-Asides

• 1.5 percent for grants to Indian Tribves and Alaska

Native Villages

• Up to two percent for small system technical assistance

• $10 million for health effects research

• $2 million for monitoring unregulated contaminants

• Cost reimbursement for operator training certification
Chapter 2 / Section 2.4

9

Funds are available to states during the fiscal year in

which they are authorized and during the following fiscal year. Any amount not obligated at the end of this

period is reallotted (according to the same formula) to

all remaining states that have already obligated their

funds. EPA may reserve up to ten percent of the funds

available for reallotment to provide additional assistance

to Indian tribes.

KEY RESPONSIBILITIES: CHAPTER TWO

Steps in the Federal DWSRF Funding Process

EPA

• For every program assessed through the PART process, OMB and associated federal agencies develop plans to

improve performance and management over time. All assessed programs are held accountable to the recommendations contained within these plans, including the national DWSRF program and EPA.

• After the President’s Budget request is submitted to Congress, both the House and Senate Budget Committees

hold hearings to discuss the budget and gather expert testimony from the various federal agencies, including EPA.

• Before funds appropriated for the DWSRF are allotted to states, EPA is required to reserve some of the funds for

specific national-level set-asides.

• 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.

State Program Office

• EPA allots federal DWSRF funds to the states according to a formula that reflects their proportional share of

drinking water needs. Funds are available to the states during the fiscal year in which they are authorized and

during the following fiscal year. Any amount not obligated at the end of this period is reallotted to all remaining

states that have already obligated their funds.

General Steps in the Federal Funding Process

Congress Presents a Final Budget Resolution President’s Budget Request is Submitted to Congress

Congress Considers Multiple Appropriations Bills

Appropriations Bills Amended as Necessary and Approved

Final Passage of Appropriations Bills

OMB Develops Apportionment Spending Plans

based on Final Appropriations Bills

EPA Allots Federal DWSRF Funds to States Following

the Application of National Set-Asides

Congress May Consider

Rescissions to Approved

Appropriations Bills

Figure: General steps in the federal funding process from the President’s budget request to EPA allotment of funds to the individual

DWSRF programs.
3.1

State Develops the Federal

Capitalization Grant Application

In order for a state to receive the DWSRF funds allotted

to it, the state must apply for a grant of the funds. This

capitalization grant application must conform to general

federal grant regulations (40 CFR Part 31 – Uniform

Administrative Requirements for Grants and Cooperative

Agreements to State and Local Governments); 40 CFR

Part 35, Subpart L – Drinking Water State Revolving

Funds; EPA’s Interim Final Rule for the DWSRF; and

Section 1452 of SDWA, as amended. (For more information on EPA grantee requirements, including

required EPA grantee forms, visit the EPA Office of

Grants and Debarment at http://www.epa.gov/ogd.)

Components of the formal capitalization grant application include:

• EPA Form 424, “Application for Federal Assistance,”

and related forms,

• The state’s Annual Intended Use Plan (IUP), including the state’s Project Priority List, and

• State Attorney General certification that the authorities establishing the DWSRF are consistent with state

law and that the state may legally bind itself to the

terms of the capitalization grant agreement

Some states submit set-aside work plans along with

their capitalization grant application, but they are not

required for the capitalization grant application. If not

submitted with the capitalization grant application, they

are submitted based on a schedule negotiated with

EPA. (For more information about set-aside work plan

requirements, see Section 3.1.5.)

Chapter 3 / Section 3.1 10

CHAPTER 3

Steps in the DWSRF Project Funding Cycle

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY POINTS IN CHAPTER 3

• In order for a state to receive the DWSRF funds

allotted to it, the state must submit a complete

capitalization grant application.

• The IUP is the focal point of the capitalization

grant application. It lays out how the DWSRF

program will employ all of its available funds.

• EPA will withhold a portion of a DWSRF's capitalization

grant if certain SDWA requirements are not met.

• States must provide a match to the Fund equal

to or greater than twenty percent of the

capitalization grant.

• States can “leverage” capitalization funds to provide a

higher level of assistance in the near term. 

• A state may transfer an amount equal to thirty-three

percent of the DWSRF capitalization grant between the

CWSRF to the DWSRF programs.

• Programs must follow formal requirements for making

loans and approving project applications.

• Programs must adhere to certain project requirements

and formal construction oversight procedures.

Capitalization Grant Application . . .

states should submit grant applications no

later than ninety days prior to the end of

the period of funds availability.
Chapter 3 / Section 3.1 11

3.1.1

Operating Agreements

An Operating Agreement (OA) is an optional document

that describes the objectives, structure, and procedures

of a DWSRF program that remain the same from yearto-year. An OA outlines how the State Revolving Fund

(SRF) will conduct business and comply with the basic

tenets of the program, including schedules for review by

and reporting to EPA. Almost all DWSRF programs

function under an OA.

The OA stands in for several portions of the capitalization grant application and agreement. It can include

most of the assurances and requirements, as noted

above. EPA and the state must agree to the OA provisions and to any changes therein. Changes can occur

without a formal grant amendment, and the state and

EPA can give the OA a termination date. With an OA

in place, subsequent capitalization grant applications will

mainly consist of the IUP.

3.1.2

Compliance with Federal Regulations

Administering Agency Authority and Responsibility. The

state attorney general must certify and document that the

state and administering agency(ies) can enter into a capitalization grant agreement, accept funds from the EPA,

and operate the DWSRF program in accordance with

SDWA. The agency that prioritizes assistance and oversees DWSRF operations must also be the primacy agency

for the state’s PWSS program. Documentation of the

roles and responsibilities for each administering agency

must be included with the application. The state must

demonstrate that it has the personnel and resources to

manage the DWSRF program. Also necessary are assurances for compliance with all state statutes and regulations

regarding DWSRF funds and for compliance with applicable federal crosscutters (See Section 3.11.3 for more

information on federal crosscutters). 

Funds Management. Each DWSRF program must

agree to the negotiated payment schedule and to the

legislative requirements for use of the funds. The capitalization grant must be deposited into the Fund and in

separate accounts for set-aside activities, as detailed in

the application. A twenty percent match to the capitalization grant and a one hundred percent match for the

State Program Management set-aside are required.3

(See Section 3.4 for more information on DWSRF setasides and matching funds.) Interest earnings, loan

repayments (except for loan repayments through the

DWSRF set-asides for land acquisition and SWP activities – see Section 4.2.1), and, where applicable, net

bond proceeds must be credited to the Fund. In turn,

the Fund can be used for new loans or security for

SRF-issued bonds. States must also provide assurances

that fiscal controls and accounting systems will be consistent with the Generally Accepted Accounting

Principles (GAAP) and that yearly Fund and set-aside

account audits will conform to the Generally Accepted

Governmental Auditing Standards (GAGAS). 

Use of DWSRF funds must follow the program’s IUP,

as submitted with the capitalization grant application,

and established DWSRF set-aside work plans (see

Section 3.1.5 for more information on developing

DWSRF set-aside work plans). States also need to have

evaluation systems and policies in place that assure each

borrower’s ability to repay their loans. Timely and

expeditious use of funds (i.e., committing and expending funds quickly and efficiently) is an additional

requirement. Every other year, each DWSRF program

must submit a Biennial Report to EPA detailing the

uses of the Fund and set-aside accounts, including

audited financial statements. Although the reporting

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

3 The one-hundred percent match for expenditures through the State Program

Management set-aside may be met through cash, in-kind services, and program

credits according to formal policies (see Section 3.4 for more information.)

“The agency that prioritizes assistance

and oversees DWSRF operations must

also be the primacy agency for the state’s

PWSS program.”
requirement calls for biennial reports, many states have

decided that it is necessary and appropriate to generate

annual reports for submission to EPA and for internal

reporting purposes. For example, several states generate

annual reports because they are required by the state

legislature.

3.1.3

General Content of the Intended Use Plan

The IUP is the focal point of the capitalization grant

application and agreement. It lays out how the DWSRF

program will employ all of its available funds, including:

• federal capitalization grants,

• state matching funds,

• loan repayments,

• Fund interest earnings, 

• loan fees, and

• bond proceeds deposited into the Fund

States may submit a two-part IUP, one part for setasides and another for the Fund itself. The whole or

each part must undergo public review to meet the

requirements set forth through the DWSRF Interim

Final Rule. The DWSRF program must describe the

review process and its response to major comments and

concerns. An IUP is required as long as the Fund or

set-aside accounts remain in operation, irrespective of

continued federal funding. Changes to the use of funds

from what is stated in the IUP are permitted, but substantive changes must undergo public review. IUPs are

approved by the State’s EPA Region.

Program Goals. The state must present short- and longterm goals for their DWSRF program. The short-term

goals should address the upcoming year’s activities and

the long-term goals should communicate how the state is

maximizing program effectiveness and how program

objectives support national goals set forth through

SDWA.

According to EPA’s Strategic Plan, the Agency is dedicated to protecting human health by reducing exposure

to contaminants in drinking water, including protecting

source waters. According to the most recent EPA

Strategic Plan (September, 2006 proposal), the following draft strategic targets are highlighted:

• By 2011, ninety percent of community water systems

will provide drinking water that meets all applicable

health-based drinking water standards throughout the

year. (2005 baseline: Eighty-nine percent)

• By 2011, eighty-six percent of the population in

Indian country served by community water systems

will receive drinking water that meets all applicable

health-based drinking water standards throughout the

year. (2005 baseline: Eighty-six percent)

• By 2011, minimized risk to public health through

SWP will be achieved for fifty percent of community

water systems and for an associated sixty-two percent

of the population served by community water systems. (2005 baseline: Twenty percent of community

water systems; twenty-eight percent of population)

• By 2015, in coordination with other federal agencies,

reduce by fifty percent the number of homes on tribal

lands lacking access to safe drinking water. (2003

baseline: Indian Health Service data indicate that

twelve percent of homes on tribal lands lack access to

safe drinking water)

Through goals and objectives developed by national

DWSRF programs, states have the opportunity and

responsibility to contribute to meeting the national

goals of EPA’s Strategic Plan. As described through

this plan, EPA’s National Water Program is responsible

Chapter 3 / Section 3.1 12

Intended Use Plan (IUP)

Required contents include:

• Short and long-term program goals

• Summary of the DWSRF accounts

• Set-aside and disadvantaged community budgeting

• Project priority list and ranking methodology

• Discussion of the public review process

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.1 13

for assessing the performance of individual programs,

including the DWSRF, and EPA regions on a continuing basis to ensure progress in meeting national objectives. DWSRF programs are encouraged to continue

positive efforts to support advancement in meeting

national measures of program accountability. 

Status Update. The IUP must also provide a summary

of DWSRF program account balances, the amounts

available for loans, set-aside activities, and subsidies to

disadvantaged communities. This information must

include details for all fund activities and the total

amounts collected through fee accounts. For fees placed

in separate, non-project accounts to pay for program

administration, the state must certify that these funds

will be used only for DWSRF purposes and will be properly audited. 

It is also important that the state document estimated

loan demand, forecasted leveraging, and other factors

that affect financial planning. Transfers to or from the

CWSRF or cross-collateralization with the CWSRF

should be described. (See Section 3.5 and 3.6 for additional information on cross-collateralization and SRF

fund transfers.) 

DWSRF Set-Asides. In addition to accounting for

DWSRF set-aside funds, the IUP must also describe

how these funds will be used, including a general schedule and expected achievements. Additional details, such

as goals and objectives, schedule of deliverables, and

specific evaluation criteria for each set-aside are further

defined through set-aside work plans. According to

national program policy, set-aside work plans are submitted based on a schedule negotiated with EPA. If no

schedule exists, work plans must be submitted no later

than ninety days after the capitalization grant award.

If a state wishes to reserve the authority to take set-aside

funds from future capitalization grants, they must

include the amount reserved in the annual IUP. States

may reserve the authority for all set-asides except the fifteen percent local assistance and other state programs

set-aside. (For more information on developing setaside work plans, refer to Section 3.1.5.)

Disadvantaged Community Assistance. States may also

adopt a disadvantaged community program to provide

additional subsidies to disadvantaged communities in

the form of “negative interest rate loans” or “loan principal forgiveness.” Both of these approaches will

reduce the amount of the original loan principal. IUP

documentation for a state’s disadvantaged community

assistance programs also requires well thought out estimates of the types and amounts of disadvantaged assistance for specific projects. A state with such a program

must also include a definition of a disadvantaged community and a description of affordability criteria that

will determine the level of principal forgiveness. Total

loan subsidies for this program cannot be greater than

30 percent of the same year’s capitalization grant and

cannot be banked for use in coming years. 

Prioritization and Distribution Methods. DWSRF programs must state their methods and criteria for distributing all available funds through their IUP. States must

also describe their overall financial planning process and

note the impact of financial decisions on the long-term

financial health of the Fund.

Questions answered through the IUP may include:

• What is the reasoning behind allocating some assistance to set-asides?

• What are the established criteria and methods for

distributing funds?

• What criteria determine the terms of assistance,

including repayment period and interest rates?

DWSRF programs must present their priority systems

for ranking projects in such a way that is clear to the

public. To the maximum extent practicable, systems

must be structured to prioritize projects that address

the most serious risk to public health, that enable compliance with SDWA, and that have the greatest needs

according to state affordability criteria for the cost of

drinking water per household.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
3.1.4

Purpose and Format of the Project Priority Lists

Any project to be funded must appear on a state

DWSRF comprehensive priority list which is made available for public review. DWSRF programs must assign

every project a priority and expected funding schedule.

Water system name and service area population must

also accompany each fundable project. In addition, a

project description and expected loan terms for each

proposed assistance agreement must be listed. Once

fundable projects have been identified, they are to be

funded in priority order. 

Deviations from the priority list are subject to certain

program requirements including adherence to established

bypass procedures. Any changes to the original funding

order, according to program bypass procedures, must be

explained in the Biennial Report and during the annual

review process. States may bypass projects if they are not

ready to proceed and for other documented reasons. The

highest ranked project on the priority list that is ready to

proceed should always receive next consideration. State

staff should work to prepare these projects for future

funding through the DWSRF program.

EPA strongly encourages states to develop a list of projects most likely to receive funding in the coming year as a

supporting table which will help to offer perspective and

context to the comprehensive project priority list. 

If emergency projects approach the DWSRF for immediate funding, state programs may fund these activities

according to previously established emergency funding

procedures. Emergency projects are those defined as

projects that require immediate attention to protect

public health or other state-defined emergency situations. All procedures for identifying and accepting an

emergency project for DWSRF program assistance must

be detailed in the IUP.

Along with the priority lists, DWSRF programs must

show how they will provide at least fifteen percent of

assistance to small systems (less than 10,000 people),

according to SDWA requirements. If there is insufficient demand, the state must describe how it will meet

this requirement in the future. A DWSRF program that

spends more than fifteen percent on small system assistance can bank any excess toward future compliance. 

3.1.5

General Content of the DWSRF

Set-Aside Work Plans

In order to draw federal dollars into its set-aside

accounts to support program activities, a DWSRF program must first illustrate how it will spend these funds

according to a formal plan. States must submit detailed

annual or multi-year work plans that list the total dollar

amount and percentage of the DWSRF capitalization

grant to be used for set-aside activities. For each setaside, states must include specific goals and objectives, a

schedule of outputs and deliverables, and a description

of evaluation criteria for each activity. A description of

specific roles and responsibilities, including third party

contractors, and projected fulltime equivalences (FTEs)

for implementation must be documented. EPA must

approve a state’s set-aside work plan before funds are

released for these purposes. 

DWSRF programs must submit their work plans on a

schedule established with EPA, or no more than ninety

days after the capitalization grant award. If a state

misses its deadline, the set-aside funds in question are

Chapter 3 / Section 3.1 14

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.2 15

transferred back to the Fund for allowable program

uses. Multi-year work plans are an option, but they

must be negotiated with EPA and funds must be

expended within four years. When implementing a

multi-year work plan, states are required to organize

budget details by individual year. 

Under the four percent administration and technical

assistance set-aside, a state is only required to submit a

work plan if providing funds for technical assistance to

public water systems. In this event, only the portion

used for technical assistance must be described within

the work plan.

If a state wishes to reserve the authority to take set-aside

funds from future capitalization grants, they do not have

to submit a work plan. Instead, states may reserve the

authority by including this amount in the annual IUP.

States may reserve the authority to take an equivalent

amount from a future capitalization grant for all setasides except the fifteen percent local assistance and

other state programs set-aside. 

3.1.6

Public Participation and Marketing

Public Participation. The 1996 Amendments to the

Safe Drinking Water Act created a public involvement

requirement that applies to the DWSRF program. As

part of the IUP development process, state programs

must seek “meaningful” public review and comment for

several elements of the IUP:

• The short and long-term goals of the program

• The priority system used to rank projects

• The priority lists of projects, including both the fundable and the comprehensive list

• The financial status of the program

• A description of the amounts of funds that the program will use for set-aside activities and the intended

use of those funds

While the requirement does not specify what would

constitute meaningful public review, programs typically

meet the requirement if they allow adequate time for

public comment and adequate time for the State to

address and respond to major comments. Examples of

state activities to involve the public include:

• Distributing the IUP to a wide audience

• Holding public meetings/hearings or participating in

conferences

• Publishing newsletters or newspaper notices

• Mailing program information to interested parties

• Developing Internet websites

• Producing public service announcements for radio or

television

• Establishing advisory groups to develop and review

policies

Marketing. In order to spread awareness of the

DWSRF and encourage applicants to apply for funding,

some state programs issue newsletters, send mailings,

hold public meetings/conferences, and develop internet websites, among other activities. These activities

are important for attracting new customers, particularly

those in small and rural communities with significant

needs and minimal resources. 

