United States

Environmental Protection

Agency

Office of Water

(4606)

EPA 816-R-00-004

July 2000

The Drinking Water State

Revolving Fund Program

Case Studies in Implementation

II. Capacity Assessment

Printed on Recycled Paper
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The 1996 SDWA Amendments establish a strong new emphasis on preventing

contamination problems through source water protection and enhanced water

system management. Capacity development is an essential component of the Acts

new preventative focus. Water system capacity is the ability to plan for, achieve,

and maintain compliance with applicable drinking water standards. For a system to have capacity, adequate capability in three key areastechnical, managerial, and financialis necessary. The capacity assessment process for DWSRF

loan applicants provides a valuable opportunity for States to work with systems

to assure public health protection, compliance and financial viability.
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iii

I. Introduction .................................................................................................. 1

II. State Summaries ......................................................................................... 3

Alaska ........................................................................................................ 3

Arizona ...................................................................................................... 5

Florida ........................................................................................................ 7

Indiana ....................................................................................................... 9

South Dakota ............................................................................................ 10

Vermont ................................................................................................... 13

III. Conclusion................................................................................................ 15

Appendix A

Attachment 1: Alaskas Capacity Assessment Worksheet

Attachment 2: Alaskas SDWA Compliance Agreement

Attachment 3: Floridas Capital Financing Plan Worksheets

Attachment 4: South Dakotas Capacity Assessment Worksheet (Part I - Applicant)

Attachment 5: South Dakotas Capacity Assessment Worksheet (Part II - State)

Attachment 6: Vermonts Priority List Application/Letter of Intent

Attachment 7: Vermonts Staff Capacity Review Form and Standard Loan

Conditions

Contents
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1

I. Introduction

1

For consistency, the acronym DWSRF is used throughout the paper even though some states use another

acronym to refer to their program.

to ensure their compliance with the SDWA. If a

state provides assistance to systems that lack

capacity, it must describe the process it will use to

ensure that each system makes the feasible and

appropriate changes in operations necessary for

long-term compliance with the Act. If a state

provides assistance to systems in significant

noncompliance with any requirement of a national

primary drinking water regulation or variance, it

must describe the process it will use to ensure that

the systems return to compliance.

This document examines the programs that Alaska,

Arizona, Florida, Indiana, South Dakota, and

Vermont have developed to evaluate the capacity of

systems applying for Drinking Water State Revolving Fund (DWSRF1

) assistance. It describes each

states capacity evaluation process, including the

documentation that systems must supply and the

procedures the state follows to evaluate and document capacity determinations. The descriptions of

projects in each state include examples of feasible

and appropriate changes required of systems that

lacked capacity prior to receiving loans and the

ramifications (where specified) of failing to make

those changes.

EPA is providing this information to generate ideas

among states for modifying capacity assessment

procedures. In selecting states for the report, the

Agency wished to summarize a practicable number

of state programs while maintaining a representative

cross-section of EPAs ten regions. The Agency

notes that there are numerous other state programs

that could have been featured in this report and

encourages readers to visit other states websites

for additional examples of assessment tools.

The 1996 Safe Drinking Water Act (SDWA)

Amendments authorized the Drinking Water

State Revolving Loan Fund (DWSRF)

Program, which provides states with funding to

address important drinking water projects that are

needed to ensure public health protection and

compliance with SDWA. In an effort to ensure that

funds are used wisely and efficiently, the Amendments limit the assistance which states can provide

to drinking water systems that cannot comply with

the Act. Section 1452(a)(3)(A)(i) specifies that no

assistance shall be provided to a public water

system that does not have the technical, managerial,

and financial capability to ensure compliance with

the requirements of this title. The section also

prohibits state assistance to any system in significant noncompliance with any requirement of a

national primary drinking water regulation or

variance (unless) the use of the assistance will

ensure compliance.

The SDWA Amendments also establish requirements for the owners and operators of drinking

water systems in the area of technical, managerial,

and financial capability (known collectively as

capacity). Under §1452(a)(3)(B), if a system

lacks capacity, its owner or operator must agree to

undertake feasible and appropriate changes in

operations (including ownership, management,

accounting, rates, maintenance, consolidation,

alternative water supply, or other procedures) if the

state determines that the measures are necessary to

ensure that the system has the technical, managerial,

and financial capability to comply with the requirements of this title over the long term.

EPAs February 1997 Guidelines and April 1999

Draft Program Rules provide additional guidance

regarding these requirements. The Draft Program

Rules require each state to describe in its capitalization grant application the process it will use to

assess the capacity of systems that seek assistance
2

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3

II. State Summaries

Alaska

The Alaska Department of Environmental Conservation (ADEC) administers the states DWSRF

program. ADECs Division of Facility Construction

and Operation performs the capacity assessment of

all loan applicants. Although the state is considering expanding assistance to privately owned systems, at this time, the state provides loans only to

municipal systems (18 AAC 76.210). ADEC used

an EPA-approved decision tree process to assess

system capacity from 1997 to 1999. To better meet

the administrative needs of the state, Alaska now

uses a worksheet-based assessment process to

evaluate capacity in DWSRF loan applicants. When

this report was prepared, the state had awarded two

loans using the new assessment process.

Capacity Evaluation Process

Alaskas DWSRF application process is described

in state regulations at 18 AAC 76.225 et. seq. The

regulations specify the documentation that must be

submitted by the system and the evaluation criteria

that the state uses to assess applicants capacity.