3.2

EPA Review of the

Capitalization Grant Application

3.2.1

Review of the State Capitalization

Grant Application

As states develop their capitalization grant application,

they work, as appropriate, with EPA regional staff to

determine IUP format, establish or change OAs, set

deadlines for set-aside work plans, and negotiate payment schedules. EPA notifies states of any new

requirements, if applicable.

Once a DWSRF program submits its capitalization

grant application, EPA reviews it to ensure that it meets

the requirements of SDWA, EPA grant regulations, and

the DWSRF program regulations. DWSRF staff at

EPA work with the grants administration staff to

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
approve the application and to prepare the state recipient for the grant award. Every year, these offices review

the IUP to determine that the capitalization grant is

issued for eligible program activities, as authorized

through SDWA. Additional review items include ensuring that the budget is sufficiently detailed, that outputs

and outcomes are sufficiently detailed, and that the program has outlined an appropriate plan for expeditious

and timely use of all available funds. 

3.2.2

EPA Award of the State Capitalization Grant

The capitalization grant is awarded to the state following EPA approval of the grant application. This initiates

a capitalization grant agreement. According to a formal

payment schedule established between EPA and the

grantee, EPA authorizes the state DWSRF program to

draw down federal grant funds for authorized program

activities and loan disbursements. (For more informaChapter 3 / Section 3.2 16

tion on formal cash draw procedures through the

DWSRF program, see Section 3.12.4.)

3.3

Withholding DWSRF Funds Available

3.3.1

Specific Criteria

Capacity and Authority Withholdings. EPA will withhold

a portion of a DWSRF’s capitalization grant if certain

SDWA capacity development requirements are not met.

Twenty percent of funds will be withheld from states

that do not have the legal authority or other means to

ensure that community and nontransient, noncommunity water systems that began operations after October 1,

1999, demonstrate technical, managerial, and financial

capacity for each drinking water regulation. Twenty

percent withholding will also occur for states that are

not implementing a capacity development strategy,

including adherence to all federal reporting requireCapitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

General Steps in Award of State Capitalization Grant

EPA Accepts and Reviews

State Grant Application

State Capitalization Grant

Application Submitted to EPA

Review Financial Terms of Assistance

Review Proposed Projects to Determine Eligibility

Review Short- and Long-term Goals in IUP

Complete Application for Federal Assistance

Develop IUP and Project Priority List

Obtain State Attorney General Certification

Review Sources and Uses of All DWSRF Funds

Review Prospective Project Outcomes and Outputs

EPA Awards State Capitalization Grant

with Capitalization Grant Agreement

EPA Regions

Provide Guidance

to States

Figure: General steps from development of the grant application,

through EPA review, and awarding of the federal grant.
Chapter 3 / Section 3.3 17

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

ments, to help systems gain capacity. (These two withholding provisions are not additive. A maximum of only

twenty percent may be withheld for either of these two

violations.) An additional twenty percent may also be

withheld if the state has not adopted and is not implementing a water system operator certification program. 

Loss of Primacy. If a state loses primacy (i.e., primary

enforcement authority) under SDWA, EPA will withhold

that state’s entire DWSRF capitalization grant. EPA

may use these funds to administer primacy in that state.

The balance of funds not used by EPA to administer primacy will be reallocated to other compliant state

DWSRF programs. A state will be eligible for future

allotments from funds appropriated in the next fiscal

year after primacy is restored.

3.3.2

Reallotment of Withheld Funds

Withholding associated with failure to: 1) implement a

capacity development strategy, 2) establish authority

ensuring systems demonstrate TFM capacity, or 3) implement an operator certification program will be reallotted

to those states that can show current compliance with

those requirements. Redistribution occurs according to

the original allotment formula for all funds in question.

Only states that have obligated all of their allotment for

that period of availability are eligible to receive these

additional monies. The receiving state must describe

how it will spend the funds in its current IUP.

Reallotment of loss-of-primacy DWSRF funds that are

not reserved by EPA occurs in a similar manner.

Reasons for Withholding

Capitalization Grant Funds

• No implemented capacity development strategy or

authority to ensure systems demonstrate TFM capacity:

maximum twenty percent withholding

• No implemented operator certification program: maximum twenty percent withholding

• Loss of primacy: one-hundred percent withholding
Chapter 3 / Section 3.3 18

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.1-3.3

Development/Acceptance of the Federal Capitalization

Grant Application/Withholding of DWSRF Funds Available

EPA

• Work with each state DWSRF program to make necessary changes to the OA and to negotiate a payment schedule for the capitalization grant. 

• Review the capitalization grant application materials, IUP, and set-aside work plans to ensure that funds will go

to eligible projects and that the DWSRF will be managed according to federal requirements.

• Award the DWSRF capitalization grant.

• Determine annually if a withholding is necessary. Withhold the proper amount of DWSRF capitalization grant

funds if a state has not met its capacity development or operator certification program requirements. 

• Withhold all funds if a state loses primacy; employ some of these allotted funds to administer primacy in that

state; and reallocate remaining funds to other compliant state DWSRF programs.

• Reallocate withheld allotted funds to other, compliant DWSRF programs according to the current allotment formula.

State Program Office

• Prepare, subject to public review, and submit to EPA an IUP that describes the use of all DWSRF funds and

establishes a priority list of fundable projects in the upcoming fiscal year. 

• Complete and submit a capitalization grant application to EPA including the funding application, payment schedule, IUP, and other required documentation, which may involve a revised OA that defines program structure and

operations. 

• Develop work plans for EPA that detail how DWSRF set-aside funds will be managed and employed within ninety

days of the grant award, or according to the agreed to schedule between the state program and EPA regional office.

• Coordinate with state PWSS and capacity development programs to remain aware of possible withholdings. 

• If relevant, state how the DWSRF will spend reallotted funds in the IUP.
Chapter 3 / Section 3.4

19

3.4

State Agrees to Provide Matching Funds

3.4.1

Federal Requirements for

State Match of the Fund

States must provide a match to the Fund equal to or

greater than twenty percent of the entire capitalization

grant. The state must demonstrate that it has the financial and legal ability to satisfy this match on or before

the date of each grant payment. It is important to note

that other state agencies may not make a loan to the

DWSRF to provide the match; however, they may assist

the DWSRF in acquiring matching funds through an

external debt offering. 

A state can issue bonds to provide its match. Revenue

bonds may be issued directly by a DWSRF with bonding authority or through other existing state mechanisms. General Obligation (GO) bonds can also be

repaid with DWSRF revenues. Review of a state match

bond proposal is an important part of the grant award

process. As opposed to bonds for leveraging, bond

issues to fund state match must be repaid only with

interest earnings. In addition to the regional review,

EPA headquarters must approve a state’s first-ever state

match bond issue but not subsequent issues with the

same structure. 

3.4.2

State Match to the Ten Percent

Program Management Set-Aside

In addition to the twenty percent match for the Fund,

DWSRF programs must provide a one-to-one match for

any amount of the capitalization grant, up to ten percent, reserved for the State Program Management setaside (see Section 4.1.3 for more information on this

match requirement). Under the DWSRF regulations,

programs are allowed the option of using credit from

state expenditures (match and overmatch) provided to

the PWSS program during FY1993. This credit may

account for up to fifty percent of the match required

under this set-aside. Regulations also allow these

amounts provided by the state to the PWSS program

during FY1993 to serve as a perpetual credit.

Additional match can be in the form of new cash, credit

for in-kind services, or credit for PWSS overmatch

(only) in the current fiscal year. Cash contributions

may come from state appropriations or income generated through program fees. State funds provided for the

State Program Management set-aside match requirement may not also be used to satisfy the match requirements under the PWSS program or vice versa. In-kind

services may include state funds used for program management activities that are directly related to the eligible

uses of the Program Management set-aside, an example

of which is employee salaries.

States are required to identify the source of match for

the State Program Management set-aside in their capitalization grant applications, as well as provide documentation of the actual source of match in their

Annual/Biennial Reports. 

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

State Match Requirements . . . Each

state must provide a twenty percent match

for each capitalization grant payment

and a one-to-one match to all grant

monies reserved under the program

management set-aside.
Chapter 3 / Section 3.4

20

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.4

State Agrees to Provide Matching Funds

EPA

• Ensure that the state will be able to provide the twenty percent capitalization grant match in accordance with

federal requirements, including restrictions on DWSRF bond issuance to raise state match.

• Review the documentation for the one-to-one match before authorizing use of the State Program Management

set-aside. 

State Program Office

• As part of the DWSRF capitalization grant application, demonstrate the ability to provide a match of twenty percent for each capitalization grant payment. Ensure timely deposit of this match according to a formally established payment schedule. 

• Document a one-to-one match for any State Program Management set-aside funds requested.
Chapter 3 / Section 3.5 21

3.5

State Leveraging Activities to

Increase Funds Available

3.5.1

Overview of the Leveraging Planning Process

States can “leverage” capitalization funds, using them as

security for bond issues that allow DWSRF programs to

provide a higher level of assistance in the near term.

DWSRF bonds are highly regarded by the market, keeping states’ interest in leveraging high. Several basic

types of leveraging are in use. No two state approaches,

however, are identical. 

If a state is considering leveraging, its DWSRF program

should examine its financial assistance needs, both the

demand for assistance and the timing of these needs, and

the role of other funding mechanisms, including local

financing. Financial modeling not only allows program

administrators to compare the supply of funding versus

this demand, but also shows the impact of leveraged program structures versus a non-leveraged program. Even if

leveraging looks like a good option financially, state

political acceptability, state policy considerations, relationships among state agencies, and the ability to administer a leveraged program might be significant obstacles.

DWSRF programs should consult with EPA when conducting leveraging planning, as regional staff members

have experience reviewing other leveraging programs. 

When a DWSRF program decides to leverage, it first has

to establish the responsibilities of state agencies and plan

any needed modifications to SRF enabling legislation, SRF

procedures, or state regulations. This is also the time to

formally initiate contact with the financial community and

to inform EPA and client communities of its plans. 

Next, the DWSRF assembles a financial team including

state personnel, bond counsel, underwriters, a trustee,

and a financial advisor. This team designs the leveraging structure and considers the level of state credit support, loan participants, the type of bond indenture, and

the type of cash flow/account structure. Preliminary

communications with those who will review the state’s

approach, including credit rating agencies and EPA,

occur during this development process. 

EPA regional DWSRF staff review any leveraging plan

to be sure that it will protect the long-term financial

health of the Fund and that its structure respects the

federal program requirements. Specifically, the net

bond proceeds must be deposited into the Fund. 

While no two states have exactly the same leveraging

account structure, a review of state programs shows

that there are two basic forms of leveraging in use in

DWSRF programs: reserve fund leveraging and cash

flow leveraging. 

For reserve fund leveraging, the capitalization grant

drawn from the federal treasury is deposited into a debt

service reserve fund as security and a source of earnings

and bond funds are used to make loans for eligible projects. In cash flow leveraging federal grant funds are lent

out along with bond funds. EPA reviews the leverage

structure for compliance with federal requirements. 

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Basic Leveraging Structure

Leveraging Considerations

• Demand for DWSRF financing

• Timing of infrastructure needs

• Role of other funding mechanisms

• Long-term impact on the Fund

• Political acceptance

• Program management capacity
Chapter 3 / Section 3.5 22

All proceeds generated by the issuance of bonds must

be allocated to the respective CWSRF and DWSRF

Funds in the same portion as they are used for security

for the bonds. States must demonstrate at the time of

bond issuance that the proportionality requirements

have been or will be met. If a default should occur,

and Fund assets from one SRF program are used for

debt service in the other SRF program, the security

would no longer need to be proportional. States may

not combine the assets of the SRF programs as security

for bond issues to acquire state match for either program. States are also prohibited from using the assets

of one SRF program to secure match bonds for the

other SRF program. Finally, the debt service reserves

for the DWSRF and CWSRF programs must remain

accounted for separately and loan repayments must be

made to the respective program from which the loan

was made. 

It is important to note that cross-collateralization does

not effect the calculation of set-asides, the four percent

administrative ceiling, or binding commitments; however, payments and cash draw proportionality may be

affected if there are defaults.

DWSRF/CWSRF CrossCollateralization . . . State DW or

CWSRF bond issues can be used to

support the other SRF program if revenues from the bonds are allocated to the

respective funds in the same portion as

they are used for security for the bonds.

As the program is developed, the state works with

finance industry professionals to develop the trust

indenture, bond resolution, legal opinion form, and

bond certificates. They also write the preliminary official statement, bond purchase agreement, and agreement among underwriters. The DWSRF program executes loan agreements and interagency agreements. At

this point, the bond issue is ready to present to the rating agencies and advertise to the market. After all these

steps are complete, the bonds are priced, printed, and

issued. Proceeds from the bond sale are deposited into

the Fund and managed by the trustee.

3.5.2

SRF Cross-Collateralization Procedures

Cross-collateralization allows funds from one state SRF

program to be used to secure the other SRF program

from revenue shortfalls. By supporting DWSRF bonds

with the very strong cash flows of the CWSRF program,

states receive stronger bond ratings that translate into

lower interest rates on their bonds and cost savings to

DWSRF borrowers. In the case of a state where few of

the DWSRF borrowers have strong credit histories,

cross-collateralization can make access to the bond market possible. 

A state must take several steps to include cross-collateralization in its SRF Programs. First, the capitalization

grant agreements for both programs must be amended

and receive an opinion from the Attorney General (AG)

certifying that state law permits cross-collateralization.

In addition, the OA and IUP in both programs must be

amended to detail how cross-collateralization will be

implemented. In particular, the IUPs for both programs must detail which funds will be used as security,

how monies will be used in the event of a default, and

whether or not monies used for a default in the other

program will be repaid. If it will not be repaid, an

explanation of the cumulative impact on the Funds is

also required. State programs are also required to submit any amended IUPs for public review and comment. 

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.5 23

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.5

State Leveraging Activities to Increase Funds Available

EPA

• Review a DWSRF program’s assistance needs and proposed leveraging structure to ensure that leveraging will

sustain the financial health of the program. 

• Examine a state’s cross-collateralization plans with regard to their compliance with all DWSRF regulations.

State Program Office

• If drinking water infrastructure funding demand is outpacing a DWSRF’s ability to provide financing, consider

leveraging DWSRF funds. 

• Assemble a team of program and financial advisors to design a leveraging structure and to plan for and

implement a bond issue. 

• Consider cross-collateralization as a way to better secure a bond issuance. This may result in a lower interest

rate and better loan terms to borrowers. 

• Obtain EPA approval before implementing proposed leveraging structure.
Chapter 3 / Section 3.6 24

3.6

Fund Transfers (Between the DWSRF

and CWSRF Programs)

3.6.1

Specific Criteria

To provide flexibility to use one SRF to support the

other in meeting state funding needs, the 1996 SDWA

Amendments (Section 302) allowed the transfer of

funds between a state’s DWSRF and CWSRF program.

Although this initial authorization ended on September

30th, 2001, Congress extended transfer authority on an

ongoing basis through annual EPA appropriations bills.

This transfer provision was later made permanent with

the 2006 appropriations.

According to DWSRF and CWSRF transfer provisions,

a state may transfer an amount equal to thirty-three percent of the DWSRF capitalization grant to the CWSRF

or an equivalent amount from the CWSRF to the

DWSRF. When electing to approve a transfer between

SRF programs, the IUPs and OAs in both programs

should cover the approach and details for SRF fund

transfers. Information on how these transfers will affect

payment schedules, cash draw proportionality, and binding commitments should also be included. Follow-up

reporting through the state Annual/Biennial Report

should include information on total recorded SRF

transfer activity.

Before transferring funds, the state’s AG, or someone

designated by the AG, must certify that state law permits such a transfer between the CWSRF and DWSRF

programs. The OA and relevant portions of the

Capitalization Grant Agreement must also be amended

for both programs to detail the specific method the

state will use to transfer the funds. States may transfer

any monies that are in the Fund, including federal capitalization grant dollars, state dollars, repayments, and

investment earnings. DWSRF programs may elect to

reserve the authority to transfer funds in one year, but

not actually transfer those funds until some later time.

This approach can help with planning. Funds must be

used for project or set-aside activities during the time

period prior to when the actual transfer occurs. If sunset provisions for transfers allow, a state could address

key priorities by accounting for transfers on a net basis

such that it can “loan” funds to its sister program that

would “repay” them with an equivalent transfer at a

later date. Because a transfer occurs after award of a

capitalization grant, it does not affect the calculation of

state match, set-asides, or administration funding levels.

Funds transferred into the DWSRF are considered to

be part of the “available funds credited to the Fund,”

and as such, they are subject to the fifteen percent

small systems provision. Also, DWSRF programs must

account for whether the transferred amount consists of

federal dollars to which federal requirements such as

payment schedules and crosscutters will apply. 

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

DWSRF/CWSRF Fund Transfers . . .

A state may transfer an amount equal to

thirty-three percent of the CWSRF

capitalization grant to the CWSRF or

an equivalent amount from the CWSRF

to the DWSRF.
Chapter 3 / Section 3.6 25

KEY RESPONSIBILITIES: CHAPTER THREE: 3.6

Fund Transfers

EPA

• Review any DWSRF/CWSRF fund transfers in the IUP to ensure that they do not exceed the transfer ceiling.

• Ensure the DWSRF program follows all other requirements for transferred funds, including application of federal

crosscutters and meeting the small systems minimal funding requirement.

• Ensure state programs have the necessary authority to transfer funds between SRFs (e.g., through state AG certification and appropriate language included in the IUP).

State Program Office

• Obtain necessary authority (e.g., state AG certification) to transfer funds between SRF programs.

• Describe transfer procedures for SRF funds within the OA.

• Document planned transfer activity to or from the CWSRF program in the IUP. 

• Provide follow-up reporting on all recorded SRF transfer activity within the Annual/Biennial Report.

• Ensure compliance with all federal requirements for transferred funds, including application of federal crosscutters and providing a minimum level of assistance to small systems.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.7 26

3.7

Federal Funding Process

3.7.1

Disbursement from the DWSRF

State programs receive each capitalization grant payment

in the form of an increase in the ceiling of funds available through the EPA Automated Clearing House

(EPA-ACH). Funds are transferred to the state from

the U.S. Treasury on a reimbursement basis, after assistance recipients have billed the DWSRF program for

work completed and the DWSRF program requests.

After the funds are transferred, the State reimburses the

assistance recipients for costs incurred. This process is

known as the disbursement from the DWSRF

3.7.2

Binding Commitment Requirements

Following a Set Payment Schedule. DWSRF programs

are required to follow a formal schedule when accepting capitalization grant payments. These schedules are

negotiated between individual DWSRF programs and

EPA. A separate schedule is developed for each capitalization grant and made final through a formal capitalization grant agreement. Schedules are based on each

program’s estimated plan for entering into future binding commitments and expenditures through the

DWSRF set-aside accounts. Both EPA and DWSRF

programs agree to follow these schedules when funding

SRF activities.

It is important to highlight that individual grant payments are not actual transfers of cash, but instead represent increases to the Automated Standard Application

for Payments (ASAP) funding ceiling available for SRF

loan disbursements or set-aside expenditures. Increases

in the funds made available track the established payment schedule. 

SRF assistance programs are required to accept all grant

payments within the earlier of eight quarters from the

capitalization grant award or within twelve quarters

from the allotment of federal funds. For example,

under the 8 quarter rule, if payments began in January

of 2000, they would end in December of 2001.

(Reference: 2000 DWSRF Interim Final Rule, Section

35.3560(a) and (b))

Establishing Binding Commitments. After DWSRF programs accept a federal capitalization grant payment

they are required to enter into binding commitments

for eligible projects within one year. Binding commitments must equal the total amount of each grant payment, net all set-aside deposits, plus state match. A

binding commitment represents a legal obligation

between a DWSRF program and an assistance recipient.

Such agreements detail all relevant terms of assistance,

including interest rates, payment schedules, and repayment terms. In many states, a binding commitment is

a closed loan; in some states a binding commitment letter is used. If binding commitment letters are used,

EPA monitors the time period between their issuance

and loan closing to assure that funds are being used

expeditiously. If a program enters into binding commitments for an amount greater than the total amount

required, the program may credit any excess toward

future binding commitment requirements.

EPA uses information about binding commitments to

calculate program pace (i.e., executed loan agreements as

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Binding Commitments

Binding commitments MUST equal:

• Federal payments (net set-aside deposits) PLUS state

match (within one year of payment date)

Capitalization Grant Payments

Programs MUST accept all capitalization grant payments

the earlier of:

• Eight quarters after the grant award, or

• Twelve quarters after the allotment
Chapter 3 / Section 3.8 27

a percentage of total funds available). Total binding commitments (as reported to EPA) are based solely on final

loan agreements, rather than interim loan agreements.

If the binding commitment requirement is not met,

EPA may withhold future grant payments and require

modification of the payment schedule prior to releasing

additional grant payments. If an individual program is

concerned that it will not meet the minimum binding

commitment requirements, program staff should establish and propose a revised binding commitment schedule

to the EPA Regional Administrator. Any amendments

to the payment schedule affect only future payments.

Although a program may revise its payment schedule, all

remaining payments must be received as originally

required (i.e., within the earlier of eight quarters of the

grant award or twelve quarters from allotment).

(Reference: 2000 DWSRF Interim Final Rule, Section

35.3550(e))

3.8

Special Program Assistance Requirements

3.8.1

Providing Special Program Assistance

Assistance to Small Communities. All state DWSRF programs are required to provide, to the extent possible, a

minimum of fifteen percent of funds available annually

for loans to small systems. Small systems are defined as

those that serve fewer than 10,000 persons. Total available funds include capitalization grants deposited to the

Fund, state match, interest earnings, loan repayments,

and bond proceeds. States must consider all of these

sources in a given fiscal year to calculate the required

level of assistance for small systems. Direct assistance to

small systems, as well as the portion dedicated to the

consolidation of a small system with another facility,

qualifies toward this requirement. Programs must detail

the total amounts anticipated for small system assistance

within the IUP and report on the actual use of funds

within the Biennial Report.

If a program anticipates that it will be unable to fulfill

the fifteen percent minimum obligation in the upcoming year, an explanation accounting for the inability to

meet this requirement must be included in the annual

IUP as well as a discussion about program activities that

will ensure the minimum requirement is met in future

years. Activities may include providing technical assistance to small systems, implementing a new marketing

strategy, or conducting other types of outreach efforts.

States are required to meet this fifteen percent minimum level of funding to small systems for as long as

the program is in operation. This fifteen percent minimum requirement is not tied to the award of a capitalization grant, but represents a permanent program

condition. (Reference: 2000 DWSRF Interim Final

Rule, Section 35.3525(a)(5))

Assistance to Disadvantaged Communities. DWSRF

programs are given the flexibility to provide additional

loan subsidies to disadvantaged communities. Each

state has the flexibility to establish its own definition of

“disadvantaged communities.” To make loans affordable for disadvantaged recipients, programs may offer

Small System Assistance. . . programs

must provide a minimum of fifteen

percent of all available loan assistance

to small systems

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.9 28

subsidies including reduced interest rates, negative interest rates, and extended loan repayment terms (up to thirty years). Alternatively, they may provide a certain level

of principal forgiveness. Programs may provide these

types of subsidies to recipients that currently meet

affordability criteria established by the state or will meet

these criteria as a direct result of receiving DWSRF loan

assistance.

When providing assistance to disadvantaged communities, programs are limited to a maximum of thirty percent of each capitalization grant deposited to the Fund

for providing loan principal forgiveness subsidies and

negative interest rates. If a state provides less than the

maximum of thirty percent of each capitalization grant

for principal forgiveness or negative interest rates, the

remaining amounts may not be banked for future use.

Programs providing disadvantaged assistance are responsible for developing affordability criteria to define these

types of communities. A “disadvantaged community”

represents the entire service area of a public water system that meets such affordability criteria. If desired,

EPA will provide additional information and assistance

to those programs developing these types of affordability determinations. Before programs may implement

their system for defining disadvantaged communities,

proposed criteria must first undergo a formal public

review and comment period. EPA reviews and approves

a state’s disadvantaged community assistance program as

part of the annual IUP review process.

All subsidy amounts are approved and committed

according to the same schedule established for overall

binding commitments. In other words, all binding

commitments, including commitments for disadvantaged community assistance, must be made within one

year of receipt of the associated capitalization grant payment. Programs are required to identify all projects

receiving this type of assistance, the overall level of subsidy, and the criteria used for awarding assistance to

these systems within their annual IUP. (Reference:

2000 DWSRF Interim Final Rule, Section 35.3520(b))

3.9 

Cooperation and Coordination

with other Programs

3.9.1

Enhancing Cooperation and Coordination

In addition to the DWSRF, there are many other complementary federal and state assistance programs.

Navigating these funding sources can be time-consuming and difficult, particularly for small and rural communities that often have significant needs and minimal

resources. Throughout the steps of the DWSRF funding process, cooperation and coordination with other

assistance programs at the state and federal levels simplifies the funding process and enhances guidance for

potential borrowers. 

Many states have taken steps to implement coordinated

funding strategies to target specific needs, benefiting

those seeking assistance as well as those providing assistance. These efforts enhance communication between

agencies and reduce administrative work, maximizing

resources and the benefits achieved. States use a variety

of approaches to coordinate funding between assistance

programs, including:

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Disadvantaged Community Assistance

• Disadvantaged community assistance (i.e.,

in the form of negative interest rates or principal 

forgiveness) may not exceed thirty percent of each capitalization grant.
Chapter 3 / Section 3.9 29

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.7-3.9

Federal Funding Process/Program Requirements for Making Loans/Cooperation

and Coordination with other Programs

EPA

• Negotiate with the DWSRF program to develop a formal schedule of capitalization grant payments.

• Ensure programs are funding a minimum of fifteen percent of all available loan assistance to small communities

or have a formal plan to meet these requirements in the future.

• Approve state proposals for developing a disadvantaged community assistance program.

• Ensure state programs do not exceed the maximum of thirty percent of each capitalization grant for eligible

disadvantaged community assistance. 

State Program Office

• Accept all grant payments within the earlier of eight quarters of the grant award or twelve quarters of the allotment of federal funds.

• Enter into binding commitments within one year after receiving each capitalization grant payment. Binding

commitments must equal total grant payments deposited to the Fund plus associated state match.

• Provide a minimum of fifteen percent of available loan assistance annually to small communities. If unable to

provide this level of assistance, provide a detailed explanation within the IUP to explain why the program is

unable to meet this requirement and how the program plans to meet this requirement in the future.

• Provide no more than thirty percent of each capitalization grant for disadvantaged community assistance in the

form of negative interest rates or principal forgiveness according to approved affordability criteria.

• One-stop meetings or screenings. Some states hold

meetings that involve multiple agencies coming

together to provide all relevant information for project

assistance, including information about funding

sources, eligibility criteria, the application process, etc. 

• Technical assistance. Assistance is often provided for

small and rural communities that are unfamiliar with

the funding and application process of the DWSRF. 

• Coordinating documents. These documents, such as

memoranda of understanding and agreements, serve as

formal commitments to enhance cooperation and

coordination among state and federal agencies. 

• Joint environmental reviews. Some programs streamline

the environmental review process by accepting environmental reviews for other programs whenever there is

joint funding or providing common environmental

review procedures. 

• Regular project review meetings. Some states hold

meetings that discuss applicants and issues, such as

readiness for construction and environmental review

status. 

• Funding fairs or events. These events provide information about the multitude of funding options available to those seeking assistance. 

• Internet websites. Many states have created websites

that provide information about assistance options and

program requirements. Two examples include

searchable databases of funding sources and selfassessment tools that allow utilities to determine the

sources of funding for which they are eligible.

• Uniform applications. In some cases, a single application may be available for multiple funding programs. 
Chapter 3 / Section 3.10

30

3.10

Project Application Process

3.10.1

Developing the Project Priority Lists

Timing of the Intended Use Plan. DWSRF programs are

required annually to develop a formal IUP.

Development of the IUP is a permanent requirement

and an IUP must be completed even if the program is

not receiving a capitalization grant. Annual IUPs

describe how programs intend to allocate all available

funds in a timely and expeditious manner, provide information on amounts reserved for project assistance, and

detail amounts reserved for DWSRF set-asides. Projects

highlighted for assistance in the upcoming fiscal year are

presented in project priority lists. State programs are

also required to provide well-defined outputs and outcomes as part of their capitalization grant application;

however DWSRF programs will often include this type of

information within their IUPs as well.

DWSRF programs typically include their IUP with the

capitalization grant application; however, some states

will submit their IUPs to EPA for review prior to submitting the grant application. Although timing may differ between state programs, annual IUPs must be submitted no later than when the capitalization grant application is submitted to EPA for approval. EPA will not

review a capitalization grant application without an

accompanying IUP. 

Developing the Project Priority Lists. Two lists of priority

projects are included in the annual IUP. These lists

include the comprehensive project list and the fundable

project list. The comprehensive list includes all projects

that are eligible for program assistance and have submitted a pre-application for priority listing. From the comprehensive list, programs develop a fundable list of projects that are expected to receive assistance in the

upcoming year. State programs will often evaluate a

project that is not able to receive funding during the

upcoming year for possible technical or financial trouble

areas. In some cases, state programs will offer technical

assistance to these systems to ensure they are capable of

receiving funding during the next project cycle.

When developing the fundable and comprehensive priority lists, state programs must include additional information to define each project listed as eligible to

receive SRF assistance. Additional details as part of the

fundable project list include the name of the public

water system, the priority assigned to the project, a

description of the project, expected terms of assistance

based on current information available, and the population of the service area at the time of loan application.

Remaining projects on the comprehensive list must

include information on the priority assigned and, if

available, the expected funding schedule.

Preapplications are often collected to gather this type of

information. Programs may use preapplications to

gather basic project eligibility information before

requesting a detailed application at a later date.

Adhering to the Priority Ranking System. Project priority

lists are arranged based on a program’s priority ranking

system. All programs must include the details of their priority ranking system criteria within the annual IUP. Both

the IUP and the priority ranking system are subject to

public review and comment. All priority systems are

required to focus funding on projects that: 1) address the

most serious risk to human health; 2) are necessary to

ensure compliance with the requirements of SDWA; and

3) assist systems most in need, on a per household basis.

A state that does not adhere to these requirements must

explain why it is unable to do so in its IUP.

Fundable Project Lists

Details must include:

• Name of the public water system

• Priority assigned to the project

• Project description

• Expected terms of assistance

• Service population

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.10

31

Submitting Priority Lists for Review. In most cases, the

project priority lists are included with the annual IUP or

as part of the capitalization grant application. In cases

where a state has not yet completed its project priority

lists, the IUP may be developed as part of a two-part

process. In these cases, programs may develop the IUP

without the project priority lists and only include information on the use of the DWSRF set-aside funds.

Public review and comment are still required for this

IUP before submitting with the capitalization grant

application. When the priority lists are complete, programs generate this additional information to detail the

use of the SRF funds for loan assistance. After an additional round of public review and comment, programs

would submit this new information as part of an amendment to the original capitalization grant application.

(Reference: 2000 DWSRF Interim Final Rule, Section

35.3555(a), (b), and (c))

3.10.2

Description of Eligible Applicant Types

General Eligibility. DWSRF programs may provide

assistance to all publicly- and privately-owned community water systems or nonprofit noncommunity water

systems. For a nonprofit system to be eligible for SRF

funding, it must have a federal tax exempt status identification number. Nonprofit systems may include school

systems, day care centers, churches, or retreat centers.

Systems that are federally-owned or recognized as forprofit noncommunity water systems are not eligible for

assistance through the Fund.

Ineligible Applicants. All borrowers receiving program

assistance must demonstrate full technical, managerial,

and financial capacity and full compliance with all

national primary drinking water regulations or variances.

If an applicant does not demonstrate full compliance in

all of these areas, it may not be eligible for DWSRF

assistance. In such cases, assistance is only offered to

those recipients that agree to undertake appropriate

operational changes to ensure future compliance or

agree to use assistance offered to address the specific

cause(s) of noncompliance. (Reference: 2000 DWSRF

Interim Final Rule, Section 35.3520(a) and (d))

3.10.3

Description of Eligible Project Activities

General Project Categories. DWSRF assistance is provided for projects that address a current violation or

will prevent a future violation of health-based drinking

water standards.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Priority Ranking Systems

Priority projects must:

• Address the most serious risk to human health

• Ensure compliance with all SDWA requirements

• Assist systems most in need

General DWSRF Priority Setting Process

Proceed down the

list from highest to

lowest priority

Will the system be ready to

proceed in this funding cycle?

Comprehensive List

(All Ranked Projects)

What technical

assistance can we

provide to help the

system get ready? Fundable List

(Projects Ready

to Proceed)

NO

YES

DWSRF Assistance Recipients

Eligible applicants include:

• Publicly-owned community water systems

• Privately-owned community water systems

• Nonprofit noncummunity water systems
Chapter 3 / Section 3.10

32

Eligible project categories include: 

• Consolidation of drinking water supplies,

• Creation of new systems,

• Costs for maintaining drinking water sources,

• Storage capacity costs,

• Transmission and distribution costs,

• Drinking water treatment costs, and

• Drinking water security measures

Additional project types not explicitly defined through

the categories listed above may still be eligible for assistance through the Fund. Questions related to the eligibility of individual project types are answered by EPA

on a case-by-base basis. Sample activities for each eligible project category are described below:

Consolidation of Supplies. Consolidation projects refer

to the consolidation of drinking water supplies when

supplies are either contaminated or when a system can

no longer maintain compliance due to a lack of proper

technical, financial, or managerial capacity.