Data Collection

Under 18 AAC 76.225, systems must submit:

1. A complete application.

2. A resolution adopted by the applicants

governing body that authorizes the application.

3. A description of the proposed project.

4. An analysis of the feasibility of the project

identifying necessary permits and the cost.

5. Documentation of dedicated source of repayment revenue.

6. Certification of a separate account to receive

and administer state funds.

7. A financial capability assessment form demonstrating the systems ability to repay the

loan and to operate and maintain the system

after completion of the project.

8. Certification that the system can legally incur

the debt.

9. Plans and specifications prepared by a registered engineer.

As listed under 18 AAC 76.240, the required

financial capability assessment form (item 7, above)

requires documentation of the following factors,

where applicable:

1. Certification of debt service requirements and

debt service coverage test.

2. The applicants:

 Ability to assess and collect revenues for

the project.

 Debt repayment history.

 Current and overall structure of debt

repayment.

 Revenue bond credit rating.

 Financial statements.

 Financial history.

 Recent levels of debt retirement, operations, or similar fund balances.
4

 Compliance with state and federal

environmental laws.

 Levels of financial reserves and prospective judgments from litigation.

 Adherence to past and current debt

resolutions.

 Capital improvement plan and proposed

debt issuance program.

3. A utility rate feasibility study.

4. Any litigation or threatened litigation that may

affect the applicants ability to repay.

5. The demand for the project.

6. Demographic and economic trends in the

proposed service area.

Along with the required submissions, the state

requires completion of a capacity assessment

worksheet. The worksheet is designed to educate

potential loan recipients about state and federal

capacity assessment requirements and to provide

information that the state will need to adequately

assess capacity and award loans. It is organized by

the three components of capacity and consists of a

series of questions with documentation requirements (e.g., financial records and feasibility studies)

to help reviewers determine capacity (see Appendix

A, Attachment 1).

To evaluate the technical capacity of loan applicants, ADEC has developed questions concerning

existing facilities, existing water source, peak

pressure and demand, certified operators, and

compliance history. The questions considered in the

evaluation of financial capacity address total user

charge revenues and total system expenses, other

revenue sources, fairness and affordability of user

charges, cash budgeting, preparation and use of

annual and capital budgets, and periodic financial

audits. Questions concerning managerial qualifications and experience, organizational structure,

compliance history, training programs, preventative

maintenance programs, record-keeping, public

outreach, and system ownership are considered to

evaluate managerial capacity. Additional information or documentation must be submitted as necessary to fully answer the questions and assist the

state in the evaluation.

Capacity Evaluation

When a system has completed and submitted all of

the capacity evaluation materials required by rule

and in support of the capacity assessment

worksheet, ADEC begins the evaluation process.

Evaluations are conducted by staff engineers in the

Division of Facility Construction and Operation and

by representatives of the local government entity

applying for assistance. After reviewing all of the

materials, ADEC prepares a report in the same

format as the worksheet documenting its determinations for each area of capacity.

The report also outlines the feasible and appropriate changes in operation systems must make to

ensure that they will be able to comply with all

drinking water regulations as a result of the

DWSRF loan. Systems deemed to be significant

non-compilers (SNCs) also sign a Safe Drinking

Water Act Compliance Agreement, (see Appendix

A, Attachment 2). The agreement indicates the

actions the system must take to come into compliance and sets a schedule for their completion.

ADEC has established 11 financial assistance

conditions under 18 AAC 76.245 to which all

assistance recipients must adhere. The conditions

are designed to ensure a fair process (e.g., documentation of a competitive bidding process for all

loans of $50,000 or more) and financial viability

and management capability over the long term (e.g.,

use of generally accepted accounting principles and

preparation and submission of an operation and

maintenance manual). To confirm compliance

ADEC can, in its discretion, make site visits to

inspect construction progress and to determine

compliance with 18 AAC 76.200 - 18 AAC

76.265.

For More Information Contact:

Alaska Department of Environmental

Conservation

Kevin Colanado, phone (907) 269-7696

www.state.ak.us/dec/dfco/dec_mlns.htm
5

Project Descriptions

Two systems for which ADEC approved loans

lacked technical capacity, but the systems will

achieve compliance with the Surface Water Treatment Rule (SWTR) as a result of the loans. According to ADECs capacity assessment:

System A currently has disinfection treatment

facilities for three sources. At this time, two of

the three sources are unfiltered and only receive

chlorine disinfection treatment. Source 1 is of

lower quality than the other sources, and is

treated using the existing 3.5 mgd filtration system at the water treatment plant. Source 1 is

expected to only be used as an emergency water

source to supplement the unfiltered water

sources. The plan process appears adequate to

meet the Surface Water Treatment Rule for effluent turbidity and Giardia removal; however,

the treatment plant will need to be evaluated to

ensure full compliance with the Surface Water

Treatment Rule before System A is allowed to

use Source 1 as a primary or secondary source.

System A is constructing the necessary contact

tanks, related upgrades, and disinfection facility

improvements to achieve compliance. When the

project is complete, it is anticipated that all primary

water sources will satisfy the SWTR by meeting

either the disinfection and filtration requirements or

by meeting all filtration avoidance criteria. ADEC

and System A have signed a Safe Drinking Water

Act Compliance Agreement.

System B also lacks the technical capacity to

comply with the SWTR. According to ADECs

capacity evaluation:

System B does not meet all capacity requirements for their treatment facilities. System B

currently utilizes a surface source impoundment

with no filtration and has not pursued filtration

avoidance.... Gaseous Chlorination is currently

the only treatment that System Bs water receives.