Creation of New Systems. DWSRF programs may fund

the development of new systems to address current public health concerns or consolidate existing systems that

face technical, financial, or managerial capacity challenges. Projects that authorize the creation of a new system are limited to the specific geographic area affected

by contamination. Projects to consolidate multiple facilities are limited to the current service areas for each

drinking water system. For all consolidation projects,

applicants must ensure that consolidated systems will

maintain compliance with all SDWA requirements.

When funding these types of projects, programs must

show that applicants have provided sufficient public notice,

considered alternative solutions, and are implementing the

most appropriate and cost-effective solutions.

Drinking Water Sources. Eligible costs include the rehabilitation of existing drinking water sources and the

development of new sources to replace those that are

contaminated. Sample projects may include dredging

activities near intake facilities, the replacement of contaminated wells, or the construction of new wells to

meet current demands.

Storage Capacity. DWSRF programs may provide assistance for the upgrade or installation of finished drinking

water storage facilities to prevent possible contamination. Activities can include the development of a finished drinking water reservoir, recoating or repair of an

existing storage tank, or the replacement of onsite

sludge ponds.

Transmission and Distribution. Costs for transmission

and distribution include the installation or replacement

of transmission pipes and distribution networks to

improve water pressure or for the prevention of possible

contamination caused by leaks or breaks in the system.

Projects can include the construction of new water

lines, the installation of new elevated tanks or storage

reservoirs, or the construction of a new drinking water

booster and pump station.

As with all projects funded through the DWSRF program, it is important to note that projects may only be

sized to accommodate a reasonable amount of growth

expected over the life of the associated facility. Growth

may not be a substantial portion of any project.

Treatment Costs. Treatment costs include expenses

related to the installation, replacement, or upgrade of

treatment facilities to improve drinking water quality or

to comply with primary and secondary drinking water

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.10

33

standards. Individual projects can include the installation of new nitrate treatment facilities, improved filtration methods for surface water, or construction

improvements for chlorine storage techniques.

Security Measures. DWSRF programs may also provide

assistance for drinking water security measures. These

may include assistance for the development of vulnerability assessments or for the development of contingency

and emergency response plans. Other types of security

components may also be included within the scope of a

larger infrastructure project. Sample security measures

include:

• Facility fencing,

• Security cameras and lighting,

• Motion detectors,

• Redundancy (systems and power),

• Securing chemical and fuel storage areas,

• Lab equipment,

• Enhanced filtration/disinfection (for biological agents),

• Enhanced treatment (for chemical agents),

• Backflow prevention devices in distribution system, and

• Covering for finished water reservoirs

Additional protection for drinking water sources may be

funded through the DWSRF set-asides. Specific activities may include fencing and security cameras for drinking water sources or the development of source water

vulnerability assessments and emergency response plans.

It is important to note that certain security measures

related to operations and maintenance costs are not eligible for assistance through the DWSRF program.

Such ineligible activities may include assistance for the

hiring of security guards, the purchase of disinfection

chemicals, or funding for monitoring costs. 

Eligible Project-Related

Costs. The DWSRF may

also fund some types of

additional costs necessary to

fully implement an eligible

project.

These additional costs must

fall within one of the following categories: 

• Costs for land acquisition

that are integral to project

implementation,

• Costs related to project planning, design, and other

pre-project costs, and

• Costs related to system restructuring activities

(Reference: 2000 DWSRF Interim Final Rule, Section

35.3520(b) and (c))

3.10.4

Ineligible Project Types

Several distinct categories of funding are ineligible for

assistance through the DWSRF program. According to

formal regulations, programs are not permitted to provide assistance in the following project areas: 1) the

development or rehabilitation of dams; 2) the purchase

of water rights (except when water rights are transferred as part of a system consolidation effort); 3) the

building or rehabilitation of reservoirs (except for finished water reservoirs and reservoirs essential to the

treatment process); 4) projects primarily developed for

fire protection; 5) projects developed primarily to

accommodate future population growth; and 6) projects that have received assistance through the Indian

Tribes and Alaska Native Villages national set-aside.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.10

34

In addition to these general categories of ineligible

projects through the DWSRF program, states may not

provide assistance for certain ineligible project-related

costs, including laboratory fees related to routine compliance monitoring or for any type of operation and

maintenance costs. (Reference: 2000 DWSRF Interim

Final Rule, Section 35.3520(e))

3.10.5

Description of Eligible Assistance Structures

DWSRF programs may provide assistance in a variety of

forms. In addition to assistance to eligible recipients in

the form of a loan, programs may also provide assistance through the purchase of local debt, the purchase

of debt insurance, or to secure SRF debt obligations

when leveraging. (Reference: 2000 DWSRF Interim

Final Rule, Section 35.3525)

Assistance through a DWSRF Loan. DWSRF loans are

provided for individual projects or for a group of multiple

projects to an individual recipient. Programs may also

combine a previous planning and design loan obligation

for an individual recipient with a newly-issued loan for

project construction. Program recipients may also apply

for a series of loans for a particularly large or expensive

project. In this case, programs may issue multiple loans

over the course of several years for one project. These

types of projects are often called “phased projects.”

Refinance or Purchase of Local Debt. DWSRF programs

also have the option to purchase or refinance local debt

obligations. Programs may purchase local debt through

a direct purchase of municipal bonds issued for project

construction. Program regulations require that all projects where debt was incurred must have a construction

initiation date after July 1, 1993. In the case where a

local government issues a multipurpose bond, only the

portion used for the DWSRF eligible project may receive

assistance through the program. Privately-owned systems are not eligible for refinancing. 

Insurance or Guarantee for Local Debt. In an effort to

improve the credit market access for a local community

or to assist in reducing borrowing interest rates, the

DWSRF may provide assistance through the purchase of

local debt insurance or a debt guarantee. Programs may

only provide assistance for debt incurred to implement a

DWSRF-eligible project. In the case of default following a DWSRF issued guarantee, the program would be

responsible for repaying the local debt obligation. It is

imperative that DWSRF programs review the creditworthiness of the guarantee recipient and ensure acceptable

coverage for the local debt obligation.

Security for DWSRF Issued Bonds. In addition to direct

assistance for program recipients, DWSRFs have the

capability to issue program debt. Program debt is

issued in the form of SRF bonds. When issuing bonds

to increase the level of funds available for program loans

and other types of assistance, DWSRF programs must

explore options to secure program-issued debt. In

many cases, programs will use fund assets (e.g., the federal capitalization grant, loan repayments, or interest

earnings) to secure SRF issued bonds. Security is proDWSRF Assistance Structures

Program assistance through:

• DWSRF Loans

• Refinance or Purchase of Local Debt

• Insurance or Guarantee for Local Debt

• SRF-Issued Bond Security

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Ineligible DWSRF Project Assistance

Projects Ineligible for Assistance:

• Installation/rehabilitation of dams

• Purchase of water rights

• Development/rehabilitation of reservoirs

• Projects primarily for fire protection

• Projects primarily for future growth

• Indian Tribes/Alaska Native Villages national

set-aside recipients

Ineligible Project-Related Costs:

• Routine compliance monitoring laboratory fees

• Operation and maintenance expenses
Chapter 3 / Section 3.10

35

vided on future loan principal and interest repayments

to the bond holders. All bond proceeds, net issuance

costs, must be deposited directly to the Fund to finance

additional DWSRF project assistance.

For more information on SRF leveraging activities, refer

to Section 3.5: State Leveraging Activities to Increase

Funds Available of this handbook.

3.10.6

Additional Uses of SRF Funds

In addition to assistance in the form of a loan, purchase

of local debt or debt insurance, and to secure SRF debt

obligations when leveraging, DWSRF programs may

also use funds for additional purposes. Additional uses

include the right to reserve a portion of funds for

administration and set-aside expenditures and the right

to earn interest on idle funds. It is important to note,

however, that all monies deposited into the Fund may

not remain there primarily to earn interest.

For more information on reserving funds for administration and other types of set-aside expenditures, refer

to Section 4.1: Four Types of Set-Asides for more

information. 

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

DWSRF Loans

• Loans for

individual

projects

• Loans for

multiple projects

• Combining

previous planning

and design loan

obligations with

newly issued

loans

• Series of loans for

phased projects

Refinance or

Purchase of Local

Debt

• Refinance debt

for lower interest

rate

• Direct purchase

of municipal

bonds at loan

closing

Insurance or

Guarantee for

Local Debt

• Purchase

insurance for

municipal debt

• Guarantee

holders of local

debt that

repayment will

continue if

municipality or

public water

system defaults

SRF Issued

Bond Security

• Security provided

on future loan

principal and

interest repayments to bond

holders

Other

• Earn interest

on funds

• Administration

activities and

set-aside

expenditures

• Guarantee debt

obligations when

leveraging

DWSRF Assistance Options and Structure
Chapter 3 / Section 3.10

36

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.10

Project Application Process

EPA

• Review and approve annual IUPs and PPLs to assure that projects and recipients are eligible.

State Program Office

• DWSRF programs are required to develop a formal IUP annually for the life of the program.

• Programs must include two priority lists with each IUP. These lists include the comprehensive project list and

the fundable project list.

• All programs must include the details of their priority ranking system within the annual IUP.

• All priority systems must place priority on projects that address the most serious risk to human health, that are

necessary to ensure compliance with the requirements of SDWA, and that assist systems most in need.
Chapter 3 / Section 3.11 37

3.11

Detailed State Loan Application Review

To conduct a fully detailed application review, programs

must receive additional documentation to ensure that

applicants have proper project planning and design.

Additional application material will ensure that a project

complies with all DWSRF program requirements for eligible reimbursable costs and that the system meets all

technical, financial, and managerial capacity determinations. Throughout the detailed application process, the

program may request additional material from the applicant. State programs will often use a checklist to keep

track of what material is received and what additional

material is necessary to complete the application.

3.11.1

Technical, Financial, and Managerial

Review (TFM)

All program recipients must pass a full TFM review. In

addition to demonstrating that the system can maintain

compliance based on technical and managerial activities,

they must also demonstrate an acceptable level of financial management, including the ability to repay the

DWSRF loan and maintain acceptable facility operations. If a system does not have adequate TFM capacity, they may only qualify for assistance if the assistance

will target a specific area of noncompliance or if the system agrees to develop a formal plan to make the appropriate changes necessary to improve compliance. In

some cases, it may be determined that the project is not

ready to proceed. In those instances, the program

should provide appropriate technical assistance to

resolve identified TFM issues.

3.11.2

Environmental Review Procedures

General Requirements. All projects receiving assistance

through the Fund must pass an environmental review to

evaluate possible negative environmental outcomes as a

direct result of project assistance. Programs must conduct this review on all projects receiving direct Fund

assistance, all refinanced or reimbursed projects, and all

SWP activities through the DWSRF set-asides unless the

activities solely involve administration (e.g., personnel,

equipment, or travel) or technical assistance. States are

not required to conduct environmental reviews for all

other set-aside activities as EPA has determined that,

due to their nature, they no not individually, cumulatively over time, or in conjunction with other actions

have a significant effect on the environment.

Programs must follow environmental review procedures

as required by the DWSRF program regulations. States

may employ a State Environmental Review Process

(SERP) that is similar to the process proposed through

the National Environmental Policy Act (NEPA). These

procedures are often called NEPA-like. Projects whose

cumulative funding is equal to the amount of the federal capitalization grant are subject to the SERP or

NEPA-like review. For all other projects, those in an

amount greater than the amount of the federal capitalization grant, states have the option to use an alternative SERP which they must propose and have approved

by EPA. In the absence of an approved alternative

process, all projects are subject to a NEPA-like review.

For all environmental reviews, programs must fully document all information collected, procedures followed,

and the reasons listed for all decisions. For example, a

state may determine a finding of no significant impact

following an Environmental Assessment (EA) or may

recommend that the project not proceed following the

preparation of a full Environmental Impact Statement

(EIS). Programs must document all decisions.

EPA Review Procedures. All state environmental review

procedures, both a NEPA-like SERP and an alternative

“All program recipients must undergo

a full TFM review before receiving

assistance.”

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.11 38

SERP, must undergo a review and receive approval from

EPA. The same criteria for both types of environmental

review approaches are used in the CWSRF and DWSRF

programs. Once these processes are approved, programs

may incorporate this information into their OAs. Any

changes to the State Environmental Review Procedures

must receive approval from EPA prior to implementation. 

Categorical Exclusions. In some cases, projects may not

require a full environmental review. These types of

projects may fall under the particular definition of a

Categorical Exclusion (CE). These projects include

activities that are known to not cause a significant environmental impact. Such activities may include the

replacement of existing transmission lines, the implementation of a wellhead protection program through

the DWSRF set-asides, or a loan issued for planning and

design. Only actions that do not individually, cumulatively over time, or in conjunction with other actions

have a significant impact on the quality of the human

environment, may qualify as a CE.

3.11.3

Federal Crosscutting Authorities

Defining Federal Crosscutting Authorities. Federal crosscutting authorities represent a general category of federal

laws, governmental policies, and executive orders that

broadly influence the activities of individual citizens, private businesses, and public entities. These authorities

influence actions in areas of environmental protection,

protection of civil rights, and the protection of open and

fair competition in business practices, just to name a few.

Federal crosscutting authorities also affect how federal

assistance dollars are spent; in particular, restricting how

they may be used according to existing federal law or

policy. Because DWSRF programs are capitalized by federal assistance grants, Congress requires DWSRF programs to apply federal crosscutting authorities to certain

DWSRF program activities.

General Requirements. Although EPA is ultimately

responsible for compliance with federal crosscutting

authorities as they apply to state DWSRF programs,

individual state DWSRF programs are required to

ensure SRF loan recipients also comply with these same

crosscutting authorities. Congress recognizes that the

DWSRF program is comprised of several types of funds

that may include federal grant dollars, state matching

funds, loan repayments, interest earnings, and bond

proceeds. When a borrower receives loan assistance

from the Fund, it is receiving a mixture of these funding sources. As it is sometimes impossible to determine

the exact source of funds for each assistance agreement,

Congress requires SRF programs to apply federal crosscutters to a state-selected number of projects with total

funding that is equal to the amount of each capitalization grant deposited to the Fund. States that elect to

impose the requirements of federal crosscutting authorities to projects and activities in amounts that are more

than the amount of the capitalization grant may credit

this excess to meet future crosscutting requirements. It

is important to note that states may only use this compliance credit within the account that generated the

credit. For example, a state cannot use a credit gained

from excess compliance through set-aside account activities to meet future crosscutting requirements for projects funded through the DWSRF Fund.

Application to DWSRF Set-Asides. In addition to applying general crosscutting requirements on the use of

DWSRF funds for loan assistance, programs are

required to apply federal crosscutting authorities to all

DWSRF set-aside assistance activities. Although all setaside activities are generally subject to federal crosscutCapitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Crosscutting Authorities . . .

“Crosscutting authorities apply to projects

and activities whose total funding is

equal to or greater than the amount of

each capitalization grant.”
Chapter 3 / Section 3.11 39

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Planning and Design

• Civil Rights Act of 1964

• Section 504 of the

Rehabilitation Act of 1973

• Age Discrimination Act of 1975

• Prohibition Against Sex

Discrimination Under the

Federal Water Pollution Control

Act

• Equal Employment

Opportunity

• National Environmental

Protection Act

• National Historic

Preservation Act

• Archeological and Historic

Preservation Act

• Coastal Zone Management

Act of 1972

• Clean Air Act

• Endangered Species Act

• Protection and Enhancement

of the Cultural Environment

• Floodplain Management

• Protection of Wetlands

• Farmland Protection Policy Act

• Fish and Wildlife

Coordination Act 

• Safe Drinking Water Act

• Wild and Scenic Rivers Act

• Coastal Barriers Resource Act

• Demonstration Cities and

Metropolitan Development Act

• Lobbying Disclosure

Construction

• Civil Rights Act of 1964

• Section 504 of the

Rehabilitation Act of 1973

• Age Discrimination Act of 1975

• Prohibition Against Sex

Discrimination Under the

Federal Water Pollution

Control Act

• Equal Employment

Opportunity

• Women's and Minority

Business Enterprise

• Uniform Relocation Assistance

and Real Property Acquisition

Act

Procurement

• Civil Rights Act of 1964

• Section 504 of the

Rehabilitation Act of 1973

• Age Discrimination Act of 1975

• Prohibition Against Sex

Discrimination Under the

Federal Water Pollution

Control Act

• Equal Employment

Opportunity

• Women's and Minority

Business Enterprise

• Preservation of Open

Competition and Government

Neutrality Towards

Government Contractors'

Labor Relations on Federally

Funded Constructed Projects

• Debarment and Suspension

• Prohibitions Relating to

Violators of the Clean Air Act

and the Clean Water Act with

Respect to Federal Contracts,

Grants, or Loan

Applicable Crosscutters During Relevant Stages of Project Implementation

Table: Application of federal crosscutters from project planning and design, through procurement, to project construction and completion.
Chapter 3 / Section 3.11 40

ter requirements, in many cases, these authorities are

not implicated. For example, administrative costs would

not require the application of environmentally-based

federal crosscutters such as NEPA or the Endangered

Species Act. In these cases, federal crosscutters would

apply only when and if appropriate.