System Bs proposed project will provide a new

water treatment facility consisting of ozonation

followed by slow sand filtration that will allow the

system to comply with current and future federal

and state drinking water regulations.

Arizona

The Arizona Water Infrastructure Finance Authority

(WIFA) administers the states DWSRF. WIFA

coordinates with the Arizona Department of Environmental Quality (ADEQ) and the Arizona Corporation Commission (ACC) in implementing the

program. The state provides assistance to publicly

and privately owned water systems.

Capacity Evaluation Process

Data Collection

To receive a loan, systems on the list must provide

evidence of capacity though the submission of the

following documentation:

Technical Capacity

 A copy of each feasibility study, engineering

report, design memorandum, set of plans and

specifications, and other technical documentation related to the proposed project.

 Copies of the resumes or biographies of, or

related information about, the certified operators, system employees, or contractors employed by the applicant to operate and maintain the existing facilities and the proposed

project.

 A description of the service territory, including maps.

 A description of the existing physical facilities.

Financial Capacity

 A description of the systems dedicated

revenue source for repaying financial assistance (including the amount of money collected through the source for each of the

previous 5 fiscal years), an estimate of the

amount that will be collected for the current

fiscal year, and a projection of the amount that

will be collected for each of the next 5 fiscal

years.

 An estimate of the project costs, including

planning, design, construction, annual operation, maintenance, and replacement costs.
6

 A copy of each financial statement, audit, or

comprehensive financial statement from the

previous 5 fiscal years.

 A copy of each budget, business plan, management plan, or financial plan from the previous

3 fiscal years and the current fiscal year.

 A summary of current user fees for drinking

water or wastewater services, including any

resolutions passed by the governing body of a

political subdivision.

 The most recent capital improvement plan or

other plan explaining proposed infrastructure

investments.

 Copies of documentation relating to outstanding indebtedness, including official statements, financial assistance agreements, and

amortization schedules.

 The number of connections to be served by the

proposed project.

Managerial and Institutional Capacity

 Copies of resumes, biographies, years of

experience, terms of office, and related

information pertaining to the owners, managers, chief elected officials, and members of the

applicants governing body.

 A list of professional and outside services

retained by the applicant for the proposed

project.

Arizona also requires documentation of legal

capability. An applicant must provide information

showing that it is legally authorized to enter into

indebtedness. Privately owned systems must

demonstrate debt authorization from the ACC.

In addition to providing the above information, all

applicants must complete a WIFA Project Finance

Application. The application requests information

regarding budgets, project engineering reports,

feasibility studies, and capital improvement plans.

Local borrower information, demographic data,

detailed project information, and more detailed

financial information, such as audited financial

statements or annual reports, are also required.

Capacity Evaluation

System capacity is assessed after the project priority

list has been determined. The first step is completion of a Due Diligence Review by a team of

WIFA staff members and staff members from the

ADEQ, the ACC, and the Arizona Department of

Water Resources. A series of yes/no questions guide

the due diligence reviewer in analyzing applicants

for financial assistance. Negative answers (either

yes or no responses depending on the question

asked) require a narrative explanation. Each team

member reviews information submitted by the

system. Team members may interview systems

directly, if necessary, to obtain further information.

Due Diligence Reviews usually take only a few

days to complete.

Next, the Project Finance Committee (comprised of

a certified engineer and five members of WIFAs

Board of Directors) reviews all information submitted by the system and obtained during the Due

Diligence Review. When the final review is complete, the Committee may recommend feasible and

appropriate changes, if necessary, and refer the

project/loan to the WIFA Board of Directors.

The Board, comprised of 12 members which

represent a variety of water system industry constituents, ultimately reviews all loans. Following a

review of the project and system capability (including past compliance with the SDWA and state rules

and regulations), the Board can approve the loan

and recommend modifications, or deny the loan.

Project Descriptions

System A provides water service through two

physically separate systems that need extensive

rehabilitation to satisfy an ADEQ Consent Order. A

loan for approximately $620,000 was requested to

construct a new well, pressure tank, and storage

tank for system A(1), a storage tank and booster

pump for system A(2), and to extensively rehabilitate and replace distribution system piping for both

For More Information Contact:

Water Infrastructure Finance Authority

(WIFA) of Arizona

Greg Swartz, phone (602) 230-9770
7

systems. Concerns about System As financial

capacity were raised during the Due Diligence

Review. WIFA staff recommended limiting the loan

to $600,000 and prioritizing and phasing improvements to ensure the systems ability to repay the

loan. Staff further recommended a Deed of Trust

and other security (i.e., life insurance) as available.

The WIFA Board approved a 20-year loan for

$600,000.

Florida

The Florida Department of Environmental Protection (DEP) administers the DWSRF for the state.

Two bureaus in DEPs Division of Water Facilities

share the responsibility of assessing capacity for the

purposes of awarding loans. The Bureau of Water

Facilities Regulation (BWFR), through its Public

Water System Supervision program (PWSS), is

primarily responsible for evaluating technical and

managerial capacity. The Bureau of Water Facilities

Funding (BWFF) focuses on financial capacity, but

also looks at the other elements of capacity through

operator certification, and the review of facility

plans and sanitary surveys. The state provides

assistance to publicly and privately owned water

systems.

Capacity Evaluation Process

 Data Collection

Florida Administrative Code Chapter 62-552

requires applicants to submit:

 Plans and Specifications.

 A Water Facilities Plan.

 A Request for Inclusion on the Priority List

for Drinking Water Facilities.

 A Loan Application.

Besides the submissions required by the rule, DEP

uses data from sanitary surveys to assess capacity.

DEP has developed a Drinking Water Manual which

contains checklists, worksheets, and application

forms. The manual serves as a guide for loan

applicants as they develop materials necessary for

the assessment of capacity, and for DEP staff in the

data collection process. The manual is available

online at: www.dep.state.fl.us/water/wff/pubs/

dwmanual/toc_pic.htm.

To assess water system capacity, DEP primarily

relies on information in the water facilities plan

(including the capital financing plans) and in the

sanitary survey results of systems. The information

discussed below, gathered from these sources, is

used for the assessment.

Technical Capacity

 A detailed description of the current system

and the proposed project, including maps of

the planning area.

 The systems expectations about meeting

federal and state drinking water regulations

and future water demand.

 A discussion of alternatives investigated.

 Documentation of operator certification.

 A description of the source and an evaluation

of how susceptible it is to contamination.

 Storage capacity, treatment type, and maintenance schedules and procedures.

 Documentation of system compliance history.

Financial Capacity

 Other revenue sources (if applicable).

 Cash budgeting.

 Water system rate setting frequency.

 Actual/projected revenues and debt coverage.

 Information on median household income,

size, etc. of population served.

 Total annual project costs for a 5-year period.

 Existing and anticipated debt for a 5-year

period.

 Projected annual operations, maintenance, and

replacement costs; debt service and other

expenses of the utility (providing DWSRF

dedicated revenues) for existing facilities;

DWSRF proposed project(s); non-DWSRF
8

proposed projects (if any); and the sum of all

existing and planned facilities.

 Projected annual operating, non-operating, and

other utility revenues, assuming all planned

projects are constructed according to reported

schedule.

 Explanation of how any net loss will be

covered to keep the utility financially selfsufficient for the next several fiscal years.

 Average water system charges, fees, and

assessments.

 Information on prior and parity liens.

 Loan repayment reserve requirements.

 Certification by the project sponsors chief

financial officer or by an authorized official

that the project sponsor has the financial

capability to ensure adequate construction,

operation, and maintenance of the water

system.

Managerial Capacity

 Identification of the system owners and

manager.

 Description of the systems organizational

structure.

 Demonstration of a reliable chain of decision

makers in the operation of the facility.

 Documentation of written policy guidances.

 Compliance history.

 Emergency preparedness plan.

 Copies of contracts or agreements that provide

auxiliary power or backup water to or from the

system.

 Sampling plans.

Capacity Evaluation1

Technical Capacity

Technical capacity is evaluated jointly by the PWSS

program (BWFR) and the BWFF Operator Certification program. The PWSS program assesses

technical capacity based on data from sanitary

surveys and water facilities plans. The Operator

Certification program ensures that the individuals

employed to operate the system are properly

licensed and have demonstrated the knowledge and

abilities necessary, based on the systems unique

characteristics, to properly operate the system.

Staffing requirements for the system are monitored

through reviews of monthly operating reports and

periodic inspections by the district office responsible.

Financial Capacity

BWFF is primarily responsible for the financial

capacity review. A systems financial capacity is

evaluated through the Capital Financing Plan (see

Appendix A, Attachment 3) and the loan application.

Managerial Capacity

The PWSS program uses sanitary surveys to

determine managerial capacity. Capacity is evaluated through plant records (including monthly

operating reports), chemical reports, and staffing

levels. Adequacy of record keeping, the use of

written policy guidances, and the systems compliance history are also considered. The Water Facilities Plan is reviewed for documentation of organizational structure, operator certification, and a demonstrated chain of decision makers.

Project Descriptions

System A is a good example of a small water

system that will meet capacity requirements as a

result of a loan. The system came to DEPs attention because of a series of monitoring and reporting

1

DEP is currently working on a more formalized means

of assessment such as evaluation worksheets.

For More Information Contact:

Florida Department of Environmental

Protection, Division of Water Facilities

Tim Banks, phone (850) 488-8163

www.dep.state.fl.us/water/wff/dwsrf/

default.htm
9

(M&R) violations. The system was poorly maintained and had serious problems with the reverse

osmosis units that were treating its wells. DEP

found the system to lack technical and managerial

capacity. Financial capacity was also a concern, but

it was determined that the system would be financially solvent after a rate increase. System A was

issued a consent order which required the system to

physically interconnect with another system. The

consent order also required a state-appointed

receiver. The loan will be used to pay for such

construction costs as piping to connect the systems.

The Grant/Loan Agreement requires the system to

implement recommended operational procedures

and conduct frequent inspections in conjunction

with sanitary surveys.

Indiana

Indianas DWSRF program is managed jointly by

the Indiana Department of Environmental Management (IDEM) and the State Budget Agency. Their

respective authorities are outlined in state statutes

and further described in a Memorandum of Understanding (MOU) between IDEM and the Budget

Agency. IDEM evaluates technical and managerial

capabilities. It has the authority to deny funding to

applicants on the project priority list (PPL) that do

not or cannot demonstrate technical and managerial

capacity. The State Budget Agency determines the

financial capacity of each political subdivision or

water system (private or not-for-profit) and can

deny funding to applicants that do not or cannot

demonstrate financial capacity. The Budget Agency

also prepares and executes each Financial Assistance Agreement (IC 13-18-21-6).