Following the Crosscutter Handbook. To assist state programs in complying with federal crosscutting requirements, EPA developed the “Cross-Cutting Federal

Authorities” handbook in October of 2003. This handbook lists all current federal authorities that apply to

SRF program recipients, including:

• Environmental authorities (such as the Coastal Zone

Management Act and the Endangered Species Act),

• Social policy authorities (including the Civil Rights

Act and Equal Employment Opportunity requirements), and

• Economic or other miscellaneous authorities (including the Demonstration Cities and Metropolitan

Development Act and the Preservation of Open

Competition and Government Neutrality Act)

For each federal authority listed in this handbook, EPA

provides a background discussion and a detailed description of its specific applicability to the SRF program.

The handbook is written for both the CWSRF and

DWSRF programs.

Although this handbook represented an exhaustive

resource of all federal crosscutting authorities applicable

to the SRF program at the time of its original publication, programs are responsible for complying with any

new federal authorities that may also affect the use of

federal assistance dollars. EPA and individual DWSRF

programs must recognize that the current list of federal

crosscutters is subject to change.

Anti-Discrimination Law Requirements. In general,

federal crosscutters are applied only to projects in an

amount equal to the federal capitalization grant and for

project assistance provided through the DWSRF setasides; however, programs are required to apply general

anti-discrimination law requirements to all projects universally, regardless of the source of SRF funds.

Currently, these crosscutters include the Civil Rights

Act of 1964, Section 504 of the Rehabilitation Act of

1973, and the Age Discrimination Act of 1975.

Minority and Women’s Business Enterprise (MBE/WBE)

Requirements. Each DWSRF program is required to

consult the EPA Regional Administrator to develop a

fair share goal for the participation of MBE/WBEs in

receiving DWSRF project assistance. These goals are

based on the presence of MBE/WBEs within the relevant market area for DWSRF project assistance. Just as

the DWSRF program is required to make progress in

meeting fair share goals for MBE/WBEs, SRF loan

recipients of assistance in an amount equal to the capitalization grant are also required to follow a standard

procedure to ensure compliance in this area. State programs must ensure that such program recipients follow

the six affirmative steps when awarding contracts using

program assistance. In addition, all contractors in such

cases are required to use these same procedures when

awarding subcontract agreements. (Reference: 2000

DWSRF Interim Final Rule, Section 35.3575 (a-e))

3.11.4

Financial Analysis and Loan Repayment

Financial Assessment of Program Recipients. Prior to

awarding a loan for project assistance, DWSRF programs must perform an assessment of all potential borrowers to ensure creditworthiness. This process is often

conducted by state program staff; however, some programs will conduct these reviews with the assistance of

local financial institutions, such as banks, or with the

help of outside contractors. EPA must review and

approve a program’s process for conducting financial

assessments and identifying acceptable repayment

sources and private security means.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.11 41

Each program borrower must demonstrate adequate

revenue or security to repay an SRF loan. The processes for public and private borrowers differ, although the

justification for the review is the same. The evaluation

of creditworthiness is used to ensure both public and

private borrowers maintain sound financial management

and possess the ability to repay an SRF loan. 

Public Borrowers: Approving a Dedicated Repayment

Source. When working with public borrowers, program

staff may review audited financial statements and discuss types of revenue sources the entity may dedicate to

the repayment of an SRF loan. For example, revenue

sources may include a pledge of additional revenues

collected through user fees. Public systems must also

demonstrate the appropriate ability to collect revenue

according to state law and/or local ordinances.

Private Borrowers: Establishing Adequate Security.

Working with private borrowers often requires more

creativity on the part of program staff in determining

creditworthiness and financial capability for loan repayment. Private borrowers may include privately-owned

community or nonprofit noncommunity water systems.

When working with private borrowers, SRF programs

are required to ensure the recipient of SRF assistance

has adequate security for an SRF loan. For example,

program staff may review income tax statements when

audited financials are not available.

When adequate security cannot be easily established

(e.g., through company assets or other revenue

sources), SRF programs may require unique collateral

arrangements or may explore other options in credit

enhancement for the applicant. SRFs have used several

types of collateral arrangements, including the establishment of a debt payment reserve or requiring the purchase of insurance to guaranty loan repayment. In

some cases, SRF programs have approved both corporate and personal guarantees of the loan recipient.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

“All borrowers are required to

demonstrate adequate security for

loan repayment.”
Chapter 3 / Section 3.11 42

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.11

Detailed State Application Review

EPA

• All state environmental review procedures, both a NEPA-like SERP and an alternative SERP must undergo a

review and receive approval from EPA.

• Although EPA is ultimately responsible for compliance with federal crosscutting authorities as they apply to state

DWSRF programs, individual programs are required to ensure SRF loan recipients also comply with these

authorities.

• EPA must review and approve a program’s process for conducting financial assessments and identifying acceptable

repayment sources.

State Program Office

• State programs must ensure all program recipients pass a full TFM review.

• Programs must conduct an environmental review on all projects receiving direct Fund assistance, all refinanced or

reimbursed projects, and all SWP activities through the DWSRF set-asides unless the activities solely involve

administration (e.g., personnel, equipment, or travel) or technical assistance. 

• Programs must apply federal crosscutters to projects and activities in an amount equal to the amount of each capitalization grant deposited to the Fund. In addition, federal crosscutters must be applied to all DWSRF set-aside

activities.

• Programs are required to apply general anti-discrimination law requirements to all projects, regardless of the

source of SRF funds.

• Each DWSRF program is required to consult the EPA Regional Administrator to develop a fair share goal for the

participation of minority- and women-owned businesses in receiving DWSRF project assistance. State programs

must also ensure SRF program recipients of assistance, in an amount equal to the capitalization grant, must follow the six affirmative steps when awarding subcontract assistance.

• Prior to awarding a loan for project assistance, DWSRF programs must perform an assessment of all potential

borrowers to ensure creditworthiness and identify source of repayment and, if applicable, security provisions.
Chapter 3 / Section 3.12 43

3.12

Project Approval and General

Loan Closing Procedures

3.12.1

Funding the Highest Priority Projects

Funding in Priority Order. DWSRF programs are

required to fund projects in strict priority order according to the comprehensive and fundable project priority

lists. Projects are initially ranked based on an approved

project priority ranking system to develop a list of all

projects eligible for funding through the DWSRF program. Based on this comprehensive list, a final fundable

list of projects is developed based on projects that are

ready to proceed during the current funding cycle.

Programs are required to offer loan assistance according

to the ranking of the final fundable project priority list.

(For more information on the development and requirements for the DWSRF program priority lists, see Section

3.1.4 of this manual.)

3.12.2

Following Formal Project Bypass Procedures

General Requirements. Although programs are required

to fund projects in strict priority order, deviations from

the project priority lists are allowable under certain circumstances. Projects on the fundable list can be

bypassed upon written notice to the loan applicant if the

project is not ready to proceed or another project is in

need of emergency program assistance. All programs are

required to document their unique procedures for

bypassing projects within their IUP. Procedures must

include specific conditions that allow for a project to be

bypassed and the method used to identify which projects

would receive funding instead. In all circumstances,

except when bypassing a project on an emergency basis,

programs must fund the next highest ranked project on

their unique fundable list.

Funding Projects on an Emergency Basis. Programs are

allowed the flexibility to provide funding assistance on

an emergency basis. Emergency projects are those

defined as projects that require immediate attention to

protect public health or other state-defined emergency

situations. All procedures for identifying and accepting

an emergency project for DWSRF program assistance

must be detailed in the IUP. Emergency projects may

originate from the project priority lists; however, programs are also able to fund projects that do not previously appear on these approved project lists. Programs

are required to list all projects receiving this type of

assistance in their Biennial Reports and discuss the

funding for these recipients during the annual program

review. The way in which individual programs will

define what constitutes an emergency funding situation

will vary. For example, a state may define a situation for

emergency financing only for water supply systems in

need of emergency repairs and when no other funding

source is available. These types of determinations are

made by the state primacy agency.

All projects, including the projects funded on an emergency basis, are subject to existing TFM capacity

requirements, as well as applicable environmental review

and crosscutter procedures. Some states may choose to

identify emergency projects as those in an amount

greater than the amount of the federal capitalization

grant. In this way, projects may be defined as those

projects receiving assistance in an amount equivalent to

state match, loan repayments, or interest earnings to

limit the applicable environmental and crosscutter

review requirements. (For more information on crosscutter requirements applicable to projects whose cumulative funding is equal to the federal capitalization grant,

see Section 3.11.3 of this manual.)

Additional Criteria for Bypassing Projects. States may

also develop additional criteria for bypassing projects for

reasons other than readiness to proceed or accommodations for emergency situations. In cases where a state

program bypasses a project for reasons other than readiCapitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

“. . . DWSRF programs are required to

fund projects in strict priority order based

on approved project priority lists.”
Chapter 3 / Section 3.12 44

ness to proceed, programs must document these occurrences in their Biennial Report and provide an explanation during the annual review. Examples of additional

bypass allowances include failure to adhere to a particular application schedule or preset deadlines on the part

of the applicant, withdrawal of the application by the

potential borrower, or reaching a state-determined limit

on annual loan assistance provided to a single borrower

through the Fund.

3.12.3

Establishing Loan Terms

DWSRF programs have the flexibility to offer a wide

variety of assistance types and establish unique borrowing provisions for loan agreements through the Fund.

Programs have the ability to set unique interest rates,

offer various repayment terms, and assess fees on program borrowers. These types of decisions may affect

the growth or ability of the SRF Fund to provide future

project assistance and require a sound approach to

financial planning. States are encouraged to have a

long-term financial plan to evaluate expected impacts of

funding decisions on the overall health of the Fund.

Programs will often balance decisions and adjust loan

terms to provide a beneficial subsidy to the borrowing

community and to ensure the continued health of the

SRF Fund. For example, a lower interest rate may provide a greater incentive to the individual borrower in

the near time, but it will reduce the future income available to the program for additional loans.

Setting the Loan Interest Rate. Programs are given considerable authority in setting interest rates as appropriate for their individual program and by borrower type.

According to regulations, programs may set borrowing

rates between zero and the current market interest rate

for all loans. If providing disadvantaged community

assistance, programs may also provide a negative interest rate; however, the subsidies provided in these cases

are limited to no more than thirty percent of the annual

amount of the capitalization grant deposited to the

Fund. (See Section 3.8.1 for more information on disadvantaged community assistance.) 

The responsibility for establishing the effective market

rate lies with the state program office. For example, a

state may use the Bond Buyer 20-Bond GO Index to

define the current market interest rate when establishing its effective SRF interest rate for current loans. Any

method used to define the current market rate must be

defined in the annual IUP. In addition, EPA recommends that state programs describe their unique

method in a formal program OA.

When considering rates for loan recipients, programs

should not set effective interest rates at a level that may

cause the recipient to fail to meet any technical, financial, or managerial capability requirements. In addition,

when assessing fees, the DWSRF program must ensure

the effective loan rate (i.e., the loan interest rate, plus

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Project Bypass Procedures

Projects on the priority list may be bypassed if:

1. The system does not meet the state’s minimum requirements for technical, financial, or managerial capacity,

2. The project is not ready to proceed, or

3. Another project is in need of emergency assistance.

SRF Loan Rates:

• General loan rates must remain between zero and the

current market rate.

• As an extra subsidy, disadvantaged communities may

receive a negative interest rate loan.

“. . . SRF programs are encouraged to

have a long-term financial plan to evaluate expected impacts of funding decisions

ont he overall health of the Fund . . .”
Setting Repayment Levels. Loan repayments are not

required to equal any particular amount (e.g., onetwentieth of the total repayment amount per year).

Although not generally in use, programs may authorize

a “balloon repayment” or escalating repayment schedules for SRF loans. In these cases, the borrower is

required to provide higher annual repayment amounts

in later years in contrast to lower repayment amounts in

the earlier years. Similarly, programs may also allow

borrowers to provide interest-only payments for a set

period of time, with higher annual repayment amounts

in later years. For all programs that wish to include

interest-only or “balloon repayment” options, the IUP

must contain a discussion of the method for calculating

this repayment schedule. Programs should recognize

the potential negative effects, including an increase in

the possibility of borrower default during the later years

of loan repayment or the decreased capacity of the Fund

to provide program assistance in the current years.

Determination of Fees. In addition to establishing loan

repayment terms and interest rates, programs are given

the authority to assess additional fees on program borrowers. These charges may include fees assessed annually (e.g., loan maintenance fees) or an assessment of a

one-time fee during the loan closing process. Fees may

be used for several purposes. Two uses include additional project assistance through the Fund or for

DWSRF program administration activities. Programs

must document all planned and actual fee activity in

the IUP and Biennial Report.

Programs may require loan recipients to pay fees directly or allow the recipient to include these charges as part

of the loan principal amount. The method of assessing

and collecting fees will determine how and for what

Chapter 3 / Section 3.12 45

assessed borrowing fees) does not exceed the current

market rate. Please see Determination of Fees below for

more information.

Setting the Repayment Schedule. In addition to establishing loan interest rates for individual borrowers, states

must establish a formal loan repayment schedule in the

final loan agreement. Requirements state that loan repayments to the SRF program must start within one year of

project initiation of operations or when the project is

capable of being initiated. In cases where a possible delay

in project completion is expected, programs may require

the borrower to begin repayment within one year of the

estimated date of completion. Programs must receive

loan repayments on at least an annual basis, although

some programs may require repayments on a semi-annual

or more frequent schedule.

After the loan repayment period begins, program borrowers must complete all repayments within twenty years

for standard loans but may extend the term to thirty

years (as determined by individual DWSRF program) for

loans to disadvantaged communities. When providing an

extended repayment period to a disadvantaged community, programs must ensure the loan repayment period

does not exceed the expected design life of the project.

Programs may consider how a longer or delayed repayment period may decrease the capacity of the Fund in

providing additional assistance. (See Section 3.8.1 for

more information on disadvantaged community assistance through the DWSRF program.)

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

SRF Programs May Assess Fees:

• Annually (e.g., for SRF loan maintenance), or

• During the loan closing process

SRF Loan Repayments

• Repayments must begin within one year of initiation of

operations.

• Repayments must be complete within twenty years from

the first loan repayment date (thirty years for a disadvantaged community).
Chapter 3 / Section 3.12 46

purposes programs may use SRF fee revenue. In all

cases, fees and interest on fees must return to the Fund

or must be deposited to an account outside the Fund.

Specific uses of fees are subject to several, additional

program requirements. These requirements are discussed further below.

Fees Paid by the Assistance Recipient. Fees paid directly by

the assistance recipient and deposited to the Fund may be

used for all eligible Fund activities, including additional

project assistance. Fees deposited to an account outside

the SRF Fund may be used for the purposes of program

administration, for combined financial administration of

both the CWSRF and DWSRF programs when operated

by the same agency, for state match, and for other allowable SDWA, Section 1452 activities, including activities

through the DWSRF set-asides.

Fees Included as a Portion of the Loan Principal. Fees

included as a portion of loan principal may return directly to the program Fund or may be deposited to a separate account outside the Fund. Fee revenue deposited

to the DWSRF Fund account is eligible for all Fund

activities, while fee revenue deposited to a separate

account is eligible for program administration activities

and for other allowable SDWA, Section 1452 activities,

including activities through the DWSRF set-asides. It is

important to note that these fees may not be used for

state match or for the combined financial administration

of the DWSRF and CWSRF programs. In addition, disadvantaged community borrowers may not include

assessed fees as part of the loan principal amount. 

When assessing fees, the DWSRF program must ensure

the effective loan rate (i.e., the loan interest rate, plus

assessed borrowing fees) does not exceed the current

market rate and is not reasonably expected to cause a

system to fail TFM capability requirements. 

3.12.4

Developing the Formal Loan Agreement

Following the establishment and mutual acceptance of

all loan terms, the SRF program drafts a formal project

loan agreement. This agreement contains all requirements of assistance from the SRF program, including

the loan interest rate, the loan repayment term, and any

applicable loan origination or annual fees. Both the

program recipient and the DWSRF program office must

sign this agreement to ensure all terms are legally binding. A signed loan agreement becomes the formal contract between program borrower and the DWSRF program office.

According to a final project loan agreement, project

assistance is only provided after the formal loan agreement is finalized and signed by both parties. According

to this contract, the DWSRF assistance recipient promises to complete the project according to schedule and

approved specifications, while the DWSRF program

office agrees to provide funding assistance on a reimbursable cost basis or approved alternative method.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

4 Unless funds are being used to correct for a noncompliance issue.
Chapter 3 / Section 3.12 47

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.12

Project Approval and General Loan Closing Procedures

EPA

• EPA is responsible for oversight to ensure state programs are complying with applicable federal requirements

throughout the project approval and loan closing processes.

State Program Office

• DWSRF programs are required to fund projects in strict priority order according to the comprehensive and fundable project priority lists.

• All programs are required to document their unique procedures for bypassing projects within their IUP. 

• All procedures for identifying and accepting an emergency project for DWSRF program assistance must be

detailed in the IUP.