Capacity Evaluation Process

Data Collection

To assess the capacity of eligible systems, Indiana

relies primarily on the information in the Loan

Application, Due Diligence Form, and Preliminary

Engineering Report.

To be placed on the PPL, a public water system

must complete a loan application. Indianas loan

application contains two yes/no questions that

address capacity: (1) Does your system currently

possess capacity? and (2) If not, will capacity be

achieved after implementation of your communitys

DWSRF project? If the system responds no to either

question, and the financial assistance requested

through the DWSRF will not directly provide the

resources to meet the capacity criteria, the system

must submit a plan which describes the steps it will

take to ensure adequate capacity (Draft FY 1999

IUP). In establishing the PPL, IDEM relies on the

communitys self-assertion on the loan application

that no deficiencies exist.

For each project on the PPL, the applicant must

complete a comprehensive due diligence form (327

IAC 14- 6-1). The due diligence process provides

financial disclosures advising the state of economic

matters related to the political subdivision and their

ability to repay the loan (327 IAC 14-2-10). The

questions on the form range from general inquiries

about the size and type of system to detailed questions concerning customer base and outstanding

debt through 2025.

Applicants are also required to prepare a preliminary engineering report for each project on the PPL.

The report must summarize the project, discuss

possible alternatives to the project, provide environmental information, and describe the public participation process and the required public hearing (327

IAC 14-7-1). The report provides much of the

technical and managerial information used to assess

capacity.

A preliminary design summary will be added as a

component of the DWSRF loan application. This

summary will contain a detailed description of

system components (i.e., treatment plant and water

mains) including the quantities and associated sizes/

capacities being proposed for SRF funding.

Capacity Evaluation

The first step in the evaluation of a systems capacity is a meeting to discuss the development of the

preliminary engineering report and inform the

For More Information Contact:

Indiana Department of Environmental

Management (IDEM), Office of Water

Management

Larry Lazard, phone (317) 233-5962

www.state.in.us/idem/owm/planbr/dwsrf/

geninfo.html
10

or appointed, etc.). Systems are also encouraged to

submit a chart that shows the hierarchy of staff

positions and a summary of the training plan that is

being implemented for staff at all levels of certification. In its assessment of managerial capacity,

IDEM will look for demonstrated interactions with

external entities (e.g., membership in professional

trade associations, interaction with the community

through public meetings, etc.).

At the time this report was written, Indiana had not

denied a loan to any system because of deficiencies

in technical, financial, or managerial capacity and

only the standard terms and conditions in the states

Financial Assistance Agreement had been applied.

South Dakota

The South Dakota Department of Environment and

Natural Resources (DENR) administers the

DWSRF program for the state through the Board of

Water and Natural Resources. Its administration

includes capacity assessments of systems applying

for loans. The evaluation process involves several

DENR offices including the Drinking Water Program and the Water and Waste Funding Program.

Drinking Water Program staff are primarily responsible for the assessment of capacity. Water and

Waste Funding Program staff also conduct technical

and financial reviews of water systems. After the

capacity review is complete, DENR representatives

present project and funding recommendations to the

Board for final approval. The state provides

assistance to publicly and non-profit privately

owned water systems.

For the purposes of its program, DENR defines the

elements of capacity as follows:

Technical Capacity: The physical infrastructure

of the water system, including but not limited to

the source water adequacy, infrastructure adequacy, and technical knowledge. Does the treatment system work the way it is supposed to? Is

the system providing the safest and cleanest water possible and required by law to customers

right now, and will it be able to in the future?

Financial Capacity: The financial resources of

the water system, including but not limited to

revenue sufficiency, credit worthiness, and fiscal controls. Basically, does the system have a

applicant of the items that it must include. At least

one representative of the community and one

representative of the engineering firm that is going

to construct the project must attend the meeting.

Once the preliminary engineering report is submitted, IDEM begins its review and assessment of the

loan application and supporting documentation.

Technical Capacity

To assess technical capacity, licensed professional

engineers on staff evaluate all of the projects

engineering-related components. First, they check

for a valid construction permit. If a permit is in

place, IDEM next reviews:

 The preliminary engineering report.

 The systems ability to meet quantity requirements.

 The results of bacteriological and chemical

sampling.

 Compliance with the wellhead protection rule

(for ground water systems).

 The results of sanitary surveys to assess the

adequacy of the infrastructure and the condition of the system and its components.

 Documentation of a designated certified

operator in responsible charge for all systems

serving more than 100 persons.2

Financial Capacity

Financial capacity is assessed by the Budget

Agency staff, primarily through a review of the

systems due diligence form. Reviewers search for

evidence of a dedicated source of repayment and

the ability of the system to repay each loan according to its terms and conditions.

Managerial Capacity

As with technical capacity, IDEM reviews the

preliminary engineering report to assess a systems

managerial capacity. In addition, it is recommended

that the system owner be identified and that the

membership of the utility board be described (e.g.,

are positions paid or voluntary, are members elected

2

Note that this requirement may change once Indiana

finalizes its rules for operator certification.
11

budget and enough revenue coming in to cover

costs, repairs, and replacements?

Managerial Capacity: The management structure of the system, including but not limited to

ownership accountability, staffing and organization, and effective linkages. In simpler terms,

does the system have a capable and trained staff?

Does it have an effective management structure?

Capacity Evaluation Process

Data Collection

Both the system and DENR provide information to

evaluate the capacity of a system applying for a

loan. Systems must complete an application form

and Part I of the Capacity Assessment Worksheet.

DENR has made the worksheets available to public

water systems via its website (www.state. sd.us/

denr/des/drinking/capacity.htm). DENR completes

Part II of the Capacity Assessment Worksheet by

using the information provided by the system and

augmenting it with data from state databases (i.e.

monitoring and violations data, sanitary survey

results, microbiological data etc.).

The evaluation process begins when a system

submits an application for DWSRF funds. The

application form includes a budget sheet, questions

regarding proposed methods of financing and

repayments, and general utility and project information. It requires the system to submit financial

planning, legal, and engineering documentation

(e.g., recent audits, articles of incorporation, a

facilities plan).

Part I of the Capacity Assessment Worksheet

contains a series of yes/no questions and is

organized according to the three components of

capacity (see Appendix A, Attachment 4):

Technical Capacity

Systems are asked questions on present and future

water supply, the water supply source, treatment,

and other system infrastructure (i.e., pumping,

storage, distribution).

Financial Capacity

Systems are asked questions about financial planning, rates, and billing. They are also required to

submit a budget worksheet, provide information

from the previous and current year, and make

financial projections for the next 3 years.

Managerial Capacity

Systems are asked about operator certification,

continued training and educational opportunities,

and knowledge of technical assistance opportunities. In addition, there are questions concerning

management structure and capability, regulatory

compliance programs, policies, system maintenance, emergency procedures, and safety measures.

To complete Part II of the Worksheet (see Appendix

A, Attachment 5), DENR staff review state databases for system information, source/facility

information, microbiological data, turbidity/enhanced surface water treatment rule information,

violations, chemical data, lead and copper data and

information, laboratory certification information,

and data concerning operator certification. Staff

also review compliance data and results from past

sanitary surveys.

This part of the Worksheet requires state staff to

answer questions about the technical and managerial capacity of the system. All of the financial

information is provided by the system.

Capacity Evaluation

DENR reviews the information using an evaluation

form comprising several yes/no questions that is

organized into the three components of capacity.

Both the evaluation form and Part II of the

worksheet provide space for reviewers to comment.

If the answer to any question is no, the reviewer

is asked if a DWSRF loan would ensure the correction of the problem. The final question in each

section asks the reviewer if the system does or

does not have capacity in the component being

reviewed.

Technical Capacity

The reviewer is asked to evaluate the systems

capacity (treatment, storage, pumping and distribution facilities) to meet current and future drinking

water treatment requirements and water quantity

demands, and to protect existing sources. Space is

provided for the reviewer to list requirements and

recommendations.

Financial Capacity

The reviewer is asked if the system produces and

uses an annual budget and if it is audited periodically. Several questions examine the systems

budget, including: Do revenues cover expenses? Is

the operating ratio greater than 1.0? Are the rates
12

less than or equal to 1.5 percent of the countys

average annual median household income (MHI)?

Managerial Capacity

The reviewer is asked to evaluate whether the

system meets all state operator certification requirements; if the system has had any violations of

drinking water regulations within the past 2 years

(and the relation of those violations to managerial

deficiencies); and if the system has adequately

maintained required records, distribution system

histories, and compliance information.

The evaluation concludes in one of three ways: (1)

Funding Recommended, (2) Funding Recommended

with Requirements, or (3) Funding Denied. Requirements may include creating a source water

protection plan or developing a cross-connection

control program, written operating procedures, or a

rate adjustment plan. Of the eleven loans that had

been issued at the time of this report, applicants

have either been recommended for funding or for

funding with requirements.

Following the final determination, DENR notifies

the system of the assessment results by mail and

describes the requirements to which the system

must agree for the state to issue the loan. The state

ensures that systems lacking capacity undertake the

feasible and appropriate recommendations

through contractor support and may condition

future financial assistance on the implementation of

the recommendations. For example, a system that

lacks technical capacity because of inadequate

storage may be denied full funding if storage needs

are not addressed.

Project Descriptions

DENR determined that System A possessed adequate capacity. Funding was recommended but

DENR also recommended that the system complete

several activities to maintain capacity:

 The system should develop a source water

protection plan after receiving the results of a

source water assessment conducted by DENR,

as required by the SDWA.

 EPA is developing new requirements involving disinfection and disinfection by-products.

The system will have to re-evaluate its disinfection process once the disinfectant/disinfection by-products rule is finalized.

 A valve exercise program should be started for

the water system. This program will help

ensure that the systems valves operate properly during an emergency.

 A cross-connection control program should be

started for the water system. Cross-connection

control inspection at each service connection

will help prevent the back-siphoning of water

from customer taps into the water lines.

 The amount of unaccounted-for water should

be calculated monthly.

 A plan to periodically increase water rates

should be developed. It is much easier to

provide for small, planned rate adjustments,

than it is to implement a large rate hike when a

crisis hits. Rates must be kept current with the

increasing costs of providing water.

System B was determined by DENR to have marginal technical capacity and was therefore recommended for funding with requirements. In a letter

to the system regarding the assessment results

DENR explains:

System B currently does not have enough storage to meet peak day demands. An additional

291 users are to be added to the water system in

the future. The addition of the new 550 gpm well

will alleviate some of the current storage problems; however, adding additional storage should

be the next water project System B undertakes.

When demands exceed the capacity of the storage facility, inadequate flow or pressure in the

system can result. This can affect the consumers

use of the water supply and create opportunities

for non-potable liquids to enter the system

For More Information Contact:

South Dakota Department of Environment

and Natural Resources (DENR)

Andrea Griese, phone (605) 773-6045

www.state.sd.us/denr/des/drinking/

capacity.htm
13

Capacity Evaluation Process

Data Collection

WSD assesses system capacity based on information from these documents:

1. Project Priority List Application/Letter of

Intent - contains a series of yes/no and short

answer questions on capacity issues to aid

WSD in screening loan applicants (see Appendix A, Attachment 6).