• States are encouraged to have a long-term financial plan to evaluate expected impacts of funding decisions on the

overall health of the Fund.

• Programs must document all planned and actual fee activity in the IUP and Biennial Report. In all cases, fees

and interest on fees must return to the Fund or must be deposited to an account outside the Fund.

• Project assistance is only provided after a formal loan agreement is finalized and signed by both parties.
Chapter 3 / Section 3.13 48

3.13

Construction Activities

and Loan Disbursement

3.13.1

Project Performance Certification

State programs require all project borrowers to designate a certified project engineer to provide continuous

oversight and verification that the project is constructed

according to design specifications. Periodic engineering

reports are collected by the SRF program to verify

progress according to the original construction schedule

agreed to in the final loan agreement. Additionally, the

borrower-designated engineer typically accompanies the

state project engineer during formal onsite construction

inspections.

If a system fails to adhere to the original project completion schedule, fails to meet ongoing compliance

under SDWA, or fails to show appropriate technical,

financial, or managerial capacity, state programs are

required to enforce remediation requirements. To

ensure that assistance recipients take the steps necessary

to maintain compliance, programs may require the

adoption of a formal Corrective Action Plan or require a

revision to the original construction schedule.

3.13.2

Project Inspections

DWSRF programs use formal onsite inspections of the

project site to verify that construction activities are completed in a timely manner, as detailed in the original

loan agreement, and according to the original design

specifications. Although there are no formal requirements on how often a state program must complete formal project inspections, programs are required to ensure

assistance recipients are using DWSRF funding for eligible purposes and to lend additional verification for all

disbursement requests.

The frequency and complexity of formal project inspections vary state to state. Some state programs conduct

monthly project

inspections, while

others complete

only two inspections of the project

site – one after fifty

percent of the funds

have been released

to the borrower and

another after construction is complete and before the

last cash draw is

completed for all

remaining reimbursable costs. State programs typically

use in-house project engineers to complete inspections.

In some cases, primacy agencies may work with external

field offices or, in cases of limited staff resources, with

local county health departments to complete interim

project inspections.

3.13.3

Approving Requests for Reimbursement

DWSRF programs are required to verify all loan payments and construction reimbursements are for eligible

program costs only. The general process for approving

an SRF loan disbursement at the state-level requires an

initial review of all invoices and accompanying documentation. After the program checks to ensure the

disbursement request is for an active borrower, an

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

Onsite Construction Inspections

General activities conducted during a construction

inspection include:

1) Adequacy of engineering supervision,

2) Oversight by water system,

3) Availability of construction drawings,

4) Compliance with the construction schedule,

5) Availability of accounting records,

6) Actual payment requests versus payment

schedules, and

7) Use of appropriate construction practices
Chapter 3 / Section 3.13 49

active project, and that the borrower is not in significant noncompliance4

, the program staff must verify the

funds requested are within the limits set according to

the loan agreement. If the level of detail contained

within an individual disbursement request is insufficient

to allow state staff to verify the release of SRF funds,

programs may request the applicant to submit additional documentation.

Often, SRF programs involve technical staff directly

involved in construction inspections to help verify individual disbursement requests. Technical staff can provide additional information on program-approved

change orders, work completed since prior inspection,

and knowledge of any observed deficiencies. This information can help SRF program staff to accurately

approve individual requests for reimbursement.

EPA Oversight of Fund Disbursements. During the

annual review process, EPA is required to ensure each

state maintains an appropriate level of control over all

SRF Fund disbursements. During onsite visits, EPA will

select a sampling of project level cash draws for review.

EPA uses this information to verify that the state is following all requirements, including formal rules for cash

draw, and conducting an appropriate level of technical

and administrative oversight to verify disbursement

requests. Should EPA discover any occurrence of an

improper payment, either through an onsite sample or

as identified in the annual program audit, the state must

identify all steps taken (or planned to be taken) to correct for any such identified inaccuracy.

3.13.4

Formal Cash Draw Procedures

for Loan Disbursesments

Calculating the Proportionate Federal Share. The state

DWSRF programs are comprised of both state and federal funds. When a loan disbursement request is submitted

to the SRF program, both state funds and federal funds

may be used to honor the request. By law, state programs are only authorized to draw the appropriate proportional federal share of all eligible incurred project

costs from the Federal Treasury. Cash draws of federal

funds may only occur for those projects with executed

loan agreements. The calculation of the federal proportional share is described in detail through the “Guide to

Using EPA’s Automated Clearing House for the

Drinking Water State Revolving Fund Program” (EPA832-B98-003). The newest system for accessing federal

funds is the ASAP system, or the Automated Standard

Application for Payments. The proportionality rules

and processes described for accessing funds through the

federal cash draw system are similar under ASAP to

those under the Automated Clearing House system.

Establishing the Cash Draw Ratios. In general, cash

draw ratios are established at the time of the capitalization grant award. Establishing formal cash draw ratios

ensures both federal and state funds are readily available as costs are incurred. Formal steps involved during the cash disbursement process include: approving

the formal disbursement request based on an allowable

costs determination; calculating the proportionate federal share for all verified disbursements; and following

an approved funds disbursement mechanism (e.g., the

ASAP process).

Below is a sample calculation to determine the appropriate federal cash draw ratio for project disbursements. 

In general, the cash draw ratio for federal funds

is equivalent to:

$ Federal Share of Project Costs / $ Total Project

Disbursement

Where the federal share is equivalent to:

The Capitalization Grant – 

Set-Asides +/- SRF Transfers

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

“. . . By law, state programs are only

authorized to draw the proportional

federal share of all eligible costs from the

Federal Treasury.”
Chapter 3 / Section 3.13 50

For example, if a DWSRF program takes the maximum

thirty-one percent of federal funds for set-asides, the federal cash draw ratio in this example would be 77.5%. (See

specific calculations used to illustrate this example below.)

Given Information:

Capitalization Grant = $100

State Match = $20

Set-Asides Reserved = 31%

Determining the Federal Cash Draw Ratio:

$ Federal Share of Project Costs = $69

[$100 (Capitalization Grant) - $31 (Set-Asides)]

$ Total Project Disbursement = $89

[$69 (Federal Share) + $20 (State Match)]

In this example, the cash draw ratio for

federal funds is equivalent to 77.5%

[$69 ($Federal Share of Project Costs) /

$89 ($Total Project Disbursement)] = 0.775

Federal Cash Draw through the DWSRF Set-Asides.

Unique to the DWSRF set-aside accounts, cash draw

ratios are set to one-hundred percent – as one-hundred

percent of the funds used for expenditures through these

accounts are federal funds. One exception is the DWSRF

State Program Management set-aside as programs may

use state funds to satisfy the state one-to-one match

requirement. (For more information on the match

requirement through the State Program Management setaside, see Section 4.1.3 of this handbook.)

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment
Chapter 3 / Section 3.13 51

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.13

Construction Activities and Loan Disbursement

EPA

• During the annual review process, EPA is required to ensure each state maintains an appropriate level of control

over all SRF Fund disbursements.

• In general, cash draw ratios are established at the time of the capitalization grant award. EPA must provide proper oversight to ensure the state DWSRF program is in compliance with federal cash draw proportionality requirements.

State Program Office

• State programs require all project borrowers to designate a certified project engineer to provide continuous oversight throughout the project construction process.

• If a system fails to adhere to the original project completion schedule, fails to meet ongoing compliance under

SDWA, or fails to show appropriate technical, financial, or managerial capacity, state programs are required to

enforce remediation requirements.

• DWSRF programs are required to verify all projects receiving assistance from the Fund are using these monies for

eligible purposes.

• By law, state programs are only authorized to draw the appropriate proportional federal share of all eligible

incurred project costs from the Federal Treasury.
Chapter 3 / Section 3.14

52

3.14

Project Completion and Close-Out

3.14.1

Final Construction Inspection

After project construction is complete and before final

reimbursement funds are released to the program borrower, a final construction inspection must be completed. This final inspection is carried out to ensure project

funds have been used for eligible purposes and the project is complete according to original plans and specifications and all state approved change orders. Typically a

state program staff engineer will complete this final

onsite inspection in combination with the borrower-designated project engineer. 

Releasing Final Project Funds. Following a final construction review, the loan recipient is provided with all

remaining project disbursements according to approved

project disbursement requests. In many cases, state

DWSRF programs will hold five percent or ten percent

of remaining loan funds pending final inspection. In

other cases, programs will only hold the amount of the

final disbursement request before signing off that the

project is complete according to all requirements. The

purpose of withholding some funds before final verification is to encourage timely completion of the project

and initiation of operations.

3.14.2

General Timing and Requirements

for Loan Repayment 

Initiating Loan Repayments. After a project is complete and has initiated operations, the loan recipient is

required to begin repayments within one year. All borrower repayments must return to the Fund (both principal and interest amounts), and all repayments must

return within twenty years.

Capitalization

Grant

Application

EPA

Acceptance

and Award

Project

Application

Review

Detailed State

Application

Review

General

Loan Closing

Procedures

Project

Construction

Phase

Project

Completion

Loan

Repayment

KEY RESPONSIBILITIES: CHAPTER THREE: 3.14

Project Completion and Close-Out

EPA

• EPA is responsible for oversight to ensure state programs are complying with applicable federal requirements

throughout the project completion and close-out processes.

State Program Office

• After project construction is complete and before final reimbursement funds are released to the program borrower, a final construction inspection must be completed.

• After a project is complete and has initiated operations, the loan recipient is required to begin repayments within

one year.
Chapter 4 / Section 4.1 53

4.1

Four Types of Set-Asides

DWSRF programs are uniquely structured to allow

states the option of providing direct program assistance

in the form of grants, technical assistance to small systems, and other types of expenditures through a separate mechanism known as the DWSRF set-asides. 

Four types of set-asides have been authorized by

Congress and these include:

• DWSRF program administration,

• Technical assistance to small systems,

• State program management support, and

• Local assistance and support for other state programs

After a state receives its capitalization grant, a certain

portion may be moved to these separate accounts for

additional uses of the program funds. In general, assistance through the DWSRF set-asides is provided in the

form of grants to drinking water systems, technical

assistance through the program staff office and third

party contracts, and for program administration activities, including salary requirements for DWSRF program

staff. Additional requirements and restrictions on the

uses of these funds are described in further detail below. 

4.1.1

Administration and Technical Assistance

States may reserve up to four percent of each capitalization grant for administrative expenses and for technical

assistance. To date, all fifty-one SRF programs are

reserving funds for use under this set-aside. Eligible

expenses include all types of administrative expenses

necessary to implement the state DWSRF loan program, including administration of the set-asides.

Sample activities may include loan portfolio management, technical reviews of preliminary engineering

reports, the preparation of the annual capitalization

grant application, and holding meetings with potential

borrowers to discuss the status of a loan application. 

In addition to reserving funds under this set-aside for

program administration activities, the DWSRF may provide direct technical assistance to the borrowing community. Only a handful of states have provided technical

assistance through the four percent administration setaside to date. These include Arkansas, Virginia, New

Mexico, Oregon, and South Carolina. Programs may

use these resources to develop multimedia products or

to provide direct technical assistance to borrowers, for

example, through face-to-face meetings. Examples

include the development of printed materials, public

service announcements, video tapes, or other media to

provide information on water conservation activities and

to provide direct assistance to applicants to ensure the

detailed application is complete and accurate.

CHAPTER 4

Funding through the DWSRF Set-Asides

KEY POINTS IN CHAPTER 4

• DWSRF programs may provide direct program

assistance in the form of grants, technical

assistance to small systems, and other types of expenditures through set-asides.

• Four types of set-asides have been authorized by

Congress, administration, technical assistance to small

systems, state program management, and local assistance

and support for other state programs.

• All set-aside activities must coordinate with the overall

goals of the DWSRF.

• State programs must follow specific requirements to plan

and account for expenditures related to DWSRF set-aside

activities.
Chapter 4 / Section 4.1 54

4.1.2

Small System Technical Assistance

In many cases, small systems may not be able or eligible

to apply for loan assistance through the DWSRF Fund

due to lack of technical, financial, or managerial capacity.

In these cases, small systems may benefit from extra

technical assistance provided through the DWSRF setasides to achieve the compliance level required for an

SRF loan. State programs may reserve up to two percent of each capitalization grant for direct assistance to

small systems. Assistance activities can include the completion of an engineering feasibility study to highlight

operational areas for improvement, additional assistance

in completing an environmental review and developing

cost estimates during the planning process, or may

include direct assistance in completing an application for

DWSRF funds. Technical assistance through this setaside can be provided directly by SRF program staff or a

third party contractor to carryout assistance activities.

4.1.3

State Program Management

State DWSRF programs are given the additional authority to provide assistance for other drinking water-related

activities under the State Program Management setaside. Programs may reserve up to ten percent of the

federal capitalization grant for several types of activities

including 1) administrative assistance to the PWSS program; 2) technical assistance for SWP activities; 3) assistance for capacity development initiatives; and 4) support for state operator certification programs.

Nationally, programs have reserved approximately five

percent of the allowable ten percent maximum through

this set-aside for these and other types of activities.

Individual project examples eligible through this setaside are many, and states continue to strive for innovative uses of these funds. Programs use assistance

through this set-aside to complement existing programs

and to provide training programs or other types of

direct assistance. Sample project activities include the

use of set-aside funds for project inspections, sanitary

surveys, and development of new training manuals or

exams for drinking water system operators. 

One-to-One Match Requirement. For all funds reserved

through the State Program Management set-aside, state

programs must provide a direct match at the time of the

grant or as funds are expended. Although states are

required to provide a direct one-to-one match for federal funds under this set-aside, several options are available that allow programs to specify in-kind services or

credit in lieu of new cash. Under the DWSRF regulations, programs are allowed the option of using a credit

from state expenditures (match and overmatch) provided to the PWSS program during FY1993. This credit

may account for up to fifty percent of the match

required under this set-aside. Regulations also allow

these amounts provided by the state to the PWSS program during FY1993 to serve as a perpetual credit.

For example, if a state plans to expend $1 million

through this set-aside over the next fiscal year, and they

have a perpetual credit for PWSS expenditures during

FY1993 of $600,000, they may only use $500,000 as

the maximum credit allowable. Again, states may only

use up to fifty percent of the FY1993 expenditures for

the PWSS programs as a credit toward the current

match requirement. In this example, the state program

must provide an additional $500,000 in direct match.

Additional match can be in the form of new cash, credit

for in-kind services, or credit for PWSS overmatch

(only) in the current fiscal year.

It is possible for a state to provide match in the form of

credit for PWSS expenditures and in-kind services without providing any additional match in the form of

direct cash match. It is important to note that the use

of in-kind services encompasses any type of eligible state

activity used to support the implementation of this setaside, an example of which is employee salaries.

Questions on the eligibility of potential in-kind services

are answered by EPA on a case-by-case basis. All forms

of match must be approved by EPA through a detailed

set-aside work plan (see Section 4.2.2 for more information on developing set-aside work plans) before eligible for use by the state for State Program Management

expenditures.

4.1.4

Local Assistance and Other State Programs

The Local Assistance and Other State Programs setaside allows additional types of DWSRF project assistance as compared to the types of assistance through

the four percent, two percent, and ten percent DWSRF

set-aside accounts. In general, DWSRF set-aside assis-
Chapter 4 / Section 4.2 55

tance is provided in the form of grants to drinking water

systems, and for technical assistance or other types of

programmatic support expenditures. Through the

Local Assistance and Other State Programs set-aside,

states may also provide loan assistance for certain SWP

activities. In particular, states may provide loans for

implementation activities related to state source water

assessments. These loans may be used for SWP land

acquisition and other types of incentive-based SWP protection measures. If a state decides to provide these

types of loan assistance options, it must develop an

EPA-approved priority setting process similar to that

created for the Fund (see Section 3.10.1 for more information on priority setting). All loan repayments under

this set-aside must return either to the set-aside account

for future loans or to the Fund for DWSRF binding

commitments or other eligible uses of the Fund.

In addition to loan assistance through the Loan

Assistance and Other State Programs Set-aside, states

may provide direct assistance in the form of a grant or

technical support activities in the following areas: 1)

SWP area delineation and assessment5

; 2) support for

wellhead protection programs; and 3) technical or financial assistance related to a capacity development strategy

for eligible drinking water systems, including small systems. Example activities eligible through this set-aside

may include the development of local SWP ordinances

and implementation of public education programs to

highlight the importance of wellhead protection.

States are limited to a maximum of fifteen percent of

each capitalization grant for these types of activities, and

may use no more than ten percent of each grant for any

one project category through this set-aside. For example, states may provide no more than ten percent for

SWP land acquisition loans or direct support for wellhead protection programs. 

4.2

Key Requirements and Recommendations

4.2.1

Account Management

Maintaining Separate Accounts. The state grantee has

primary responsibility for proper maintenance of a sepa5 Support for source water delineations and assessments were eligible using set-aside

funds from the FY1997 capitalization grant only. All state programs have used funds

for these purposes.