2. Loan Application - requires the applicant to

complete a capacity questionnaire and provide

additional information regarding proposed

project financing in addition to that applied for

from the DWSRF.

3. WSD Records (i.e., sanitary surveys, water

quality documents, etc.).

Information obtained from these documents that

factors into the eligibility decision includes:

Technical Capacity

 Water quality monitoring.

 Source water protection.

 Determinations of groundwater under the

influence of surface water.

 Sanitary survey recommendations.

Financial Capacity

 Current and projected water rates.

 Delinquent accounts.

 Financial planning.

 Payment of lawful fees.

Managerial Capacity

 Compliance status with current requirements

for an O&M manual.

 Operator certification.

 Long-range planning.

through cross-connections. Prolonged interruptions in water service represent a public health

hazard. Additional funding from this department

may be denied if additional storage is not included in the next water project.

DENR also made the following recommendations to

System B:

 The system should develop a source water

protection plan after receiving the results of a

source water assessment that will be conducted by the department.

 A qualified pump contractor should inspect all

pumping equipment annually to identify

potential problems and perform maintenance.

This will help extend the life and reliability of

the systems pumps.

 To prevent water main breaks, a routine

program for leak detection should be conducted and a record of distribution repairs

should be kept.

 A cross-connection control program should be

started for the water system.

 Written procedures for routine and emergency

system operations should be developed. These

written procedures may be as simple as a onepage list of instructions. They should cover

items such as daily operations/inspections,

start-up and shut-down procedures, and

response to equipment failure and other

emergencies.

 A plan to periodically increase water rates and

keep them current with the costs of providing

water should be developed.

Vermont

The Water Supply Division (WSD) of the Department of Environmental Conservation (DEC) is

primarily responsible for implementing the policies

and procedures of the DWSRF program. However,

the Vermont Municipal Bond Bank makes determinations of financial capacity for municipal systems,

and the Vermont Economic Development Authority

(VEDA) makes fiscal capability determinations for

private systems (24 V.S.A. §4756). The Bond Bank

and VEDA make loans on behalf of the state.
14

 Identified responsible officials.

Capacity Evaluation

To determine whether capacity-based conditions are

needed in the loan agreement, WSD developed a

form for staff to complete while reviewing loan

applications (see Appendix A, Attachment 7). The

form, similar to the capacity questionnaire in the

loan application, requires the staff reviewer(s) to

answer 17 yes/no answers and provide documentation in support of each response. Vermonts 17

standard loan conditions correspond to the questions on the form (see Appendix A, Attachment 7).

The corresponding condition is applied to a loan

agreement if the reviewer provides a negative

response.

Vermont has never denied assistance on account of

capacity deficiencies, but the state often places

conditions on loans in an effort to improve a

systems technical, managerial, or financial capacity. For example, if a system lacked a certified

operator, its loan agreement would require the

hiring of such a professional by a specified date and

so eliminate that deficiency in managerial capacity.

Similarly, a system that lacked an annual budget

would be required to develop one and submit a copy

to WSD by a set date.

Vermont is working with New England Rural Water

Association (NERWA) to track loan conditions and

to develop templates and other tools to help systems

demonstrate compliance with each condition. All

loan conditions are entered into a database maintained by WSD. None of the longer term conditions

have come due for any of the loan agreements that

have been issued (approximately 20 as of the

writing of this report, with several more very close

to being issued), and all of the shorter term conditions (e.g., a bacteriological sampling plan) have

been met.

If a system fails to comply with the terms and

conditions of a loan agreement, the state can call

the loan (i.e., collect from the systems assets).

Conversations with Vermonts DWSRF contact

indicate that, because of all the technical assistance

that is now offered to systems, the state believes it

will never have to call a loan.

Project Description

System A received a $360,000 no-interest loan for

the interconnection of, and improvements to, two

water systems. The preliminary engineering study

and final design were also financed under the loan.

The term of the loan is 20 years, with $18,000

payable each year following the issuance of a

certificate of completion.

Due to capacity deficiencies identified by the

reviewer, 8 of the states 17 standard conditions

were placed on the loan. For example, the system

did not have a long-range plan for facility improvements and operation and maintenance, so the state

made plan development a condition of the loan.

Because the system had not completed water quality

monitoring as required by Vermonts Water Supply

Rule, another loan condition required that such

monitoring be completed by January 1, 1999. As of

the writing of this report, System A had satisfied all

of the conditions that had come due under the loan

agreement.

For More Information Contact:

Vermont Department of Environmental

Conservation, Water Supply Division

Tom Bartholomew, phone (802) 241-3425

www.anr.state.vt.us/dec/watersup/

dwsrf.htm
15

III. Conclusion

A review of the criteria and processes used

by six states to assess the capacity of loan

applicants indicates that states are not

rejecting systems for loans based strictly on technical, financial, or managerial deficiencies. Such

deficiencies are being handled through loan terms

and conditions, which detail the required feasible

and appropriate changes to meet the requirements

of the SDWA. Some state contacts noted that future

loans may be denied based on capacity, but until

rules are final and a baseline established (for all

systems, not just new systems), it will be very

difficult to deny a loan to a system based on its

capacity.