Amount Statutory Purpose Required Can Authority

Citation Match Be Reserved

4% 1452(g)(2) DWSRF Administration & Technical Assistance to PWSs None Yes

2% 1452(g)(2) Small Systems Technical Assistance None Yes

Technical Assistance to PWSs Serving<10,000 Persons

10% 1452(g)(2) State Program Management: 1:1 Yes

1. Administer the State PWSS Program

2. Administer or Provide Source Water Technical Assistance

3. Develop & Implement a Capacity Development Strategy

4. To Develop & Implement an Operator Certification Program

15% 1452(k) Local Assistance & Other State Programs: No more than 10% None No

of Capitalization Grant Amount Can Be Used for Any One Activity

1. Loans to Acquire Land or Conservation Easements for

Protection of Source Waters

2. Loans to Provide Funding to Implement Voluntary, IncentiveBased Source Water Quality Protection Measures

3. Assistance to PWS as Part of Capacity Development Strategy

4. For 1996 & 1997 Only, Assistance to Delineate or Assess

Source Water Protection Areas

5. Assistance to Establish & Implement Wellhead Protection

Programs Under Section 1428

DWSRF Set-Aside Reference Chart
Chapter 4 / Section 4.2 56

rate and identifiable DWSRF Fund account. If providing assistance through DWSRF set-asides, programs

must maintain separate and identifiable accounts for

both Fund activities and set-aside expenditures. If loan

repayments for project assistance through the fifteen

percent Local Assistance and Other State Programs setaside are deposited back to the set-aside accounts, oversight of these accounts must meet the same management requirements as implemented for the Fund. 

Coordinating Goals. All set-aside activities must coordinate with the overall goals of the DWSRF. Set-aside

activities are eligible through the program to support

the overall mission of SDWA in accordance with the

requirements for assistance through the Fund. In addition, all set-aside activities are subject to requirements

for federal crosscutters and environmental review procedures; however, in most cases these requirements will

not pertain to set-aside activities. (See Sections 3.11.2

and 3.11.3 for more information on environmental

review and federal crosscutter requirements.)

4.2.2

Reporting Requirements

Basic Reporting Requirements. State programs must follow specific requirements to plan and account for

expenditures related to DWSRF set-aside activities.

According to the basic requirements for the program,

the level of funds and general descriptions of planned

activities for DWSRF set-asides must be included in the

IUP. Detailed descriptions and budget information are

included in formal set-aside work plans. Follow-up

reporting on the actual use of DWSRF set-aside expenditures, in comparison to planned activities, is included

in the Annual/Biennial report or a separate set-aside

activity update. Other types of reporting, at the request

of the Region or initiative of the state, can supplement,

but not substitute for these required reporting activities.

Set-Aside Work Plans. Detailed requirements for setaside work plans are included in the final DWSRF program regulations. According to these original requirements, all set-aside work plans must include six specific

sections of information. These sections include: 1) a

thorough description of planned activities and identification of the goals and objectives for each set-aside; 2) an

identification of roles and responsibilities for all implementing parties; 3) the annual and cumulative funding

amount and percent of the capitalization grant reserved

for each activity; 4) expected outputs, outcomes, and

deliverables; 5) projected work years to completion and

a schedule of deliverables; and 6) a description of how

the state will evaluate success. Regions may request

additional information or specify certain formats for

work plans. For example, states may be requested to

briefly discuss the relationship of work identified in the

current work plan with ongoing work in prior year work

plans and work plans associated with the PWSS, security,

and operator training grants. In addition, a region may

request information from a state on what steps a state

may take to expedite work if large unexpended balances

of set-aside funds have accumulated.

Set-aside work plans are due in accordance with schedules identified by EPA Regional staff. EPA must

approve all work plans and work plan amendments.

States must prepare a work plan for all set-asides,

except the four percent administration set-aside. No

work plan is required for administrative activities, unless

the four percent set-aside is also used for technical assistance. In this case, a work plan would only be required

for the portion of funds used for technical assistance.

Acceptable Formats. Set-aside work plans come in a

variety of formats. Plans may be developed according

to an individual grant, on an annual basis (even if the

state does not receive a grant in the current year), or

according to a multi-year format. Regulations limit

multi-year work plans to no more than four years.

Planning over the course of multiple years is helpful if

funded activities are expected to take several years to

complete with the use of multiple capitalization grants

and other funding. 

In addition to different reporting schedules, states may

develop work plans based on each individual set-side by

creating a separate set-aside work plan for the two per-

“. . . all set-aside work plans are due

within ninety days of the capitalization

grant award, unless a shorter schedule

is approved . . .”
Chapter 4 / Section 4.2 57

cent, four percent, ten percent, and fifteen percent setasides, or by developing individual work plans by category of funding. For example, a state may develop a

separate work plan for Capacity Development and

another for Operation Certification or SWP activities. 

Annual/Biennial Reports and Set-Aside Activity Reports.

State programs must report on set-aside use through the

Annual/Biennial Report or another type of set-aside

activity report (also called a Set-Aside Performance

Report), as agreed upon with the EPA Region.

Information reported through these documents allows

the states and others to compare the planned use of SRF

funds for set-aside activities with actual expenditures of

funds for project assistance. Funding information reported through the set-aside activity reports or

Annual/Biennial Reports should reconcile with the previous year’s IUP and work plans. Any discrepancies

should be explained within these documents.

KEY RESPONSIBILITIES: CHAPTER FOUR

Funding Through the DWSRF Set-Asides

EPA

• Several options are available that allow programs to specify certain in-kind services in lieu of new cash to satisfy

the one-to-one match requirement under the State Program Management set-aside. Questions on the eligibility

of potential in-kind services are answered by EPA on a case-by-case basis.

• EPA must approve all set-aside work plans and work plan amendments.

• As agreed upon with the EPA Region, state programs must report on set-aside use through the Annual/Biennial

Report or additional set-aside activity report.

• EPA will negotiate with the program office on corrective action measures, if necessary, to reduce large balances of

unexpended set-aside funds.

State Program Office

• No work plan is required for administrative activities, unless the four percent set-aside is also used for technical

assistance.

• For funds reserved through the State Program Management set-aside, state programs must provide a direct

match at the time of the grant or as funds are expended.

• Through the Local Assistance and Other State Programs set-aside, states may also provide loan assistance for certain SWP activities. If a state decides to provide loan assistance, it must develop an appropriate priority setting

process. All loan repayments must return either to the set-aside account for future loans or to the Fund.

• States are limited to a maximum of fifteen percent of each capitalization grant for activities funded through the

Local Assistance and Other State Programs set-aside and may use no more than ten percent of each grant for any

one project category.

• If providing assistance through DWSRF set-asides, programs must maintain separate and identifiable accounts for

Fund activities and set-aside expenditures. 

• All set-aside work plans are due within ninety days of the capitalization grant award, unless a shorter schedule is

required by the EPA regional office.

• State programs must report on set-aside use through the Annual/Biennial Report or another type of set-aside

activity report as agreed to with the Regional Office.
Chapter 5 / Section 5.1 58

5.1

State Develops the DWSRF

Annual/Biennial Report

5.1.1

Purpose

Each DWSRF program must submit a Biennial Report

to its EPA regional office detailing the state’s performance and its compliance with DWSRF regulations and

capitalization grant requirements. Many states, especially those where management of the CWSRF and

DWSRF is coordinated, choose to report annually

instead of biennially. The report may also be submitted

as a combined CWSRF and DWSRF report. In this

case, all CWSRF and DWSRF financial activities must be

clearly and separately reported.

5.1.2

Key Requirements and Recommendations

The Annual/Biennial Report documents the actual activity of the DWSRF program for the prior year or two

years. It describes the program’s progress toward shortterm and long-term goals as described in the IUP. States

are also required to address progress toward agreed upon

outputs and outcomes as defined in their IUP, including

satisfactory explanations, as necessary, as to why specific

outputs and outcomes were not achieved.

Reporting also includes detailing the timely and expeditious use of funds, binding commitments and loans executed, and all types of assistance provided. Specifically,

the state must demonstrate that it has provided funding

to projects consistent with the project priority lists and

that it adhered to its project bypass process. In addition to the accompanying DWNIMS reports (see

Section 5.4 for more information on DWNIMS); the

Annual/Biennial Report should include financial statements and an overall assessment of the financial health

of the DWSRF program. A region may specify a particular format for the report, including financial tables. It

should also cross-reference the independent audit

report (see Section 5.2 for more information on SRF

program audit procedures). 

In addition to demonstrating compliance, the report

needs to show which projects satisfy the various federal

and state requirements, differentiating between costs

paid out of the capitalization grant and state match and

those paid by other monies, including repayments and

interest earnings, in the Fund. The DWSRF program

should demonstrate compliance with the specific assurances as stated within the IUP. Most importantly, all

costs incurred must be eligible under SDWA. The

Annual/Biennial Report must also report on the status

of the set-aside accounts separately. One EPA grant

CHAPTER 5

State Follow-Up Activities

KEY POINTS IN CHAPTER 5

• The Annual/Biennial Report documents the actual activity of the DWSRF program for the prior year or two

years. 

• Program audits perform a comprehensive check of

DWSRF operations. These include the loan Fund, setaside accounts, and administrative or fee accounts.

• Under the Single Audit Act, all nonfederal entities that

expend more than $500,000 of federal dollars in any

fiscal year are required to conduct a Single Audit.

• State programs must report on set-aside use through an

annual set-aside performance status report or the state

DWSRF Annual/Biennial Report. 

• DWNIMS is used to compile a comprehensive and consistent set of data quantifying SRF activity.
Chapter 5 / Section 5.1 59

condition requires that each DWSRF program illustrate

the public health benefits for its activities and progress

in achieving outputs and outcomes. 

In addition to these regular components, the report

should also follow-up on previous PER findings and

evaluate any other program changes. Taking a longterm view is important for EPA, the financial community, state legislators, and others, as this is a public document. Reporting requirements will continue to exist as

long as the DWSRF program operates, however they

are expected to be reduced after the award of the last

capitalization grant, as several program requirements

will no longer apply.

KEY RESPONSIBILITIES: CHAPTER FIVE: 5.1

State Develops the DWSRF Annual/Biennial Report

EPA

• Set a schedule for receipt of the Annual/Biennial Report with each state DWSRF program, and notify the state

of any changes to reporting requirements.

• If desired, the regional office may specify a preferred Annual/Biennial Report format.

State Program Office

• Submit an Annual/Biennial Report to EPA detailing DWSRF program activity over the past year(s), including

project funding commitments, financial statements, progress in achieving outcomes and outputs, resolution of

prior year PER issues, and expected program changes.

• In the Annual/Biennial Report, demonstrate compliance with the DWSRF regulations and capitalization grant

requirements. 
Chapter 5 / Section 5.2 60

5.2

State Completes and Submits the

DWSRF Annual Audit to EPA

5.2.1

Purpose

Program financial audits help to ensure that DWSRFs

operate within the law, comply with federal requirements, use appropriate accounting and fiscal procedures,

and minimize the risk of waste, fraud, and abuse. EPA

uses audited financial statements to determine if the

program is operating as intended, and to gather information necessary to report to Congress. Prior period

audit reports are reviewed by the Region as a confirmation of previously reported financial information and

information reported through the Annual and Biennial

Reports. Any identified inconsistencies should be

addressed and resolved. 

States that conduct audits under the DWSRF program

can use administrative funds from the four percent setaside account to pay for them.

5.2.2

Key Requirements and Recommendations

Annual Program Audits. Independent financial audits

of State DWSRF program accounts are conducted by

nearly every state program. 

Program audits perform a comprehensive check of

DWSRF operations rather than individual capitalization

grants. These include the loan Fund, set-aside

accounts, and administrative or fee accounts. Auditors

first express an opinion regarding the fairness of the

financial statements and determine whether the state

has used accounting and fiscal procedures that conform

Financial Information for a Sample State's DWSRF

(Millions of Dollars) 2004 2005 2006

Cash Flows

Operating Activities

Interest Received on Loans 1.8 1.6 1.9

Loan Principal Repayments 3.4 3.7 4.5

Total Loan Disbursements (incl. amounts forgiven) (13.0) (14.0) (18.7)

Transfers - Other SRF Funds 0.0 0.0 0.0

Federal Capitalization Grants - Cash Draws 12.7 13.5 18.0

State Match Deposits - Excluding Bonds Paid by SRF 2.7 5.1 2.8

Additional State Contributions 0.0 0.0 0.0

Net Cash Provided by Operating Activities 7.5 9.9 8.4

Noncapital Financing Activities

Gross Leverage Bond Proceeds 0.0 0.0 0.0

Leverage Bond Proceeds (Gross less Issuance Expense) 0.0 0.0 0.0

Interest Paid on Leveraged and State Match Bonds 0.0 0.0 0.0

Net Refunding Bonds and Funds Used for Refunding 0.0 0.0 0.0

State Match Bond Proceeds (Gross less Issuance Expense) 0.0 0.0 0.0

Repayment of Leveraged Bond Principal 0.0 0.0 0.0

Repayment of State Match Bond Principal 0.0 0.0 0.0

Net Cash Provided by Noncapital Financing Activities 0.0 0.0 0.0

Investing Activities

Interest Received on Short-term Investments 0.4 0.4 0.5

Interest Received on Debt Service Reserves 0.0 0.0 0.0

Deposits to Debt Service Reserve for Match Bonds 0.0 0.0 0.0

Deposits to Debt Service Reserve for Leverage Bonds 0.0 0.0 0.0

Net Cash Provided by Investing Activities 0.4 0.4 0.5

Net Increase (Decrease) in Cash and Cash Equivalents 7.9 10.3 8.9

Beginning Balance - Cash and Cash Equivalents 27.0 34.9 45.2

Ending Balance - Cash and Cash Equivalents 34.9 45.2 54.1

Ending Balance - Undrawn Federal ACH Balance 15.9 12.1 8.2

Sample Financial Statement
Chapter 5 / Section 5.2 61

to GAAP and that allow for the proper measurement of

the flow of funds into and out of the DWSRF accounts.

They then review the balance sheet accounting for all the

DWSRF assets, liabilities, and net assets in order to

report on the internal controls related to the financial

statements. This is part of a broader check to ensure

that the state has appropriate internal controls and

accounting procedures to prevent waste, fraud, and

abuse.

Next, the auditors express an opinion as to whether the

state has complied, in all material respects, with laws,

regulations, and provisions of the SRF capitalization

grants and other applicable federal laws and bond indentures. The audit will detail the state’s cash management

practices and note whether the DWSRF is earning a reasonable rate of return on invested funds. The audit

should document any identified erroneous payments,

cash draws, disbursements, and the steps taken (or

planned) to correct such occurrences. 

States must submit completed audit reports and management letters to EPA for review and for use during

the state annual review process. The EPA Region uses

these audit reports, which are hopefully complete by the

time of the Annual Review, to evaluate program management. 

The Single Audit. Under the Single Audit Act and

OMB Circular No. A-133, states are required to conduct an annual audit, known as the Single Audit. The

Circular implements the Single Audit Act amendments

of 1996 and requires all nonfederal entities that expend

more than $500,000 of federal dollars in any fiscal year

to conduct a Single Audit. 

In addition to the DWSRF program financial audit, loan

recipients that expend more than $500,000 of federal

assistance in a single fiscal year must also conduct an

audit under the Single Audit Act. States must ensure all

DWSRF program recipients that meet these criteria are

conducting Single Audits, adhere to GAAP accounting

requirements, and work to resolve any issues identified

through the audit process. 

Information derived from the Single Audit can subsequently be used for financial audits of the DWSRF program. Set-asides used for programmatic purposes may

also be covered by the Single Audit. 

Format of the Single Audit Report. The Single Audit

report may be contained within one combined report

or several separate reports.

In general, the Single Audit report will contain

the following information:

• An opinion on whether the financial statements are

fairly presented in accordance with GAAP,

• Status of internal controls relative to the financial

statements and major programs,

• Assessment of recipient compliance with laws,

regulations, and terms of federal assistance awards,

and

Schedule of findings and questioned costs. 

Although the Single Audit alone is not traditionally

used to fulfill DWSRF audit requirements, for those

states that do not conduct an annual independent audit

and do not have a recent EPA OIG Audit available,

EPA regional offices will need to pull as much information as possible from the Single Audit report to verify

program compliance.

(For more information concerning SRF audits, see the

U.S. EPA Audit Guide for Clean Water and Drinking

Water State Revolving Fund Programs, September

2002.)
Chapter 5 / Section 5.2 62

KEY RESPONSIBILITIES: CHAPTER FIVE: 5.2

State Completes and Submits the DWSRF Annual Audit to EPA

EPA

• Review the most recent independent audit, OIG audit, or Single Audit for each DWSRF program to determine

compliance and proper financial management and to check for consistency with the state’s previous reporting. 

• Ensure that the state has received and reviewed single audits from the designated DWSRF loan recipients. 

State Program Office

• Arrange for an independent audit or Single Audit of program operations to document compliance with all necessary authorities, internal controls on financial transactions and reporting, and GAAP. 

• Work with the auditor to conduct the audit and to discuss/resolve findings. 

• Submit the auditor’s report, including audited financial statements, to EPA for review. 

• Collect Single Audits from loan recipients covered by the Single Audit Act. Follow-up on audit findings if related to the recipient’s ability to repay the loan.
Chapter 5 / Section 5.3 63

5.3

Submitting Annual Set-Aside

Performance Status Reports

5.3.1

Purpose and Requirements

Annual set-aside performance status reports (also known

as set-aside activity reports) may be developed to provide

an annual update and description of activities conducted

and funds expended under each individual set-aside

account. These reports are optional, unless required by

the Region; however, a state program must report on

set-aside use either through this type of report or the

state DWSRF Annual or Biennial Report. This documentation allows the states and others to compare the

planned use of SRF set-aside funds with actual expenditures. (See Section 4.2.2 for more information on setaside planning and reporting requirements.)

The set-aside status reports should also include a discussion of planned versus actual expenditures of setaside funds. If there is a balance of unexpended funds

which exceeds the amount expected based on planned

schedules in the approved work plans, the state should

identify measures it will take to reduce the excess

amount. Such measures could include steps to expedite planned work, identification of additional tasks

(e.g., revised work plans), transfer of funds to the other

set-aside categories (if ceilings are not already reached),

and transfer of excess amounts to the infrastructure

Fund.

KEY RESPONSIBILITIES: CHAPTER FIVE: 5.3

Submitting Annual Set-Aside Performance Status Reports

EPA

• EPA must ensure proper oversight of state DWSRF set-aside reporting activities. State programs are required to

report on set-aside use either through an annual set-aside performance status report or through the DWSRF

Annual/Biennial Report.

State Program Office

• State programs must report on set-aside use through an annual set-aside performance status report or the state

DWSRF Annual/Biennial Report. 
Chapter 5 / Section 5.4

64

5.4

Reporting for the Drinking Water

National Information Management

System (DWNIMS)

5.4.1

Purpose and Requirements

The DWNIMS is used to compile a comprehensive and

consistent set of data quantifying SRF activity. DWNIMS data can be used to provide credible reports and

analysis of program activity; monitor progress in meeting program goals and objectives; and to support efforts

in financial planning. Information collected through

the DWNIMS system include details on project assistance by category (e.g., system compliance with

SDWA), assistance by population served, information

on awards and expenditures through the DWSRF setasides, and information on the DWSRF financial indicators. States use the DWNIMS data to track program

progress over time.

DWNIMS data reports are also used by regions during

the Annual Review process to assess the financial health

of the program and to report on program activity measures.

Program Activity Measures (PAMs). According to federal requirements, EPA program offices are required to

link DWSRF capitalization grants to EPA’s Strategic

Plan. Regional offices work with states to ensure welldefined outputs and outcomes are addressed within capitalization work plans. In relation to national

reportable outputs and outcomes, four PAMs are identified for the DWSRF program. These include:

• Annual percentage of assistance agreements to bring

entities into compliance,

• Fund utilization rate [cumulative loan agreement dollars

compared to cumulative funds available for projects],

• Return on federal investment [cumulative dollar

amount of assistance disbursements to projects divided by cumulative federal outlays for projects], and

• Cumulative number of project completions

5.4.2

General Schedule

The DWNIMS reports program data from July 1, 1997

through June 30th of the current year. Data is collected from Excel spreadsheets or through the internet (at

http://www.dwsrf.net) at the State’s option. 

EPA began work to develop DWNIMS during the late

1990s. A pilot effort was launched in six states including Kansas, Maine, Maryland, Ohio, Oregon, and

Virginia. A final version of the system was initiated in

2000 by EPA. The new system contained data collection requirements for over four-hundred data elements

for each state program. Today, all states report information for the uses of their DWSRF funds to DWNIMS. 

The DWSRF data reporting period ends annually on

June 30th and final numbers are submitted to EPA

through an established website by a September deadline. States may report only information for the most

recent fiscal year and are requested to submit any

changes or corrections to the prior year only.

5.4.3

Use of the DWSRF Financial Indicators

There are seven financial indicators calculated through

DWNIMS. These figures help to give EPA and the

states a means to track program progress and explore

initial assessments of overall program health.

Information is collected for the following types of

DWSRF indicators: 

• Return on federal investment,

• Assistance provided as a percent of funds available,

• Disbursements as a percent of assistance provided,

• Additional assistance provided due to leveraging,

• Net return/loss after repaying match bonds and forgiving principal,

• Net return on contributed capital, and

• Set-aside spending rate

Programs use these indicators to develop various

assumptions on program health and to assist during the

financial planning process for the program. EPA also

uses these indicators to help prepare the DWSRF PART

response for OMB. As described earlier in Section

2.1.1 of this handbook, PART is a series of questions
Chapter 5 / Section 5.4

65

that seek to assess the purpose, management, and performance of individual programs, including the

DWSRF. Programs must demonstrate that their purpose is clear, that they are results-oriented, that they are

well managed, and that they achieve intended results.

Program effectiveness, as evaluated through the PART

process, also plays a role during the development of the

President’s Budget by providing relevant information

for allocating limited funds to programs that can best

demonstrate success.

KEY RESPONSIBILITIES: CHAPTER FIVE: 5.4

Reporting for the Drinking Water National Information Management System

(DWNIMS)

EPA

• EPA must ensure states report timely and accurate information through the DWNIMS data system.

State Program Office

• The DWSRF data reporting period ends annually on June 30th, and final numbers are submitted to EPA through an

established website by a September deadline.

• States may report only information through DWNIMS for the most recent fiscal year and are requested to submit

any changes or corrections to the prior year only.
Chapter 6 / Section 6.1 66

6.1

State and EPA Annual Review Process

6.1.1

Purpose

The main purposes of an annual review are to evaluate

the DWSRF program’s financial and operational health

and check its compliance with relevant statutes, regulations, and grant conditions. The review focuses on the

DWSRF’s activity over the previous year and includes

actions and agreements that affect the program. EPA

regional staff generally conducts part of the review at

the state offices and use the visit as an opportunity to

assess the state’s capacity to run its program. Opening

and exit interviews, as well as specific meetings to discuss new requirements and initiatives, are a valuable

means of improving DWSRF management in the shortand long-term. 

6.1.2

EPA Responsibilites

The annual review is central to EPA’s oversight of the

DWSRF program and thus encompasses all aspects of a

state’s operations. The 2004 Annual Review Guidance

for Clean Water and Drinking Water State Revolving

Fund (SRF) Programs provides a comprehensive discussion of core review elements and a checklist for EPA

regional staff to complete during the review and submit

to EPA Headquarters with their PER. Beyond these

core components, regions may emphasize certain elements of the DWSRF program based on situational

knowledge and past reviews. To help ensure that the

state and EPA are on the same page, regions are encouraged to share a draft of the PER with the state and to

discuss findings and proposed action items clearly. 

EPA’s general responsibilities for the annual review

begin with an assessment of the state’s progress and

performance in achieving goals and objectives as identified in the IUP and reported through the state’s

Annual/Biennial Report. EPA also reviews a selection

of programmatic and financial project files, often onsite

at the state program offices, to determine program

compliance with federal requirements, adequacy of

environmental reviews, and eligibility of program recipients and assistance activities.

Specific review activities are used to ensure:

• Program operation is in accordance with established

OA (if applicable), 

• Program is achieving the intent of Section 1452 and

other pertinent sections of SDWA,

• Program coordinates with other water quality and

drinking water programs in the state, as appropriate, 

• Program is in compliance with Part 31 of the general

grant regulations and the provisions of the capitalization grant agreements, and

• Assistance activities are eligible through the DWSRF

program

CHAPTER 6

EPA Oversight Activities

KEY POINTS IN CHAPTER 6

• The annual review is central to EPA’s oversight of the

DWSRF program and thus encompasses all aspects of a

state’s operations.

• EPA’s general responsibilities for the annual review begin

with an assessment of the state’s progress and performance in achieving goals and objectives

identified in the IUP.

• In addition to the annual reviews of state DWSRF programs, EPA Headquarters also conducts oversight reviews

of each individual regional office.
Chapter 6 / Section 6.2 67

Additional focus areas include EPA’s annual review of

the financial status and performance of the Fund and

set-aside accounts. Financial review of the Fund

includes assurance of state match, assessment of binding

commitment requirements, use of appropriate cash draw

procedures, compliance with audit requirements, use of

appropriate assistance terms and fees, and proper assessment of borrower creditworthiness. EPA also confirms

that the state is completing all Federal Cash Transaction

Reports (FCTRs) and Financial Status Reports (FSRs) as

required by the EPA Office of Grants and Debarment.

EPA’s review of the DWSRF set-aside accounts includes

an evaluation of work completed as defined through the

set-aside work plans, assessment of adherence to federal

requirements, and evaluation of overall set-aside expenditure rates. 

In addition to EPA’s review of financial and programmatic requirements for the DWSRF program, the EPA

regional review team will perform an examination and

follow up on any open audit findings and check the status of any prior year PER recommendations. Finally,

EPA may note state progress and initiatives with regard

to the public health benefits of the program and look

for opportunities to improve overall management of

DWSRF programs, including marketing efforts, information systems, and strategic planning. 

6.2

EPA Regional Review Process

6.2.1

Purpose

In addition to the annual reviews of state DWSRF programs conducted by EPA regional offices, EPA

Headquarters also conducts periodic oversight reviews of

each individual regional office. These reviews focus on

ensuring EPA regional staff is conducting an appropriate

level of management oversight for each state DWSRF

program in their jurisdiction. These reviews take into

consideration how the EPA regional office tracks state

program activities, ensures proper use of federal funds,

and conducts annual DWSRF program reviews. 

EPA Headquarters works with the region to discuss each

state program individually with a highlight on program

performance and successful public health protection.

Additional topics of review include:

• PER follow-up,

• Review of audit findings,

• Financial management of the program,

• Set-aside utilization,

• Program pace,

• Terms and conditions of assistance,

• IUP goals,

• Priority list development and actual projects funded,

• Coordination between the State DWSRF and PWSS

program,

• Reporting through DWNIMS, and

• Status of required work plans and other reports

The EPA Headquarters review team provides oversight

responsibilities to ten EPA regional offices. In turn,

these regional offices oversee all fifty-one state DWSRF

programs. This unique national perspective helps EPA

Headquarters better assist the EPA regional offices.

EPA Headquarters often provides valuable solutions

and recommendations that help improve program assistance and oversight activities. On average, the EPA

Headquarters review team visits approximately five EPA

regions per year. 

General Steps in Annual Review Process from State Perspective

Preparation for EPA On-Site Visit

Submittal of Annual/Biennial Report Preparation of Annual/Biennial Report

Facilitate EPA On-Site Visit

Receipt and Comment on

Program Evaluation Reports

Figure: General steps in the annual review process from a state perspective from submittal of annual/biennial report to state receipt and

comment on Program Evaluation Report.
Chapter 6 / Section 6.2 68

KEY RESPONSIBILITIES: CHAPTER SIX

EPA Oversight Activities

EPA

• Conduct the annual review of each DWSRF program to assess performance and to ensure compliance with

SDWA, the DWSRF regulations, the grant management post-award monitoring requirements, and applicable

bond indentures.

• Assess the financial health and management capacity of each DWSRF, working with the state to improve program

operations. 

• Document and work to resolve any findings of noncompliance or concerns about DWSRF program management. 

• Participate in EPA Headquarters reviews of each EPA regional office to discuss DWSRF program performance

and compliance.

State Program Office

• Submit the Annual/Biennial report and supporting documents to EPA in accordance with the agreed-upon

schedule. 

• Provide project files, documented procedures, and staff time to facilitate EPA’s annual review. 

• Comment on EPA’s draft PER and work with regional staff to finalize this document.
Chapter 7 / Section 7.1 69

7.1

Assessing Implications of Fund

Management Decisions

7.1.1

The SRF Fund Management Handbook

To assess SRF financial performance, EPA has provided

tools to assist state programs

in conducting SRF strategic

planning. For example, the

SRF Fund Management

Handbook, released by EPA

in 2001, provides a “how

to” guide for SRF managers

to conduct SRF strategic

financial planning activities.

The handbook is organized into three sections including

Strategic Management, Fund Management Issues, and

Analytic Tools and Techniques. 

The Basic SRF Fund Management Model described

through this document provides information on strategic planning, program management, and program evaluation. Key objectives for sound fund management

include a goal to fund projects with greatest public

health benefits. The Fund Management Manual further describes how to manage the Fund effectively in

order to provide the maximum amount of assistance

over the long-term while maintaining the overall purchasing power of the fund. Financial considerations

discussed through this document include the use of various types of loan terms, the proper management of

investment returns, the best use of Fund resources, and

an exploration of options in loan portfolio management

approaches. Financial planning activities help the SRF

reevaluate program goals and set lending terms for

future assistance.

7.1.2

SRF Loan Portfolio Analysis

Proper loan portfolio analysis requires a direct understanding of the financial conditions for each borrower.

For example, DWSRF programs with loan portfolios that

have a large proportion of financially weaker borrowers

may consider off-setting factors that increase the assurance of repayment. Such factors may include additional

security for loan repayment beyond pledges of revenues

from user charges, such as pledging the full faith and

credit of a community. Loan portfolios should also be

evaluated with respect to loan terms that may affect the

ability of borrowers to make repayments in the future.

For instance, programs should be careful to consider

how the use of “balloon” and interest-only repayment

options may affect the overall health of the Fund. 

Assessing the financial condition of the DWSRF loan

portfolio can serve a number of purposes. Proper evaluation of the loan portfolio, for example, can serve to

CHAPTER 7

Revisiting the Program Structure

KEY POINTS IN CHAPTER 7

• To assess SRF financial performance, EPA has provided

tools to assist state programs in conducting SRF

strategic planning, including the SRF Fund Management

Handbook.

• Financial planning activities help the SRF reevaluate

program goals and set lending terms for future

assistance.

• The SRF planning model helps states make the best

planning decisions for their Drinking Water SRFs.
Chapter 7 / Section 7.1 70

assess the likelihood that all outstanding loans will be

repaid on time. Any identified risks or potential default

rates should be incorporated during the financial planning process. Assessing the loan portfolio can also be

used to provide feedback on a program’s financial capability review process. Analysis of the loan portfolio can

help to determine if DWSRF program procedures are

adequate to appropriately categorize the financial condition of borrowers.

For additional, more detailed, information on loan portfolio management and analysis, please refer to EPA’s

2001 SRF Fund Management Handbook.

7.1.3

Use of the SRF Planning Models

The SRF Financial Planning Model was developed by EPA

to assist states in assessing both short- and long-term

effects of Fund management decisions. The SRF planning model helps states make the best planning decisions

for their Drinking Water SRFs. For example, the model

allows state staff to produce output in both reports and

graphs to illustrate the effects of various scenarios on the

ability of the SRF to provide assistance in the present and

future. These outputs include sources and uses of funds,

pro-forma-financial statements, and graphs showing annual project commitments and disbursements.

The SRF Financial Planning Model allows states to

assess the impact of many variables including changes to

the loan interest rate, investment returns, Fund utilization rates, the use of leveraging, alternate levels of setaside expenditures, and changes to the level of disadvantaged community subsidy provided.

Annual Project Disbursements for a Sample State's DWSRF

0

5

10

15

20

25

30

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

Millions of 2006 Dollars

Annual Project Disbursements for a Sample State’s DWSRF
Chapter 7 / Section 7.1 71

KEY RESPONSIBILITIES: CHAPTER SEVEN

Revisiting the Program Structure

EPA

• To help states assess SRF financial performance, EPA provides tools to assist state programs in conducting SRF

strategic planning.

State Program Office

• States use the SRF Financial Planning Model to help assess both short- and long-term effects of Fund management decisions. Financial planning activities help states make the best management decisions for their Drinking

Water SRFs.
72

APPENDIX A

REFERENCES

Cross-Cutting Federal Authorities: A Handbook on

Their Application in the Clean Water and Drinking

Water State Revolving Fund Programs Unavailable Online

EPA DWSRF Homepage

• Program Guidance

• Fact Sheets and Reports

• Tribal and Territorial Programs

• Program Data

• Related Programs

• Contact Information http://www.epa.gov/safewater/dwsrf.html

Federal Budget http://www.whitehouse.gov/omb/budget/

Federal Legislative Information http://thomas.loc.gov/

House Budget Committee http://www.house.gov/

House Committee on Appropriations http://appropriations.house.gov/

PART Process http://www.whitehouse.gov/omb/part/

Senate Budget Committee http://budget.senate.gov/

Senate Committee on Appropriations http://appropriations.senate.gov/

SRF Fund Management Handbook See EPA DWSRF Homepage

The Drinking Water State Revolving Fund Program:

Financing America's Drinking Water from the Source

to the Tap, Report to Congress See EPA DWSRF Homepage

Water Infrastructure: Information on Federal and

State Financial Assistance www.gao.gov/new.items/d02134.pdf
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EPA DISCLAIMER: This document is intended to be purely informational and is based on SDWA provisions,

EPA regulations, guidance, and established policy effective at the time of publication. It does not substitute for

the applicable provisions of statutes, and regulations, guidance, etc., nor is it a regulation itself. Thus, it does not

impose legally-binding requirements on EPA, States, or the regulated community.
EPA-816-B-06-007

October 2006

Printed on Recycled Paper

Office of Ground Water and Drinking Water (4601)

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