The states reviewed in this report evaluate similar

information to assess capacity (see Figure 1),

although how the information is obtained and used

varies. For example, some states require specific

information by law (i.e., annual budgets and facility

plans), while others obtain similar information

through questions on a loan application or from

state records on the system. Similarly, some states

consider certified operators to be an indication of

technical capacity, others consider them an aspect

of managerial capacity, and still others consider

them an aspect of both.

Due to the potential repercussions that a systems

lack of financial capacity may have on the lender, in

this case the state, the financial assessment is more

involved than the technical and managerial review

for a DWSRF loan. The financial assessment

typically requires detailed documentation of a

sound financial history and projections for the

future, in addition to basic questions on an application form. As a result, some states have a separate

agency (e.g., the Budget Agency in Indiana) that

conducts the financial assessment. Floridas Bureau

of Water Facilities Funding assesses financial

capacity, while the Bureau of Water Facilities

Regulation evaluates technical and managerial

capacity. Both bureaus, however, have the power to

place conditions on loans, if necessary. Vermont

further defines these roles for municipal and private

systems. The Municipal Bond Bank assesses the

financial capacity of municipals, and the Vermont

Economic Development Authority completes the

financial assessment of private-sector applicants.

Assessment procedures also vary by state. Alaska,

Arizona, South Dakota, and Vermont use capacity

assessment worksheets to guide reviewers (and in

the case of Alaska, loan applicants) through the

assessment process. The process used in Arizona

and Vermont leads the reviewer through a series of

yes/no questions which correspond to a list of loan

conditions. The corresponding conditions are

applied to the loan agreement in any area where the

reviewers response was negative.

South Dakotas capacity review process is an

example of effective data gathering. The state uses

worksheets to facilitate the review of capacity, but it

shares the collection burden with the applicant. This

efficiency most likely stems from the states welldeveloped capacity development program and

proven dedication to comprehensive assessment. A

portion of South Dakotas set-aside dollars is

devoted to employing contractors to help water

systems complete Capacity Assessment Worksheets

and implement any recommendations (feasible and

appropriate changes) that are attached to the loan.

As indicated in Figure 1, a number of the states

reviewed, including Arizona, Florida, Indiana,

South Dakota and Vermont, use sanitary survey

results as a key factor in assessing capacity. Florida,

for example, relies on sanitary survey records for

information on applicants existing physical facilities, compliance history, emergency operating

procedures, and other aspects of capacity. A new
16

sanitary survey guidance, published by EPA in

April 1999, recommends that surveys include a

section on water system management and operation

with questions on management structure, planning,

staffing, O&M manuals and procedures, funding,

and administrative records. The guidance manual

also explains that the purpose of a sanitary survey is

to evaluate and document the capabilities of the

water systems sources, treatment, storage, distribution network, operation and maintenance, and

overall management.... [Guidance Manual for

Conducting Sanitary Surveys of Public Water

Systems; Surface Water and Ground Water Under

the Direct Influence (GWUDI) EPA 815-R-99-016

April 1999 or online at www.epa.gov/safewater/

mdbp/pdf/sansurv/sansurv.pdf] Sanitary surveys

developed under these guidelines are excellent

capacity assessment tools and may substitute for a

more complicated or fragmented method of information acquisition.

States assess system capacity at different points in

the application process. Capacity considerations are

factored into Vermonts initial determination of

system eligibility through the priority list application and other means. This pre-screening of applicants limits the number of assessments that the state

must conduct. The final assessment of system

capacity comes later, when the results can be used

to identify the loan conditions necessary to improve

a systems capacity. The DWSRF Program Coordinator explained that an assessment later in the

process works for Vermont because systems are not

denied funding strictly due to deficiencies in

capacity. South Dakota, on the other hand, conducts

a preliminary assessment of capacity as part of a

pre-application process for a DWSRF loan. In this

way, the state limits the number of loan applications

that it must process.

There was not much evidence of enforcement

provisions if a system fails to meet its obligations

under a loan agreement. Arizona includes enforcement provisions in loan documents and coordinates

with the ACC for non-governmental water systems.

Indianas rules require any system that fails to

satisfy the conditions of its agreement to immediately repay all outstanding principal and accrued

interest on the loan. Other states are not so prescriptive. Conversations with the states indicate that,

because the DWSRF program is so new and many

states are just beginning to make loans, enforcement

has not been much of an issue. If the loans have

conditions, most of them have not yet come due.

It is likely that most states will change the process

they use to evaluate the capacity of systems seeking

DWSRF assistance as programs mature and states

develop capacity development strategies to address

all public water systems. (As noted previously,

many states have yet to define benchmarks for

capacity.) States are encouraged to share information about their programs and the lessons learned

through their regional EPA DWSRF or capacity

development coordinators, through newsletters

addressing both programs, and through presentations at conferences and annual meetings.

Additional information about capacity development

and its relationship to the DWSRF program can be

found on the DWSRF program website at

www.epa.gov/safewater/dwsrf.html
17

Attachment 1: Alaskas Capacity Assessment Worksheet

Attachment 2: Alaskas SDWA Compliance Agreement

Attachment 3: Floridas Capital Financing Plan Worksheets

Attachment 4: South Dakotas Capacity Assessment Worksheet (Part I)

Attachment 5: South Dakotas Capacity Assessment Worksheet (Part II)

Attachment 6: Vermonts Priority List Application/Letter of Intent

Attachment 7: Vermonts Staff Capacity Review Form and Standard Loan Conditions

Appendix A